China's road to the future

Management accountants must prepare for the opportunities and challenges that China's 'Belt and Road' initiative will create for finance departments.
China's road to the future

One of the most important influences on the world's economic landscape during the next decade is likely to come from China's "Belt and Road" initiative. The complex and ambitious investment plan aims to develop a new Silk Road through the creation of land and sea corridors — mainly rail lines and ports. There are few Asian territories it will not touch, and few international businesses whose supply chain will not be impacted.

The official name of the initiative, which China designed as an economic strategy as much as a foreign policy, has changed over time. It previously was known as One Belt, One Road, and often is still referred to by that term in the media. "One Belt" referred to land-based transport infrastructure — road and rail routes also known as the Silk Road Economic Belt. "One Road" referred to sea routes known in China as the 21st Century Maritime Silk Road. It includes ports, navigation aids, and other maritime infrastructure that help link to the land sectors. This strategy is all about moving goods as efficiently as possible.

Geographically, Belt and Road covers seven corridors from China to Eastern Russia, Western Russia, Turkey, Singapore, Myanmar, Pakistan, and the Mediterranean Sea. But plans change as new opportunities reveal themselves. Current plans touch more than 60 countries, which, according to a McKinsey podcast, "cover 65% of the world's population, one-third of the world's GDP, and about a quarter of all the goods and services the world moves".

It's hard to pin down an exact price tag for Belt and Road, but $1 trillion is a commonly cited estimate, according to the Council on Foreign Relations.

The wide reach of this Chinese investment creates a very good argument for CFOs, finance specialists, and other business leaders worldwide to make every effort to keep their finger on the pulse of changes induced by the Belt and Road initiative. Few large, multinational companies — no matter where they are based — will escape the effects of Chinese international expansion. But it also provides great opportunities for many.

SHIFTING DYNAMICS

The first and simplest fact that needs to be accepted by the business world is that China is coming your way, said Shanghai-based David Wu, founder and CEO at GMPTALENT International (a member of IMD International Search Group).

"One thing you have to bear in mind if you're a CFO sitting in your headquarters, is that the One Belt, One Road initiative is an indication of China going to the international market more aggressively," Wu said. "You will see the Chinese coming. It might be to acquire a local company or make some other investment in the local market, but you have to be aware that they are coming and they want to do business with you."

Wu's assertions are backed up by Chinese action. Chinese businesses recently have purchased outright, or bought controlling shares in, national institutions including GE's appliance business and Hilton Worldwide in the US, Italian soccer clubs AC Milan and Inter Milan, global Swiss agribusiness giant Syngenta, and Australian dairy farm Van Diemen's Land Company.

Finance and accounting experts should become more familiar with some of the main regulations and accounting rules in China, Wu said. Even the simple act of transferring money to or from China can be quite complicated, meaning an understanding of the basics can prove powerful.

Knowledge of your own business-specific risks involved in doing business with or in another territory is also important, Wu said. "Internal control definitely has to be enhanced," he said. Working with laws and regulations and varying levels of government control in Asia can become "a little bit complicated, so you have to be a bit sophisticated in terms of the design of your internal risk-control policies".

Developing an understanding of Chinese culture is very useful, as is ensuring your staff has a few Chinese speakers, he said.

LAYING THE GROUNDWORK

Belt and Road presents many opportunities for those in the finance world, said David Martin, director of marketing and communications at the China-Britain Business Council.

With Belt and Road, Martin said, large Chinese construction companies will lead projects around the world. All of the companies and projects will require financing, master planning, project management, logistics support, and more. Banks, finance houses, and law firms, he said, have a lot to gain from boarding the China train.

"These businesses need to nurture their relationships with the Chinese government and with Chinese construction companies to ensure that when tendering processes come out, they are at the front of the queue," he said. "They need to start doing their groundwork now."

However, it's also important not to overstate the importance of Belt and Road to your business, Martin said. If you're an engineering firm involved in the design and construction of infrastructure, it's easier to see how to dive right in, but for some types of businesses it is simply a matter of keeping an eye on developments.

Chris Sheedy is a freelance writer based in Theodore, Australia. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a senior manager with FM magazine, at Chris.Baysden@aicpa-cima.com.