[NGW Magazine] China and its maritime silk road
China’s SMEs can help to secure a clean gas economy and cost savings through the 21st century Maritime Silk Road, a part of the Belt and Road initiative where mastery of the seas plays an important part.
China’s small and medium enterprises (SMEs) have a role to play in securing the country’s cleaner, gas-based economy. The 21st Century Maritime Silk Roadmap has highlighted their importance to China.
In mid-November 2017, China’s state oceanic administration (SOA) and the Shenzhen Stock Exchange jointly held dialogues with eight oceanic technology SMEs from Shanghai, Zhejiang, Fujian, Xiamen as well as more than 20 investment companies in China.
According to the SOA, these investor roadshows and business networking dialogues for areas such as green technology, oceanic environmental protection and sustainability, innovative growth, remote hydrocarbon exploration and development technology and maritime security, were held in coastal cities to encourage SMEs and business people to explore opportunities with investors and it is hoped, to enable a maritime industry to flourish.
Facilitating a sustainable and green seaborne supply of gas for use in China is important because China receives much of its energy by water. The BP Statistical Review 2017 calculated that China imported 34.3bn m³ of gas as LNG in 2016, of which almost half – 15.7bn m³ – came from Australia.
At the same time, China is also in the middle of transforming its economy, by decarbonising it as much as possible. Some of this could be driven by companies specialising in green high-technology. These dialogues also indicate a basic two-pronged approach between state and businesses: in particular, smaller enterprises can facilitate the economy of the future, which is seeking to rely less on hydrocarbons.
An International Finance Corporation report in 2012 reported the potential of sustainable energy financing for small and medium enterprises in China. It showed that back in 2012, SMEs which comprise more than half of China’s economy, have the potential to contribute to energy cost savings.
In particular, SMEs in six provinces – Guangdong, Zhejiang, Jiangsu, Shandong, Henan and Hebei – were ranked top in all aspects of energy cost saving potential. With the right encouragement, SMEs can be the driving force for a functional clean gas economy from ground-up.
SME – A Strategy of Belt and Road Initiative Blue Partnership
BRI has two main programmes: the Silk Road Economic Belt and the 21st Century Maritime Silk Road. Launched in 2013, they were viewed initially as foreign economic and political tools to foster win-win international relations for the benefit of China and more than 100 countries.
While the Silk Road Economic Belt has progressed significantly in the form of infrastructure and transport, based on co-operation with European, central Asian and African countries, the Maritime Silk Road project was mostly overshadowed by the concerns of neighbouring countries, some of which are still engaged in disputes with China over conflicting claims to the South China Sea, and the oil and gas beneath it.
Attempting to overcome this obstacle, the central planning agency National Development and Reform Commission (NDRC) and the SOA issued “A Vision for Maritime Co-operation under the BRI” in June 2017. The intention is to create a multi-dimensional, broad-based “Blue Partnership” to forge a “Blue Engine” of growth in collaboration with those other countries also situated along the Maritime Silk Road, to jointly develop and use marine resources including hydrocarbons.
The principles of co-operation were phrased in very positive terms and also included upholding a consensus-driven international ocean order with neighbouring countries; inclusive and collaborative development; and market-oriented, multi-stakeholder development and benefit-sharing. Broadly these principles of engagement should provide a framework for governments and businesses to gain from the Maritime Silk Road.
Focusing on SMEs, as well as micro enterprises, is just one of 19 major strategies aimed at facilitating China’s trade and economy – in this context, the BRI Blue Partnership along the 21st Century Maritime Silk Road. It is a simpler and faster solution to developing the Maritime Silk Road, especially in emerging industries such as maritime security and innovation such as the green movement. Strengthening SME growth is expected to strengthen the BRI Maritime Silk Road project.
SMEs are growing their contribution to the Chinese economy through the BRI. As of August 31, 2017, a report compiled by the Shenzhen Stock Exchange based on half-year annual reports disclosed by 887 companies on the SME Board, 145 companies involved in BRI projects across all sectors saw their average operating revenue amount to CNY 2.836 trillion, up 35.9% compared with last year, and net profits up 33.08% to CNY195bn. The revenue increases were recorded even as China’s economy slowed in 2017 on deleveraging and currency adjustments.
According to Standard Chartered’s proprietary SME Confidence Index published in October, a survey-based diffusion index gauging sentiment at more than 500 SMEs across China, the majority of SMEs still expect stable energy costs, with a slightly bullish bias. Just over a quarter, or 28.1%, predicted higher energy costs, up from 27.5% in September, while respondents expecting lower energy costs fell to 7.6% in October from 9.0% in September. This could be caused by China’s economic slowdown and the transition lag caused by coal-fuelled growth. LNG spot prices have also reportedly risen to a three-year high in the fourth quarter of 2017.
China’s September 30, 2017 announcement of targeted reserve requirement ratio cuts to improve commercial bank lending to SMEs which fulfil the “inclusive criteria” referring to innovative growth, poverty reduction and agriculture, is expected to ease funding concerns.
Nonetheless, Chinese Maritime Silk Road SMEs will continue to face high funding costs and business risks. While the June 2017 Vision mentioned increased inter-governmental financial investment tools such as the China-Asean Maritime Co-operation Fund, China-Indonesia Maritime Co-operation Fund, the Asian Infrastructure Investment Bank and the Silk Road Fund, less was said about available funding for maritime SME. Additional context specific funding options will have to be announced if the sector is expected to grow further with a nudge from government.
Green and Low-Carbon Maritime Silk Road
In the 2017 Vision, China suggested that to ensure coastal inhabitants’ welfare, a 21st Century Maritime Silk Road Blue Carbon Programme will be set up to monitor coastal and ocean blue carbon ecosystems, develop technical standards, promote research on carbon sinks and launch a 21st Century Maritime Silk Road Blue Carbon Report.
Demonstration of recycling and low-carbon development in maritime sectors are also part of the plan. These are new businesses which will bring additional revenue through the 21st Century Maritime Silk Road. While state-owned enterprises will allocate resources to these new segments, SMEs with specialised skills will be significant in starting up certain niche areas within the low-carbon technology development sector.
On the societal front, Sam Geall from the Lowry Institute observed in a November 2017 report that “a key uncertainty in transitioning away from coal is China’s response to the perceived social stability challenges from declining employment in carbon-intensive sectors”.
Cutting reliance on carbon-intensive areas disrupts business and creates new opportunities for small, medium and micro enterprises, which in some ways, are a symbol of small business owners making a living in China’s transforming market-oriented economy. This matches the requirements of emerging industries such as green-tech and innovative growth companies, for which such dialogues are expected to bring much needed funding and support, apart from SOE funding.
A further setback to the green movement were recent news out of China about how civilians have to endure harsh winter weather this season because coal power plants were switched off before gas pipelines start operations. It reflects how a transition to a low-carbon economy is costly and requires time, especially in an economy where low-carbon systems, infrastructure and policies were not yet fully developed.
Green tech and construction small and medium enterprises could be the solution to this transition phase, while aiding in the coal-to-gas transformation of the Chinese economy. Green tech small and medium enterprise development could also flourish if the state and lenders facilitate such development. The trend fits in the exponential demand for green technology, equipment and infrastructure.
21st Century Maritime Silk Roadmap (Credit: Wikimedia Commons: Lommes/CC BY-SA 4.0)
Maritime Security
“Maritime security is a key assurance for developing the blue economy,” according to the China Silk Route Vision. This aspect becomes more significant when examining the context of the Chinese-Pakistani Economic Corridor (CPEC), which was hailed a flagship BRI project.
Connecting China to the Indian Ocean via the Port of Gwadar in Pakistan, the CPEC plays a significant role in adding a transit route of maritime transportation of energy to China, which may be regarded cheaper, compared to existing pipeline construction. However as recently as 2016, terrorist attacks at Gwadar construction projects have been reported, and China’s plans for this part of the Maritime Silk Road were jeopardized. While China-Pakistan government-to-government support is present, it is the only time that Chinese security firms have played a part in ensuring that the Silk Route investments, project personnel and infrastructure stay safe.
An ideal scenario in which SMEs can play a role is taking the lead in exporting China’s “ecological civilisation”. From exporting China’s green technology in dealing with pollution of China’s scale to the standardisation of green financing for companies of all sizes, as well as the governance and co-ordination of China’s new gas economy, small and medium enterprises have much to contribute on a global and regional front where lessons can be learnt from China via the Belt and Road Initiative and Maritime Silk Road interactions.