China’s digital silk road

While railways and ports are becoming the landmarks of Belt and Road Initiative (BRI) deployment, less-visible telecommunications infrastructure will form the backbone of regional economic integration.

Written by The Economist Intelligence Unit on behalf of HSBC

The project of a “digital silk road”, first proposed in July 2015 at the China-EU Digital Cooperation Roundtable in Brussels, involves investments in many sectors, from e-commerce and telecoms to scientific cooperation and the smart economy.

The “Digital Belt and Road” is an important component of Beijing’s strategy in BRI countries. According to a March 2015 Action Plan on the BRI issued by the National Development and Reform Commission, the Ministry of Foreign Affairs, and the Ministry of Commerce,1 it will mainly consist of the construction of cross-border optical cables and mobile networks, as well as the development of e-commerce between China and BRI countries.

Despite a lack of specifics so far, the plan could be instrumental in addressing the crucial infrastructure needs of China’s trade partners. According to a 2016 ITU (International Telecommunication Union) report, Sri Lanka, Cambodia, Afghanistan, Bangladesh, Laos and Yemen – all countries along the Belt and Road – fewer than 20 per cent of households use the Internet.2

Telecoms will also be key in unlocking the huge South-east Asian market, with a young and information-hungry population. Indeed, Chinese investment and technologies are already driving developments across the region, and although this process did not originate with the BRI, it is likely to be intensified within the framework of this initiative.

Overall, the emphasis on a digital BRI reflects the Chinese government’s ambition to redirect investment priorities from natural resources and industrial goods to technology and consumption-oriented sectors.

Building telecoms infrastructure

Both Chinese state-owned (China Telecom and China Unicom) and private (Huawei and ZTE) companies have played an increasing role in building new underwater fibre-optic cables across BRI countries in order to improve international digital connectivity.

In 2017, Huawei signed a deal to build the Pakistan East Africa Cable Express (PEACE), linking Pakistan to Kenya via Djibouti, which may then be extended north to Egypt and south to South Africa, reaching a total length of 13,000 km. China is also considering building a fibre-optic cable across the Arctic Circle, along with Finland, Japan, Russia and Norway.

In addition to this, China is developing land-based routes to help increase connectivity in landlocked countries in Central Asia and Africa. For example, since 2013, Chinese companies have taken on ambitious projects such as the “Diverse Route for European and Asian Markets”, the world’s longest Trans-Europe–Asia cable link.

Improving mobile networks and cloud solutions

Due to weaknesses in fixed-line infrastructure, mobile networks play a crucial role in most developing countries along the BRI, and are critical in allowing the population to access global trade and communication networks.

ZTE and Huawei have a long-standing presence in Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. In 2015, China signed a partnership with the EU to coordinate the research and development of 5G networks. Chinese companies are also developing their presence in Africa and South-east Asia, where Chinese development banks provide loans to fund mobile network-building projects in finance-starved countries. This financial support in turn provides Beijing with considerable leverage to favour Chinese companies and help them secure key markets.

Chinese companies are also planning to tap into the BRI market for cloud computing. Inspur, China’s largest server maker, announced in 2017 that it would partner with four global IT companies (Cisco, IBM, Ericsson, and Diebold Nixdorf) to provide data centres and fintech-related services in BRI countries.3

The Chinese government is also promoting its Beidou satellite network, a competitor to GPS (Global Positioning System), along the BRI. Pakistan has become the first foreign country to use China’s navigation system, and Beidou has pledged to cover most areas along the BRI by 2018. It now has more than seventeen communication satellites in orbit.

Developing e-commerce and smart cities

Developments in connectivity can also drive increased e-commerce in BRI countries. E-commerce is flourishing in China, and in Asia-Pacific it is expected to more than double and to make up around 25 per cent of total retail sales by 2021, according to a 2017 eMarketer Report.4

Alibaba and JD.com, the two Chinese e-commerce giants, have pledged massive investment in logistics to facilitate cross-border trade. In 2017, JD.com announced a plan to operate more than 20 self-run overseas warehouses and to cover more than 100 countries and regions.5 The same year, Alibaba signed partnerships with Pakistan and Malaysia to develop e-commerce, improve regulatory processes, and build services platforms and warehouses, in order to help small and medium-sized businesses access the Chinese market. Also in 2017, the Chinese government signed memoranda of understanding on e-commerce cooperation with Australia, Estonia, Hungary, Cambodia and Brazil.

Chinese technology for online payments has been increasing its presence in BRI markets in recent years. Alipay, Alibaba’s online payment platform, provides financial services in emerging markets, including India, Thailand, the Philippines, Indonesia, South Korea and Malaysia. In February 2018, South Africa’s Standard Bank announced that it would accept Chinese UnionPay card payments in African markets by the end of 2018, paving the way for Chinese online payment in the African market.6

Finally, China intends to export its knowledge of smart cities, smart electricity grids, and smart transportation and logistics, as well as smart agriculture. The objective, in all these projects, is to use electronic data to manage assets and resources more efficiently. In 2017, China took on a massive smart city building project, the City of Pearl, in Manila Bay – its biggest project in Philippines. Since 2017, Alibaba and Huawei have also signed deals to develop smart cities in Kenya, Germany, and Malaysia.

Risks and opportunities

Increased Chinese involvement in technology infrastructure poses certain risks and opportunities for BRI countries. Satellite and mobile networks, as well as the fibre-optic projects, could benefit developing economies by improving their connectivity. However, they have raised concerns that Beijing could use these networks to exert pressure on other states or engage in electronic surveillance.

On the other hand, the development of e-commerce and regional trade could help local products in South-east Asia, Africa and Central Asia reach the Chinese market more easily, boosting local economies and helping small-scale producers.

Expanding the digital economy may profoundly transform BRI countries – and South-east Asian economies in particular – and the advantages may outweigh the risks. In order to achieve this, BRI countries will need to enhance regulatory frameworks and oversight of projects to mitigate financial risks and political dependence. Another major challenge will be to ensure socially-inclusive impacts of cross-national trade. This will require diverse policy approaches, such as those encouraging financial inclusion and access to international markets.

1 http://en.ndrc.gov.cn/newsrelease/201503/t20150330_669367.html

2 ITU (2016), “Measuring the Information Society Report”, cited in Das, Sanchita Basu (2017), “OBOR’s Digital Connectivity Offers Both Benefits and Risks”.

3 http://www.scmp.com/tech/enterprises/article/2118179/chinese-server-giant-inspur-alliance-global-tech-leaders-offer

4 https://www.emarketer.com/Report/Asia-Pacific-Retail-Ecommerce-Sales-eMarketers-Estimates-20162021/2002091

5 http://www.chinadaily.com.cn/business/2017-04/26/content_29090311.htm

6 http://www.xinhuanet.com/english/2018-02/06/c_136951508.htm

A feature by The Economist Intelligence Unit