China’s ‘One Belt, One Road’ will link South Asia with the East

The Chinese initiative is more than a network of highways and ports into Europe. It’s unlocking intraregional opportunities for developing countries in Asia

China’s ‘One Belt One Road’ project linking it with Europe across land and sea routes in Asia and Africa is opening intraregional opportunities for developing countries in the region, says Anna Marrs, Standard Chartered Bank’s head of ASEAN-South Asia and group CEO for Commercial and Private Banking.

The ‘One Belt, One Road’ project has realised $150 billion in infrastructure investment in 68 countries since 2013. According to McKinsey, a global management consultancy, the ambitious project requires an annual investment of $2-3 trillion, partly funded by China. Developing countries in ASEAN and South Asia will get new roads, highways and ports, but the benefits run deeper.

The region struggles to develop adequate cross-border infrastructure to support intraregional trade. “Infrastructure in the region is nowhere where it needs to be to deliver progress. The ‘One Belt, One Road’ initiative promises to change all that,” Marrs says.

Countries like Sri Lanka will benefit from China’s initiative, but there are other positive factors too. South Asia will be able to integrate with the more prosperous ASEAN region to the East. India is also increasing overseas investments and diversifying markets within the region. “These interests, together with improving policy stability and local firms increasingly venturing abroad, will make Sri Lanka a very different country 10 years from now,” Marrs says.

Excerpts from the interview are as follows:

You look after a region Standard Chartered defines as ASEAN-South Asia, whereas most other organisations separate and treat the two differently. South Asia lags behind ASEAN in terms of development; so, how does the bank deal with the contrasting opportunities and risks?
● Marrs: Of course, they are two different regions, or even three depending on how one looks at it. However, for Standard Chartered, it’s one region. ASEAN-South Asia is quite an interconnected region, and the opportunities are many. Increasingly, the opportunities are not just in ASEAN, but in South Asia as well. The ASEAN-South Asia region is home to a large population.

Its economy is growing at over 5%: within the region, there are markets growing at over 7%. Sri Lanka will grow around 4.5% in 2017. This compares well with lower growth rates for ASEAN members, like Singapore at 2%. India and Mekong peninsular countries like Cambodia are forecast to grow 6.5-7%. Relative to the rest of the world, these definitely count as high-growth markets.

The region will benefit from China’s ‘One Belt One Road’ initiative. China has pledged hundreds of billions of dollars to infrastructure development across the region. This will help the region make material progress. For example, transport across the region is more expensive than international benchmarks. Infrastructure is nowhere where it needs to be to deliver progress. The ‘One Belt, One Road’ initiative promises to change all that. No opportunity is risk-free. We live in a volatile world less dictated by fundamentals and more by geopolitics. It’s difficult to say for certain how some markets or countries will develop. There is a risk that growth may be less balanced and benefit only the top one percent. So, it’s critical to diversify public and private investments within the region. This will spread the benefits to as many people as possible.

Our corporate clients are diversifying their manufacturing bases and investing elsewhere in the region. We’re seeing this here in Sri Lanka, and in Bangladesh, Cambodia and Vietnam

The one thing we learnt about the world economy in 2016 was that it’s difficult to predict. No one predicted those events that moved markets, like the US elections or Brexit. We at Standard Chartered have given up on short-term forecasting for a while, because it’s difficult to make a call. Looking ahead, the advice we offer is this: Diversify. Investors shouldn’t have all their eggs in one market. Companies need to have a strong capital base to weather volatility. Despite near-term uncertainty, this much is certain: long-term macroeconomic trends in ASEAN-South Asia are positive. Businesses need to be able to ride through rough times by diversifying their investments and markets.

Are Standard Chartered clients heeding this advice?
● Marrs: Yes. Our corporate clients are increasingly diversifying their manufacturing bases and investing elsewhere in the region. We’re seeing this here in Sri Lanka, and in Bangladesh, Cambodia and Vietnam. We also see companies diversifying their markets. The ready-made garments business, historically, depended on European and US markets; but now, these firms are turning towards China.

But, it seems South Asia is unable to realise potential intraregional investments?
● Marrs: Intraregional investment is challenging. First, it involves different governments with different positions coming together. Investors have to deal with these differences and others like separate sovereign credit ratings.

Even ASEAN hasn’t got enough success stories for cross-border investment. There’s probably a couple: One is the energy project between Laos and Thailand. There have been many projects in the region that weren’t so successful. But, we’re beginning to see a new wave of projects. Malaysia and Singapore are investing in a railroad, each spending on the component that falls within their country. If they’re successful, it will be an interesting benchmark for cross-country infrastructure. ASEAN-South Asia needs several projects like this in railways, shipping, roads and highways to transform itself.

Where does Sri Lanka fit in to all this?
● Marrs: We see many promising and exciting developments in Sri Lanka. The strategic location, and interest shown by China and India will unlock many opportunities. China’s ‘One Belt, One Road’ project will make a lot of progress over the next decade; and I know India is keen to balance its own economy by diversifying its investment and markets. Going into the next decade, there will always be risks, but Sri Lanka can position itself to enter the next phase of development. It’s attracting investments from China, India and other markets as well.

The government’s commitment to infrastructure development is encouraging. Sri Lanka needs to manage its social and environmental concerns well. The government seems committed to improving policy stability, and delivering sustainable and equitable development, but nothing is going to change overnight.

Sri Lanka contrasts India. We see Sri Lankan companies expanding and diversifying. Indian firms are not investing in their domestic market enough, and this will prevent India from realising its full potential. Sri Lankan businesses are increasingly investing abroad, especially in the apparel and energy sectors. FDI interest is also picking up. Investors are watching the policy environment for cues of more stability, but there’s real interest. There’s strong GDP growth ahead. As Sri Lankan companies continue to diversify their investments; the government improves policy stability; and China, India and others continue to invest here, Sri Lanka will look a very different country 10 years from now.

There will be a materially improved infrastructure base financed by a diversified group of partners. That will make an enormous difference to the economy. Sri Lanka is still at the early stages of realising its potential. It’s making progress on policy stability, and early-stage construction is booming.

With so much riding on the Chinese and Indian economies, what are the risks?
● Marrs: A few years ago, everybody was talking about China’s impending hard-landing. We didn’t hold that view at the time; we still don’t. Over-leverage is a concern and poses risks to China’s financial system. However, we’re not particularly concerned about China’s macroeconomic risks right now.

India is a remarkable economy. Its demonetisation surprised everybody. The wipe-out of 85% of the country’s currency worried banks. We were worried about what that might do to India’s credit profile. There were concerns that companies and individuals under stress may default on loans. However, what we saw was a remarkably smooth transition. We did not see incremental credit stress at all. The Indian economy quickly got back to business. People were saying GDP growth would tank from 7% to around 4-5%, but that did not happen.

What are Standard Chartered’s prospects in the region?
● Marrs: The group had some problems a few years ago, but we’re getting back on track. One of the things we’ve talked about a lot is the need to grow with our clients. In Sri Lanka, we see an opportunity to do that. We serve corporate clients who are growing and making that transition into a global business. As companies grow, so will people’s affluence. We’re very proud of the retail banking business in Sri Lanka, and this is something we want to grow further.

When we put together the group’s strategy, we realised there was no shortage of opportunities in ASEAN-South Asia. But, we had to be selective. The bank exited the retail business in Thailand and the Philippines, while investing to grow this segment in India and Singapore. Standard Chartered invests $1.4 billion a year on technology across our businesses, mainly on client services and streamlining internal processes.

We’ve invested in a system that keeps track of portfolio investments, and recommends when and where re-balancing is required. The system is being piloted in Singapore, so only our wealth managers use it there at the moment. Eventually, we hope to roll out this service in other markets and give our clients direct access.

The system uses big data analytics. It’s like a robotic wealth manager. However, people in the region may not be too comfortable interacting with robots just yet. However, fintech is transforming the banking landscape everywhere, and we’re preparing for it.