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China’s one belt one road (OBOR) initiative unveiled by President
Xi Jinping in 2013, aims to restore the country’s old land and sea
trade routes and to boost economic connectivity between Asia,
Europe and Africa. It covers 65 countries and six economic
corridors accounting for two thirds of the world’s population and
one third of the world’s GDP. Here Clifford Chance experts look at
the opportunities it offers and some of the challenges for investors.

China says it will invest US$4 trillion in • Facilities connectivity

OBOR countries (although it has not
The OBOR initiative will focus on the
given a timeframe for that investment) a
transport, energy and information
significant proportion of which will be in
infrastructure that connects Asia,
infrastructure such as roads, railways
Europe and Africa. Projects identified
and airports. However, the initiative goes
include a network of highways,
much further than infrastructure and
railways, air and sea routes, gas and
China’s central planning agency, the
oil pipelines, power grids and
National Development and Reform
internet connections.
Commission (NDRC), has identified five
priorities for the OBOR initiative in an • Unimpeded Trade
implementation plan entitled “Vision and China wants to reduce trade barriers,
Actions on Jointly Building Silk Road increase efficiency and promote
Economic Belt and 21st-Century regional economic integration. This
Maritime Silk Road.” These are: involves working with other countries
and regions to open free trade areas
“China wants to transform its economy and to improve customs clearance
processes. To date it has signed 14
from one based on manufacturing to free trade agreements involving over
20 countries. The goal is to encourage
one based on services.” two-way investments.

— MAGGIE ZHAO • Financial integration

Partner, China also wants to enhance
cooperation in monetary policy,
Clifford Chance manage financial risk through regional
arrangements, increase cross-border
• Policy coordination cooperation between credit-rating
China says that it will work with the institutions and systems and expand
other OBOR countries to develop the scope of currencies settlement
plans for regional and cross-border and exchange between countries
co-operation and to provide policy along the Belt and Road. It is setting
support for large-scale infrastructure up a regional development financial
projects. So far, China has signed institution, called the Asian
inter‑governmental co-operation Infrastructure Investment Bank.
agreements with over 30 countries • People-to-people bonds
and international organisations and in
The OBOR initiative also aims to bring
a symbolic move, signed a letter of
people together to share information,
intent with the United Nations
ideas and best practices, enable
Economic and Social Commission for
cultural and academic exchanges, and
Asia and the Pacific in April 2016
promote universal technical standards.
agreeing to promote the
implementation of OBOR.

China’s six proposed economic corridors

OBOR aims to transform OBOR and

the Chinese economy internationalisation of
OBOR is very ambitious and, if it is the Renminbi
successful, will have a very deep and China has been trying to globalise its
long lasting economic and geo-political currency for many years. In the Asia
impact. It is also intended to solve Pacific region, the use of Renminbi
domestic issues. According to the World (RMB) as a trade settlement currency
Bank, China has enjoyed staggering has now surpassed US dollars and
growth in the past 30 years at an Japanese Yen, but it is not as widely
average of 9 percent a year, but the used as an investment or reserve
Asian Development Bank says that this currency. The Chinese government
year growth has slowed to about 6.5 hopes to achieve this by using or
percent. Partner Maggie Zhao says: investing RMB in projects in OBOR
“Following the global economic crisis, countries to encourage widespread
Chinese economic growth has been acceptance of the currency.
based on the government pumping
money into the system, building In 2014, the Chinese state-owned Silk
infrastructure and creating jobs but in Road Fund was established to finance
that process it has created excess OBOR projects. It is capitalised to about
capacity in manufacturing. That excess £25 billion and has four major investors:
capacity needs to be absorbed the State Administration of Foreign
somewhere, which is why it is Exchange (SAFE), which owns a vast
focusing on the OBOR initiative.” amount of Chinese foreign currency
She adds that China also wants to reserves; CIC – the Chinese Sovereign
“transform its economy from one Fund; and two Chinese policy banks, the
based on manufacturing to one Export-Import Bank of China and China
based on services.” Development Bank. China is also setting
up a regional development bank – the
Asian Infrastructure Investment Bank
(AIIB). The UK was the first country to

sign articles of agreement with the AIIB and the size of finance required, but also
and around 50 other countries are in the with a lot of things that are new to them
process of signing up. AIIB was initially such as hedging,” says Jenkins.
capitalised at £65 billion of which China
contributed around £20 billion. Challenges for OBOR
Chinese institutions are
grappling with the OBOR projects begin to There are a number of challenges facing
challenges of the scale of get off the ground OBOR including the risk of political
the projects and the size of “There is a lot of money being instability in the countries it will pass
the finance required. committed by the Chinese government through. “Infrastructure projects such as
and the Chinese public and private railways, highways and power stations
sectors into helping the countries along depend on continuing and constant
the OBOR to develop infrastructure and government support. However, many
other projects,” says Zhao. For example, countries in the OBOR region are subject
President Xi Jinping has pledged US$46 to frequent political upheaval which can
—HUW JENKINS, billion to boost Pakistan’s infrastructure have an impact on policy, and the
Consultant to Clifford Chance, and China has invested in rail and power implementation and success of projects,”
Clifford Chance projects in Indonesia. says Senior Associate, Vicky Ma.

Consultant Huw Jenkins says: “I think For example, the Sri Lankan government,
what’s interesting about OBOR is that which was appointed early last year,
the scale of the infrastructure projects suspended work on a US$1.4 billion port
has really stepped up.” China’s Silk Road project, which had been agreed by the
Fund is investing in Yamal LNG, a US$27 previous administration, citing various
billion natural gas project in the Russian irregularities including a lack of proper
Arctic. “It is an equity investor. It is the permits and approvals. The project was
off-taker. It is supplying the kit. It is on hold for a year but has now started
supplying the loans. It’s an indication of again. The Chinese developer estimates
the type of deals that Chinese that the shutdown cost it more than
companies and banks are doing in US$380,000 a day. “These examples
cooperation with international sponsors send a clear warning message to the
and with international banks,” he says. Chinese investors that they should not
lose sight of the implications of political
On projects such as this, RMB is risks. Although it can’t be fully eliminated,
increasingly viewed as a trade or it is something to be aware of and
financing currency. “If your supplies prepared for, “ says Ma.
come in from China, your offtakes are for
China and your loans come in from Other challenges relate to the different
China, then Renminbi is the natural regulatory and legal systems in the
currency to use for financing that project. countries along OBOR. Many of these
Multiple billion loans will be made in countries are still developing so their
Renminbi and used in a completely pari legal and regulatory systems may not be
passu way across the capital structure,” so sophisticated, may be incomplete
Jenkins says. and may not have been tested for
foreign investments. For example, a
China is going through a steep learning US$1.1 billion Chinese high speed rail
curve in all aspects of financing OBOR. project in Indonesia was also suspended
Take for example, export credit just days after work began, due to
insurance. China’s own version, incomplete paperwork, it was alleged.
Sinosure, is not as developed as UK As a result, the Chinese consortium
Export Finance, France’s Coface or received a permit to build only 5km of
Japan’s JBIC. It is a single bank product the proposed 150 km rail line. The
worked with by institutions gathered project is now back on track but it has
together in a syndicate. “The Chinese sparked controversy in Indonesia as
institutions are grappling with the politicians have argued that it is too
challenges of the scale of the projects expensive and not suited to local needs.

In addition, most Chinese banks are EDF, the French energy company and
comparatively less experienced in cross- China’s Shandong Electric Power and
border and international transactions, or I’m still working with the same parties on
transactions on a very large scale and deals. However, you can’t build those
are still very focused on domestic long term relationships without investing
lending. Vicky Ma says: “They may not in Chinese businesses. It’s very
be fully aware of typical project finance important to build good links between
models or the multi-national risks your people and your contacts in China.”
involved. It is crucial that before any
investment decision is made and before Jenkins says that OBOR will provide
contracts are negotiated, that you opportunities for the UK. While many of
identify the risks and work out how to the deals being done are transacted out
address them.” of Hong Kong due to its location, much
of the expertise for doing deals in Africa
Huw Jenkins adds that the Chinese is based in London.”The money will not
experience of project finance is quite necessarily be purely Chinese money,
different from that in the West. “China it will be a collaboration between different
has laws that restrict guarantees that institutions likely done under English law,
can be given by state entities so the so there’s a reason for these deals to
concept of Public-Private Partnerships come to London. And China also thinks
just doesn’t work in China. You cannot of London as a place that gets things
guarantee debt in the same way from a done so I think there will be opportunities
state organisation. China takes a more in delivering OBOR projects.”
commercial rather than government
liability perspective, shifting the risk
much more to the private sector.”
“It is crucial that before any investment
He adds that: “Security law in China
focuses around physical assets such as decision is made and before contracts
land, buildings and machinery but in
large projects a lot of value is in the
are negotiated, that you identify the risks
contracts, the cash sitting in an account and work out how to address them.”
and how you control the arrangements.
Many of the Chinese bankers on these
deals are learning how to structure
security arrangements over those sorts Consultant,
of assets for the first time.” Clifford Chance

Seizing OBOR
Huw Jenkins says: “Long term
relationships are very important. I worked
during the 1990s on a project between


Maggie Zhao Huw Jenkins Vicky Ma

Partner Consultant to Consultant
London Clifford Chance Hong Kong
T: +44 20 7006 2939 London T: +852 2825 8995
E: maggie.zhao@ T: +44 20 7006 5135 E: vicky.ma@
cliffordchance.com E: huw.jenkins@ cliffordchance.com

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