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Navigator 3rd issue
Borderless win-win cooperation in building the Belt and Road

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

After five years of significant advancement of the Belt and Road Initiative (BRI), its link with the development strategies of Belt and Road (B&R) countries and regions has increasingly become a key driver for economic globalization and regional integration while achieving the "five major goals" of the BRI.

We are pleased to see more countries and international organizations are participating in the B&R construction, especially in third-party market cooperation – a new model of cooperation between two countries in third-party markets – which has been actively promoted by the Chinese Government last year and has been gaining traction and attracting participation among many developed countries and leading multinational corporations (MNCs). Looking forward, the BRI will see stronger and deeper links between China and the B&R countries while promoting mutual trust in politics, economic, social and cultural interconnection and eventually, benefitting people along the route.

The year 2019 marks the 70th anniversary of the founding of the People’s Republic of China. China will continue to push forward the B&R construction and globalization. With many upcoming diplomatic events in 2019 such as the 2nd Belt and Road Forum for International Cooperation (BRFIC) and the 2nd China International Import Expo (CIIE), we believe the BRI will reach higher standards and higher-level of development, providing momentum in boosting mutually beneficial cooperation and prosperity.

We hope this issue of Navigator will inspire Chinese investors and MNCs to participate in third-party market cooperation in the future. EY will help Chinese companies continue to expand their presence in the B&R markets, accelerate internationalization and pursue high-quality development in the global marketplace.

Albert Ng
Chairman, China
Managing Partner
Greater China

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The BRI offers huge potential for third-party market cooperation. In accordance with the BRI’s principle of achieving shared growth through discussion and collaboration, third-party market cooperation is an effective way to make it happen. As such, China will build closer relationship with developed countries to identify new opportunities arising from economic globalization and explore new areas of cooperation through government and enterprise partnership, thus providing Chinese solutions to international cooperation.

Executive summary

In the past five years, the BRI has not only received positive feedback and worldwide participation, landed many large projects, but also demonstrated China’s commitment and determination to enhance international cooperation. As a new way of international cooperation, ”third-party market cooperation” links the competitive production capacity advantages from China, the advanced technology from developed countries and the vast development needs from developing countries. As a result, "win-win" outcome can be achieved: (i) help China export its production capacity and industrial products to international markets; (ii) help developed countries explore new economic growth drivers; and (iii) boost industrialization and economic development of developing countries.

This issue of Navigator focuses on the development and prospect of “third-party market cooperation” under the BRI. With the challenges of current imbalanced global economic development, rising unilateralism and protectionism, “third-party market cooperation” is an innovative model to boost the B&R construction, which is in line with the principle of achieving win-win results through collaboration. To move closer to the vision of building a community of shared future for mankind under the BRI, “third-party market cooperation” also plays an active role in strengthening international cooperation and upholding multilateralism and free trade.

In this issue, we will highlight the third-party market cooperation between China and the following countries:

  • China - Japan: from competition to cooperation, from rivals to partners
  • China - France: building a benchmark for cooperation with a focus on Asia and Africa
  • China - UK: breaking the barrier and complementing each other

Loletta Chow
Global Leader
China Overseas Investment Network
Belt and Road Task Force Leader

1. The joint multinational B&R construction opens a new journey for building “five major goals”

Policy coordination: Deepen and refine policy coordination to promote the BRI

The BRI has been highly commended by developed economies that have been actively involved in the construction while China is building interconnection with developing countries. In March 2019, Italy just signed the Memorandum of Understanding (MOU) to Jointly Advance the Construction of the BRI with China, making it the first G7 member to sign an MOU on the BRI. Other developed countries including Portugal, Greece, Hungary and New Zealand, etc have signed B&R cooperation agreements with China.

Furthermore, a number of developed economies are expecting to participate in the B&R construction and work with China to expand third-party market cooperation. China has officially signed third-party market cooperation documents with countries such as Japan, France, Canada, Singapore, Spain, the Netherlands, Belgium, Italy and Australia, etc.1

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

Sources: China Ministry of Commerce, China National Development and Reform Commission (NDRC)

Unimpeded trade: Building a trade development platform to promote trade liberalization and facilitation

With the rapid development of the Chinese economy in recent years, China has become the world's largest trading nation. In 2018, China’s total trade value was US$4.6 trillion, up 12.6% YOY. The total trade value with the B&R countries reached US$1.3 trillion, up 16.3% YOY, which was 3.7 percentage point higher than the overall growth rate. This indicates that the B&R trade starts becoming a new driving force for China's trade development.2

The General Administration of Customs of China (GACC) issued the Belt and Road Customs Clearance Co-operation Action Plan (2018-2020) (hereinafter referred to as the “Action Plan”) in January 2018. The Action Plan aims to strengthen the establishment of the B&R customs liaison system with surrounding countries, support the BRI comprehensive test area and cross-border economic cooperation zone. GACC is actively carrying out the Authorized Economic Operator (AEO)3 consultation with the B&R countries, aiming to complete mutual recognition with the B&R countries that are willing to cooperate with China in AEO certification program before 2020. At the same time, China has reached 17 free trade agreements (FTAs) with 25 countries and regions, and is currently negotiating 13 FTAs with 28 countries.

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

Source: China Ministry of Commerce, State Council Information Office of China

Facilities connectivity: A compound infrastructure network is taking shape

As the main framework of the BRI, the framework of “six corridors and six channels serving multiple countries and ports” has been implemented steadily. Major construction projects are being planned and built in multiple regions. The connectivity is achieved in a wide range of areas such as commodity, technology, information and capital, which move the BRI towards a higher-quality development. Meanwhile, relevant countries are not only facilitated in the global division of labor and resources allocation to realize their own economic development, but also contribute to the regional and global economies.

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

Source: NDRC, People's Daily, Xinhua.net

Financial integration: Diversified financing system adds momentum to the BRI

  • Currency swap: The BRI promotes the interconnectivity in trade, energy and labor between China and the countries along the route, generating great market demand for expanding RMB swap lines and developing financial products and services.
  • Securities market interconnectivity: As an important move for interconnectivity between the A-share market and overseas markets, the Shanghai-London Stock Connect program is expected to launch in 2019. This is not only an important sign of financial integration under the BRI, but also a milestone for opening up China’s capital market.
  • Chinese-funded banks accelerate overseas expansion: With the BRI advancing further, it is inevitable that there is a growing demand of Chinese-funded banks venturing into unexplored areas. In addition to opening branches, Chinese-funded banks have also been engaging in overseas M&As to expand their network rapidly.

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

Source: AIIB, Bank of China, China Banking Regulatory Commission

People-to-people bond: Promoting non-governmental cooperation and deepening cultural exchanges

It is essential of the BRI to encourage cross-border communication and cultural exchanges. The Confucius Institute is an important platform for the world to get to know China. In 2018, China established 530 Confucius Institutes and 1,113 Confucius Classrooms in 149 countries and regions worldwide, as among such, 144 Confucius Institutes and 134 Confucius Classrooms in primary and secondary schools are located in 53 B&R countries, which is one of the fastest growing regions in the world4.

Another measure to promote people-to-people exchange is to create a unique Silk Road tourist route, encouraging tourism in the B&R countries. In recent years, China has been promoting the visa exemption or landing visa arrangement with the B&R countries to enhance tourism. Meanwhile, China’s education sector has developed rapidly and it has already become the most popular destination in Asia for overseas students. The number of international students has maintained a double-digit growth rate for two consecutive years.

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

Source: State Council Information Office of China, Confucius Institute, Ctrip

1 Source: China Ministry of Commerce
2 Source: State Council Information Office of China
3 Note: According to the World Customs Organization (WCO) framework of standards to secure and facilitate global trade, an authorized economic operator (AEO) is "a party involved in the international movement of goods in whatever function that has been approved by or on behalf of a national Customs administration as complying with WCO or equivalent supply chain security standards. Authorized Economic Operators include inter alia manufacturers, importers, exporters, brokers, carriers, consolidators, intermediaries, ports, airports, terminal operators, integrated operators, warehouses and distributors"
4 Source: Ministry of Education of China

The BRI embarks on a new journey

In the past five years, the B&R development has laid a solid foundation and created a road map as its international influence grew. The 2nd BRFIC will be hold this year and the B&R construction will be also entering the next 5-year phase, we are looking forward to seeing the initiative develop broader, in higher quality and in a more efficient manner:

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

2. Development and prospect of third-party market cooperation

Over the past five years, with the gradual deepening of the B&R construction, third-party market cooperation has become increasingly prominent. China has signed third-party market cooperation documents with Japan, France, Canada and Singapore, etc. and has also set up third-party market cooperation funds with European Investment and Development Bank and other French financial institutions.

2.1 China - Japan: from competition to cooperation, from rivals to partners

Sino-Japanese relations have warmed up since 2018 and the two countries have been strengthening communication and cooperation in various aspects. Most B&R countries are still in the early stage of industrialization. They urgently need to develop infrastructure while facing challenges and lacking technology and capital. Sino-Japan third-party market cooperation is conducive to speeding up the social and economic development of those countries.

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

Source: The National Development and Reform Commission, Ministry of Commerce

  • Infrastructure construction

    China overseas infrastructure development advantages lie in strong financial strength, short construction cycle, strong government support and high cost-performance ratio. However, the risk management and control mechanism of Japanese infrastructure enterprises are more mature and well developed. They have obvious advantages in project operation and management, but at the same time, they face the issues such as labor shortage and long construction cycle. Therefore, third-party market cooperation between the two countries in the infrastructure sector is highly complementary and has broad prospects.

  • Technology

    On 26 October 2018, China and Japan signed the Memorandum on Establishing China-Japan Innovation Cooperation Mechanism. The two governments agreed to establish an inter-departmental “China-Japan Innovation Cooperation Mechanism” under the high-level dialogue to promote specific cooperation in areas such as industrial innovation and intellectual property, etc1.

  • Finance

    On 26 October 2018, China and Japan restarted currency swaps after five years, with a scale of RMB200 billion5. The purpose is to maintain financial stability, support the development of bilateral economic and financial activities, expand mutually beneficial and pragmatic cooperation in the fields of finance, and further deepen Sino-Japanese economic relations.

At present, the major third-party market cooperation between China and Japan in financial sector mainly involve China's policy banks and state-owned enterprises, with Japan's three major banks in investment, loans and insurance areas. In the future, we expect more diversified cooperation, and small and medium-sized financial institutions will gradually "go abroad" so that the two countries will broaden their cooperation in a deeper extent.

Although the Sino-Japanese relations have experienced ups and downs, the economic and trade relations and market cooperation between the two countries have great potential and good prospects. After a relatively short period of development, the third-party market cooperation between China and Japan has successfully established a mechanism such as the Sino-Japan Third-Party Cooperation Forum, which set a great example for the cooperation and development of third-party markets between China and other countries.

2.2 China - France: building a benchmark for cooperation with a focus on Asia and Africa

France has deep roots in Africa, especially the French speaking countries. France has a high level of technology in infrastructure and energy. African countries have urgent need to improve their infrastructure which has been stalling economic development. On the other hand, China has production capacity advantages, complete manufacturing base and strong financial strength. Therefore, third-party market cooperation with France can help Chinese companies enter the African market whereas China can help French companies enter the Asian market taking its location advantage in Asia.

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

Source: Ministry of Foreign Affairs of China, People.com.cn

  • Finance

    China and France are actively establishing bilateral mechanisms for third-party project investment in accordance with the Joint Statement on the cooperation of third-party markets jointly issued by the Chinese and French governments. First, establish a mutual investment fund to provide financial support for tripartite cooperation. Second, establish a mechanism for dialogue and coordination between the two countries to build a platform to promote communication and participation of various financial institutions, and their participation in project investment. Meanwhile, the NDRC and the French Treasury has established a steering committee and set up a demonstration project list mechanism to identify cooperation credentials.

  • Energy

    France is a traditional nuclear power country. China's technological advantages in nuclear energy have also been greatly improved in recent years. The French government has recently begun to vigorously develop renewable energy. On the other hand, China is also seeking to transit from fossil to renewable energy, which lay the foundation for the two countries to cooperate in nuclear energy and renewable energy sectors. Meanwhile, African countries have rich natural resource in renewable energy. Looking forward, there is great potential of the cooperation between China and France in energy sector.

  • Transport and Logistics

    In the joint statement on the cooperation in third-party markets between China and France, it mentions that in transportation, both parties should make full use of their advantages to strengthen cooperation in trunk railways and urban railways, and jointly study and explore cooperation areas and potential5. French companies still have the first-mover advantages in high-speed rail technologies, but Chinese companies have been catching up quickly in recent years, gaining competitive advantages in construction period and cost. It is of great potential for the two parties to strengthen cooperation and jointly develop transport infrastructures in third-party markets.

The cooperation between China and France in third-party markets requires both the governments to improve their mechanisms and strengthen guidances. It also requires the enterprises to explore the market, build benchmarking projects and show credentials.

2.3 China - UK: breaking the barrier and complementing each other

When President Xi Jinping visited the UK in 2015, he mentioned the cooperation between China and the UK on the B&R - “The Chinese and British industries are highly complementary, and the concepts of jointly promoting open markets are similar. The willingness to promote free trade and expand two-way investment is the same.” The development of third-party market cooperation between China and the UK is not only a great historic opportunity, but it has also garnered the support of both Chinese and British governments and policies.

EY - Navigator 3rd Issue: Borderless win-win cooperation in building the Belt and Road

Source: Ministry of Commerce of China, Xinhua.net

  • Infrastructure construction

    China and the UK has its own strengths in the field of infrastructure construction and are complementary. The UK has advantages in design, law, consulting and management in the engineering field. China are strong at construction efficiency, engineering technology innovation, cost control, supply chain management and cost performance. The cooperation between the two countries can achieve a win-win outcome and meet the development needs of third-party countries.

  • Finance

    Compared with China, the UK has a long history and rich experience in international finance service. As a traditional international financial center, the UK has a well-established system and has a history of cooperation and close relationship with many B&R countries. The China-UK development has a good momentum in green finance. Green development also plays an important role of China's economic transformation and the B&R sustainability.

The B&R financial cooperation between China and the UK has been at the forefront of other Western countries, and has set a number of precedents. The UK is the first applicant to join the AIIB, the first to invest in the AIIB Special Fund2, and also the first to sign the Guiding Principles on Financing the Development of the Belt and Road6.

5 Source: People.com.cn
6 Source: Ministry of Finance of China

(Neither the global EY organization nor its member firms make any guarantees about the completeness and accuracy of the information. Moreover, it should be seen in the context of the time it was made. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.)

Contacts

EY - Loletta Chow
Loletta Chow
Global Leader
China Overseas Investment Network
+852 2629 3133
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Michelle Ho
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Kelly Li
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