Post Covid-19: Balancing a Company’s Reputation Risk along the Belt and Road Initiative


The future of globalisation in 2021 and beyond looks more optimistic compared to the grim 2020 reports concerning the cross-border flow of goods, people, information, data, and capital. Nevertheless, 2021 and 2022 are not going to differ from the previous years in terms of high uncertainty and a rapidly changing business landscape. The reputational risk is surging among the many risks that companies operating in a global business environment need to take into consideration.  Previously, companies were mainly concerned with environmental or social reputational risks, but during the past few years, the reputational risk, applied to fast changing geopolitical dynamics, is an increasingly important variable in the business risk management equation.

The Covid-19 pandemic, according to the 2020 edition of the DHL Global Connectedness Index, is not going to inflict a severe damage to the globalisation as it happened during the 2008 financial crisis. In 2021 trade and capital flow have rebounded and digital information flow is witnessing a new renaissance, also thanks to work from home and distance learning. Nevertheless, the pandemic’s constraint on the movement of people is a severe blow to the hope for a complete recovery.

In a post-Covid-19 scenario, China is the only major economy that has rebounded with a 2.3% GDP growth in 2020. The Chinese National Bureau of Statistics stated that in the fourth quarter of 2019, the GDP grew by 6.5% compared to the previous year.

At the same time, the geopolitical and geo-economic dynamics that characterized the relationship between Beijing and Washington during the Trump administration constituted a country risk and, above all, a reputational risk for any company attempting to conduct business with both countries. While Pyongyang and Tehran don’t need to worry about a further deterioration of their business relationship with the US, the rest of the world doesn’t have the same luxury.
The post-Covid-19 new normal and the policies ignited by the Trump administration in the relationship with China, profoundly affected the international trade and investment landscape as well as globalisation’s core dynamics.  While the Biden administration is still measuring its response to China, international businesses are caught between a rock and a hard place. The public tension witnessed during the first official meeting of the Biden administration with China in Alaska, foreshadows the present and future challenges of the China-US dialogue.  Winston Churchill said: Meeting jaw to jaw is better than war.

From 2021 onward, the only certainty in doing business with China is uncertainty. Even from a company’s business perspective, China’s current and future relations with different economic blocks from ASEAN to the European Union, China’s first trade partner, and above all with the United States, needs to be constantly monitored, assessed, and managed in order to prevent risks and mitigate crisis.

Nevertheless, the critical aspects associated with partnerships with China along the Belt and Road Initiative or via foreign direct investments (FDIs), do not deter companies in being part of the public-private partnerships (PPP) cooperation framework promoted by Beijing. On the one hand, China’s country risk from a macroeconomic perspective, despite the escalating trade disputes between Beijing and Washington, is low. On the other hand, from a geoeconomic point of view, the reputational risk is high as the perception of foreign companies operating in proximity or with Chinese state actors, may cause repercussions in international markets.

While working in a PPP framework, it is noteworthy to emphasize that the strategies of Chinese State-Owned Enterprises (SOEs) comprise an important political dimension that overlaps with the economic-financial one. As several BRI projects have already showcased, the attitude to risk and the priority of long-term Chinese geoeconomic strategies often have the upper hand over efficient choices for a short-term financial return on investment.

The Chinese choice to have foreign companies operating along the BRI ranges from financial risk transfer to acquiring much needed technological and managerial capabilities.

In addition, from the point of view of cybersecurity, the reputation of foreign companies could be on the line.  The Big Data component generated by the new cooperation has immediate implications for China’s cybersecurity law (June 2017) and it could collide with different national cybersecurity regulations such as the European GDPR (May 2018). Nevertheless, in the context of a market economy with ‘’Chinese characteristics”, the choice to support President Xi’s flagship foreign policy initiative offers several advantages including direct and preferential relations with Chinese state bodies, Chinese production and logistic networks, or access to preferential line of credit from Chinese state banks. Participation in the BRI also constitutes a strategic starting point for the penetration of the Chinese market.

Threat Matrix & Trends
In the last decade, several countries’ perception of China, from Australia to Sweden, has progressively shifted from strategic partner to economic rival. The US have even shifted its perception of Chinese risk as a present security threat.

Under Trump, the message towards China was straightforward: an economic adversary that in a not too short time could turn into an all-out adversary including military security and geopolitical influence. Therefore, investing in China and with China in third countries is getting increasingly complex for international companies. Once, international relations analysis and country risk management was a prerogative of nation states. Today, however, even SMEs are required to equip themselves with additional risk management tools. Among these risks, the reputational risk, if not taken into consideration at the time of collaboration with Beijing, can generate negative repercussions and externalities over the long term and in different markets.
The key points regarding the implications of joining the BRI from a reputational risk standpoint take broadly into consideration that this is a private-public partnership based on two different economic systems, with different priorities. Since the beginning of Xi Jinping’s presidency, the strategic goals of Chinese market socialism have neither been strictly related to an efficient financial return on investment nor to a shrinking of the state presence in the economy.

Key features of reputational risks and benefits are summarised as:
– Reputational risks as a result of the actions of the company’s Chinese partners outside the context of the partnership.
– Cybersecurity and impact of China’s national cyber law and interaction with other national cyber security laws.
– Benefits internal to the Chinese country context being part of China Manufacturing 2025.
– External benefits to the Belt and Road Initiative (BRI), Digital Silk Road (DSR), and Health Silk Road investment context
– Chinese financial sector to support the company products and services.

The impressive resources made available by Beijing in the development of the Belt & Road initiative offer an interesting opportunity for the allocation of foreign capital, technologies, and best practices. At the same time, investors must face challenges not only related to the business environment but especially to relations with governments that are directly or indirectly influenced by China’s economic diplomacy. As an example, the 2021 military coup in Myanmar showcased acts of violence against Chinese-owned textile factories as the protesters did not feel any support by China. A few years earlier in Vietnam, protests that turned violent against Chinese-owned companies included arson against South Korean and Singaporean companies just because they were perceived to be Chinese.

To add complexity to the already intricate geopolitical reality of the Belt and Road Initiative are the infrastructural shortcomings of the countries receiving Chinese investment.  In this respect, many local governments with a weak rule of law are prone to abuses, corruption, and violence that can spiral into anti-Chinese sentiments. In this context and on various occasions, the message regarding Chinese investments from the Cape to Cairo are tied to risk rather than return.

At the same time, Chinese investments promoted by the Belt and Road Initiative have generated different, but equally significant, political concerns from the ASEAN to the EU. The 17+1 group (Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Lithuania, Latvia, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia) is perceived as a sort of Chinese divide-and-conquer by northern European countries and the NATO bloc itself. The role of Cambodia in the ASEAN voting process is also a case in point. Similarly, the China 2025 industrial development policy has repeatedly alarmed foreign countries for possible Chinese economic interference, appropriation of intellectual property, access to dual use technologies, and a monopoly in the two leading sectors of future research: 5G and artificial intelligence (AI). In these two macro contexts, a partnership with Beijing can generate in the eyes of the actors involved a perception of geoeconomic interference in the first case, and as a national security threat in the second.
Nevertheless, China’s BRI is a turning point in geoeconomics in many ways. First, the BRI has the potential to close substantial portions of the infrastructure financing gap across Eurasia. If completed according to Chinese expectations, the initiative can help create a more stable and less risky business and investment climate. For now, Beijing’s investments are often associated with considerable risks for both the recipient countries and China itself as an investor and lender. These are financial, environmental, social, and governance risks. In this respect, the variable capabilities and political economies of the countries to which Chinese investments flow are a critical factor in the risk equation.

Risks with Chinese characteristics

Investing with China also requires an understanding of the risk attitude and issues that the market economy with Chinese characteristics has encountered when investing abroad.

Over the past decade, China’s economic footprint has expanded and diversified, as have the risks associated with it. Losses, financial disputes, and litigation in foreign jurisdictions are becoming a common problem for an increasing number of Chinese companies.

Since 2018, Beijing has repeatedly and very clearly announced that it will not support inefficient investments in the BRI. In recent years, there has been an increased overview of overseas investment projects, with an explicit focus on anti-corruption campaigns and an emphasis on “quality investments.” Chinese enterprises have developed internal procedures to address more advanced risk mitigation and have increased their engagement with international insurers and multinational enterprises. Chinese banks, in particular, have adopted more robust risk management procedures and demonstrated a willingness to engage with international partners to acquire best practices.

On a project-by-project basis, risk mitigation can be improved through a detailed, specific, and holistic assessment of all risks. Unlike Chinese attitudes, the risk and crisis assessment and management process must be embedded ex ante, coupled with a well-defined and continuous risk monitoring process. The assessment mechanism must include not only the necessary financial assessment of revenues, investments, and operating costs but also a comprehensive assessment of the project’s context; the risks to the project related to the working environment of the country involved; the environmental and community impacts of the project, and the security risks in the case of dual-use technology transfers.
Despite significant improvements, which are likely to be reflected in improved project quality in the years to come, the Chinese risk approach often remains focused on managing crises as they arise versus choosing to develop internal processes for prevention and mitigation.

In order to manage and properly monitor any business partnership along the BRI, it is necessary to take into consideration transparency and access to data. Gaps in information constitute a major obstacle to effective decision-making and risk management. Initiatives to collect data in a consistent and reliable manner, taking into account the needs and limitations arising from progressive and more stringent implementation of China’s cybersecurity law, will improve risk management and capital allocation.

Risk mitigation can be improved by requiring clear competencies, transparency, and governance of key projects as well as a continued focus on economic viability versus geopolitical objectives.

In the not-too-distant past, staying above the political fray was the best way to protect corporate interests and advance reputational ones. Now, geopolitics has once again returned to the attention of the markets and media impact for any company operating in proximity to China is, from a risk point of view, the most challenging to monitor and manage, both in terms of human resources and capital. The effects of recent geopolitical events on market performance are evidenced by the uncertainty created by the ongoing economic friction between China and the United States.

Last, but certainly not least, is the assessment of the geopolitical risk related to the proliferation of economic sanctions as a foreign policy tool. The Trump administration’s increasing weaponization of economic tools has projected the US as the leading country for sanctions enforcement globally. The evolution of the US sanctions under Biden administration must not be underestimated in order to navigate increasingly uncertain waters without well-defined maps.

Dr Alessandro Arduino
Principal Research Fellow, Middle East Institute, National University of Singapore; Co-Director, Shanghai Academy of Social Sciences, People’s Republic of China
April 2021