China’s Belt and Road Initiative (BRI) is instrumental to China’s aim of reshaping global trade. With the potential to be the world’s largest platform for inter-regional collaboration, the project is ambitious in the extreme—covering 65 per cent of the world’s population, one-third of the world’s GDP and a quarter of cross-border trade in goods and services.
With the aim of improving connectivity, trade routes and deals, and cooperation across Eurasia and Africa, BRI will link China to Europe, the Middle East and Africa through ports, highways, tunnels and railways that will encompass over 70 countries.
Yet, the critical connectivity will also require the involvement of a financial supply-chain large enough to construct and support this scale of infrastructure as well as financing the resulting increase in trade. And that means a major role for both global and—importantly—local banks.
Middle East Advantage
This is particularly true for the Middle East. There is no doubt that there is potential for local banks throughout the region to become key beneficiaries of China’s enthusiasm for strengthened partnerships in the Middle East, stemming from the country’s reliance on the region for oil imports.
Middle East-China relations are already strong and appear to be on an upward trajectory. China currently sources more than half its oil from the Middle East and North Africa (MENA), and the International Energy Agency expects China to double its oil imports from the MENA region by 2035.
Given this, a successful BRI could bring substantial benefits to the Middle East: new trade corridors, improved infrastructure, increased investment opportunities, and, of course, an increase in bilateral trade.
The role of local banks
It is through local banks that much of the investment will be channelled, whether via trade finance, infrastructure finance, or through local payments and collections. Indeed, BRI can potentially create significant opportunities for local banks. Yet, this could stretch some providers with respect to capacity and expertise. Technology could offer an answer, but a number of local banks may struggle to compete with global players in terms of delivery and capabilities.
Given this, local banks in the region can choose to harness the international reach and advanced technological capabilities of specialist providers, through non-compete partnerships with global banks. In this way, they have the added support to ensure that the financial supply chain can cope with the increased volumes and complexity of the physical supply chain.
Marrying the reach and technology of global trade services and cash management providers with local banks’ region-specific regulatory knowledge and understanding of local culture and client needs can, therefore, help to ensure that Middle Eastern banks are effectively positioned to truly harness the changes brought with the BRI.
Initiatives to promote greater ChinaArab financial cooperation are already underway. In 2018, China’s President Xi Jinping announced the establishment of the China-Arab Countries Interbank Association, capable of granting up to $3 billion in loans for financial collaboration.
Founding members include banks from countries such as Egypt, Morocco, Lebanon and the UAE. Initial areas of focus will be promoting cooperation on oil and gas, nuclear and clean energy— but there is potential for the breadth of sectors to become far wider.
Driving trade opportunities
Undoubtedly, trade remains the critical driver. Already, China’s Middle East trade is extensive—China is both Saudi Arabia and the UAE’s top trading partner, with the Egypt-China trade corridor, for example, rapidly gaining strength. Yet from now on, China’s expansion of trade and investment are likely to be tied to the wider goals of the BRI and helping to improve the flow of goods across Eurasia and Africa.
For instance, Egypt and Jordan have emerged as key focal points of China’s BRI ambitions. Egypt is particularly interesting. Over 60 per cent of China’s exports to Europe already passes through the Suez Canal.
What’s more, Egypt’s trade agreements with African states means that Chinese products that are made in Egypt can enter African markets with fewer trade barriers. Consequently, Chinese investment along the canal has been significantly amplified. The Suez Canal Economic Zone (SCZone), for instance, has attracted an array of Chinese companies, helping to fuel opportunities and economic growth.
The establishment of Chinese fibreglass manufacturer, Jushi’s huge production base in the SCZone, for example, has resulted in Egypt becoming one of the largest fibreglass producers and exporters in the world.
Moreover, efforts to further expand the China-Egypt Suez Economic and Trade Cooperation Zone—operational since 2015— are being stepped-up. So far, it has helped Egypt establish industries in areas such as petroleum equipment, building materials and machinery manufacturing; with car manufacturing and textile opportunities also expected to be developed.
Following the success of the initiative, countries including Saudi Arabia, the UAE and Oman have also worked with China to develop similar industrial zones. There are plans to ultimately connect these zones with regional ports in the UAE, Egypt and Djibouti, with the aim of building business hubs and increasing trade flows and cooperation in the energy, finance, science and technology sectors, in particular.
Proving that Chinese interest in Egypt is not limited to the Suez, in 2016, President Xi Jinping pledged to provide $1.7 billion in financing for Egyptian banks to lend to country-wide infrastructure development and signed an additional $15 billion worth of deals. As an alternative route to the Mediterranean, the Levantine region is also likely to become a critical region for the development of the BRI.
Jordan is positioned as China’s focal point here, and accordingly, Chinese Jordanian ties have steadily strengthened. In 2015, Jordan joined the Asian Infrastructure Investment Bank and signed investment deals across transportation, energy and trade sectors worth more than $7 billion. Bilateral trade volume increased by 30 per cent in 2017 as a result of strengthening SinoJordanian relations.
Certainly, the Middle East stands to benefit from major foreign direct investment (FDI) from China, which will help to drive trade and economic growth. China invested over $182 billion in the MENA region between 2005 and 2018, overtaking the UAE as the region’s largest lender in 2016.
Indeed, the BRI is far from a oneway street. Middle Eastern countries are increasingly exploring ways to leverage opportunities and harness the partnership. However, effective cross-border trade will only be possible if banks are able to facilitate local businesses’ efforts to navigate new and existing trade corridors and leverage their position to capture growing opportunities in a rapidly evolving trade landscape.
This requires a regional understanding of regulatory frameworks, culture and business practises and an ability to harness innovative technology, as well as maintain the global reach of a correspondent banking network. Increasingly, it seems, local and global banks need to act in harmony to maximise the obvious potential opportunities of the BRI.