The Belt & Road initiative needs offshore investment to succeed, says Elise Donovan, Director, BVI House Asia.
China’s Belt & Road Initiative (BRI) is perhaps one of the most ambitious infrastructure projects in modern history. A recent report by Baker McKenzie estimated that US$350 billion will be committed to BRI projects by China by 2022, whilst ratings agency Fitch revealed that US$900 billion in projects were already planned or underway. In order to achieve its ambitious targets the programme will require massive investment not just from the People’s Republic of China, but from partners, businesses and investors all over the globe.In order to achieve this level of co-operation across 134 nations, international entities must operate across one common law to allow for seamless business arbitrage and ultimately, allow for a profit-making enterprise.
Bringing nations together
Many such projects are already being set up using offshore Joint Venture or Holding Companies. These arrangements allow for a Chinese company, headquartered in China, to set up group-level financing and begin the process of bringing on board investors. The company can then set up an offshore Holding Company which allows any business or individual from another country to join with the Chinese company.From this, the Chinese and international parties are able to form an offshore Joint Venture corporation enabling them to cement their agreements and organise project-led financing. In this way they are also able to work up project contracts, government and engineering programmes and any other legal outlines that allow them to organise their pan-continental building projects.These structures make it more efficient and simpler to operate on a local level with the relevant authorities and organisations, whilst facilitating international investment with minimal disruption.
The role of English common law
So why should a China-based business create a Joint Venture Company via an offshore financial centre? Importantly to the BRI, inward investment by international entities is heavily regulated by China and the approval, registration and filing procedures can be a complicated and time consuming process. Incorporating offshore also enables joint venture businesses to choose to refer back to English Common Law – the world’s most recognised and agreed-upon legal system.English law has fully developed jurisprudence and a universally respected judicial system. Contracts under English law are largely straightforward and understandable in comparison to some of the more arcane elements of US legal drafting, for example. This means international interpretations of contracts and agreements are clearer and less likely to end in contention. Furthermore, many international investors prefer English law as opposed to the laws of the People’s Republic. Under English law for example, parties can agree to refer matters in dispute to arbitration, whereas in China different rules on dispute resolution apply depending on the presence of a foreign party.
The ‘bankability’ of the BRI
As well as making it easier to facilitate business and manage disagreements between parties, operating BRI projects via an offshore vehicle assures international banks of the so-called ‘bankability’ of projects they are investing in.Banks want to feel comfortable that the BRI projects they invest in will be profitable. As such, many Western and Japanese financiers may prefer the provisions and protections of English law to help achieve this. Whilst the law of the People’s Republic is quickly evolving and adapting to the challenges of its trillion dollar pan-continental endeavour reliant on the investment of hundreds of countries, non-Chinese parties with limited exposure to the region may not yet be well versed in doing business in Chinese law. For those companies, the bankability of many BRI projects may well be reliant on the offshore vehicles that power them. For investors with less exposure to particular regions along the BRI route, they may also look to set up an offshore Joint Venture in order to keep assets protected from potential loss, damage or sequestration resulting from socio-political instability or delinquent legal, regulatory or enforcement institutions. This route enables mitigation of risk, making the venture far more bankable for investors.
Many Chinese and international businesses looking to invest in the Belt & Road Initiative have already been using offshore vehicles for years, underlining how integrated the region’s economy is with offshore financial centres. The British Virgin Islands in particular was the second largest investor in China from 2006 to 2012, providing US$7.72 billion of inward foreign direct investment in 2012 alone. What’s more, according to recent research by independent economics consultancy Capital Economics, two-fifths of all BVI Business Companies were located in China and other Asian countries whilst the region accounted for more than 40 per cent of the US$1.5 trillion in assets mediated through the BVI.China has already built much of its existing economy around offshore vehicles such as the British Virgin Islands. Now, as it looks towards the next step in its development, these jurisdictions will provide a safe and secure place to conduct international business ensuring China is able to achieve its vision of the new Silk Road.