As markets in the West continue to turn inwards, Asia’s markets (led by China and India) are turning outward. While North America, Europe and South America talk about building walls, Asia is talking about building bridges.
In part, the shift towards the East is being driven by some of the issues discussed in the previous trend (Trend 3, Risk perceptions and realities change) — capital is moving towards places and projects where greater margins can be achieved adjusting for risk. Significant injections of capital into Belt and Road Initiative projects by China’s state-owned enterprises, banks and investors will increasingly draw money and capabilities to the East.
Yet, at the same time, many governments and development banks across the region also recognize that investment continues to be constrained by low levels of transparency, sophistication and project planning in many markets.
As the Asian Infrastructure Investment Bank (AIIB) noted in a recent report on infrastructure investment across eight Asian markets, “There is an urgent need to redouble efforts to mobilize private capital, and these would include improving project preparation, improving country policy framework, and sustaining the supporting conditions such as through better information for market players.”1
The good news is that — again, led by China — infrastructure capabilities are starting to mature across the region. A way to increase private capital participation and partly in response to growing demands for more competitive tender processes within target markets, China is working with its state-owned enterprises and infrastructure developers to gradually improve their focus on high-quality, sustainable and financeable infrastructure projects.
China is also driving innovation across the value and delivery chain. Indeed, when you consider the massive scale of China’s construction industries and the market’s rapid evolution in high-tech capabilities, we would be surprised if China does not surpass the West in a number of construction capabilities over the coming year (more on this in Trend 8, Infratech tilts the balance).
We are slowly starting to see the effects of increased innovation and internationalization ripple across the region as sophistication steadily improves across the delivery and supply chain — from planning and development through to financing and operations.
In China and across the region, much more will need to be done. As the AIIB report also noted, while expectations for private financing into Asia-Pacific have been high, actual levels have been falling since 2016. Continued macroeconomic pressures in many markets may further dampen investment over the coming year.
While the fruits of this trend will take some time to materialize, our view suggests that the winds of globalization will continue to blow from the East. And the force of those winds will only increase as greater sophistication, innovation, transparency and competition is achieved. It may take some time for some to feel the breeze shifting.
1 Asian Infrastructure Finance 2019 (PDF 11.1 MB)