| By Andrew Kitson and Kenny Liew

Summary: While the core focus of China’s Belt and Road Initiative (BRI) is on traditional infrastructure deployments, it is evident that the Digital Silk Road is a key part of the overall BRI strategy, and China will leverage technology to increase its influence along the route. Opportunities exist in the deployment of telecoms infrastructure, data centers, and smart cities. Technology security concerns will be a major hurdle for Chinese vendors as they move to deepen and widen the BRI’s technology footprint.

The Digital Silk Road has become the focal point of the BRI as controlling the flow of data becomes increasingly important for shifting the balance of geopolitical power in China’s favor. The Chinese government has sought to build out telecoms infrastructure across BRI member/partner states by championing local technology companies and leveraging state-owned banks to fund construction projects. Besides the “Digital Silk Road” and its networks of new fiber-optic cables, China has also launched a “Spatial Information Corridor,” consisting of Chinese-backed systems of communications, positioning, and observation satellites. Chinese enterprises, which were already present in most markets along BRI routes, have jumped at the opportunity to accelerate their expansion plans, boosted by additional state support.

There are three main ways in which the telecoms, media, and technology sector will continue to develop in conjunction with the BRI across Asia, the Middle East, Europe, Africa, and Latin America:

Chinese telecoms equipment makers—including Huawei Technologies and ZTE—will play a prominent role in the launch of 5G networks across BRI member states, leveraging their relationships with the Chinese government to win concessions. Besides wireless networks, Chinese companies will also be involved in the build-out of fiber-optic cables and other communications infrastructure projects.

Data centers and data storage infrastructure will continue to be built along BRI routes as China’s communications providers look to position themselves in less-developed markets to benefit from the take-up of digital services as they move up the technology value chain. At the same time, Chinese consumer-technology players will invest in companies that already provide digital services throughout the BRI footprint.

Chinese companies will seek to use the BRI as an opportunity to export their interpretation of smart city sensor and data platforms. At the same time, governments could be attracted to the Chinese model of cyber governance, although Fitch Solutions views this risk as low.

5G: One of Many Facets of Chinese Telecoms Dominance

The Chinese government, together with state-owned banks, will continue to extend loans to both Chinese companies and governments of BRI member states to fund the deployment of telecoms infrastructure across the BRI. State support has allowed these Chinese companies to enter many new markets and offer subsidized prices, edging out competing telecoms equipment suppliers such as Ericsson and Nokia. In many developing BRI markets, the deployment of communications networks at the lowest cost will take precedence over any—so far unfounded—fears of Chinese telecoms gear potentially being weaponized and, as a result, Fitch Solutions expects Huawei Technologies, together with compatriot ZTE, to dominate 5G deployments across many of the BRI member states.

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Recently announced 5G investments in BRI markets include:

• In August 2019, the Serbian government announced that Huawei was keen to develop the country’s 5G network infrastructure.

• In June 2019, Russian operator MTS signed an agreement with Huawei to conduct 5G trials and deploy a 5G network. The agreement was signed at the St. Petersburg International Economic Forum (SPIEF), where Chinese president Xi Jinping was in attendance.

• In April 2019, Cambodia’s Ministry of Post and Telecommunications signed an agreement with Huawei at the Second Belt and Road Forum (BRF) to develop a 5G network. Cambodian operator Smart Axiata announced in July 2019 that it would build its 5G network in cooperation with Huawei.

The availability of advanced fiber-optic cables underpins the viability of 5G networks, and therefore China has undertaken many fiber-optic cable projects in order to increase its ownership of the flow of global data traffic. Both terrestrial and subsea cable deployments have the potential to reduce latency and data packet travel times between countries, and, at the same time, add redundancy to each other. The “Transoceanic Fiber Optic Cable,” which was conceived following the Second BRF in April 2019, is one of 35 key projects and initiatives being prioritised for development, although details of the new subsea cable are still scarce. There have been several other investments into cable links, including, but not limited to:

• The 820-km, $44 million Pakistan-China Fiber Optic Project, completed in February 2019. 85 percent of the project is funded by the Export-Import (Exim) Bank of China through a concessionary loan, with the remainder funded by Pakistan’s government.

• The Pakistan East Asia Africa Cable Express (PEACE), spanning 12,000 km, which is being deployed by Huawei Marine and is set to come online in the first quarter of 2020. The project will be partly funded by the state-owned China Construction Bank.

• An African Information Superhighway, which involves the construction of a 150,000-km optical cable covering 48 African countries was proposed by China Communications, a subsidiary of China Telecom, in March 2017.

• In September 2018, the Exim Bank of China loaned $328 million to the Nigerian government to build a Huawei-commissioned telecoms network.

Ultimately, the use of Chinese equipment in 5G networks is unlikely to lead to a fragmentation of the global technological ecosystem, given that 5G standards are dictated by internationally established telecoms associations, namely the 3rd Generation Partnership Project (3GPP) of the International Telecommunications Union (ITU). The use of Chinese equipment will largely be a question of effectiveness and cost, rather than a preference for a particular standard. In December 2017, the National Standards Committee further issued a “One Belt One Road” Action Plan (2018 – 2020), proposing to deepen the standardization of infrastructure networks and increase the level of compatibility between Chinese and international standards.

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Data Center Investments to Enable Better Digital Services

As transmission infrastructure becomes more robust and widespread along the BRI, the opportunity will emerge for tech companies to tap into pockets of previously underserved populations. As a result, Fitch Solutions believes that data center investments will pick up momentum in the short-to-medium term, as hosting content closer to end-users will allow for lower data packet travel times between countries, resulting in more efficient digital services. Coastal countries will emerge as investment hotspots, as this will allow the data centers to have direct access to subsea cables, allowing for greater regional connectivity. Landlocked countries will receive less attention, although there are several countries through which fiber links built by the Chinese now pass that could be suitable locations for data centers. These are largely countries at the intersection of Asia and Europe, such as Tajikistan and Afghanistan.

• China Telecom Global is expanding rigorously into other overseas markets in partnership with Chinese data center providers Daily Tech and Global Switch. The trio announced plans to build a Hong Kong data center in December 2017, and in March 2019 agreed to launch a data center in Singapore. Chinese steel giant Jiangsu Shagang Group took full control of Global Switch at the end of August 2019, making it wholly Chinese-owned. As a leading independent carrier-neutral colocation provider, Global Switch will have a key role to play in furthering the reach and cost-effectiveness of the Digital Silk Road.

• China Mobile International launched its first data center in Singapore in July 2019 while highlighting the city-state’s importance as a key BRI node.

• Alibaba Cloud has been leveraging China’s influence along the BRI to expand the availability of its cloud computing services. Most recently, it launched new data centers in Japan and Indonesia in January 2019.

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The rise in data center investments coincides with increasing Chinese investments into digital services players along BRI routes; these companies are seeking to capitalize on improved take-up of digital services as better infrastructure becomes available. For instance, Tencent and Alibaba have invested into Southeast Asian ride-hailing services Grab and Go-Jek, while Ant Financial (Alibaba’s payment subsidiary) has piled cash into many fintech companies globally (see table).

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Smart City Projects Also in Focus

Smart city projects will proliferate along the BRI route, as Chinese companies look to export their solutions using the pretext of BRI as a cover. Critics have pointed out that the BRI is being used as an avenue for China to export its model of cyber governance, and this has been echoed in allegations of cyberespionage; notably, Huawei has been accused of assisting the Ugandan and Zambian governments with the surveillance of political opponents, claims which both African countries and Huawei have denied. In August 2019, at the Beijing Cyber Security Conference, the Chinese government called on local companies and research institutes to strengthen cooperation with the international community under the BRI to “jointly safeguard cyberspace security and order.”

While critics have suggested that several countries along the BRI, mostly in Southeast Asia, have been attracted by China’s strict laws on data localization, such changes are mainly being made to safeguard data on citizens and spur foreign investments into local data center capacity, rather than due to a preference for China’s model of cyber governance. Nevertheless, the potential for these systems to be used by local governments to crack down on social unrest and political opposition groups should not be completely dismissed.

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Digital-first projects will come hand-in-hand with conventional infrastructure development projects under the BRI, which include urban transport and utility projects. Chinese president Xi Jinping has highlighted that the development of big data, cloud computing, and smart cities is key to the Digital Silk Road, with better connectivity and better data management allowing governments to better respond to rapid urbanization and booming population growth. Operators will be keen to roll-out Machine-to-Machine (M2M) solutions to provincial/municipal governments and develop smart city solutions in areas such as waste management, energy monitoring, and traffic control.

• In April 2019, the Chinese government extended a $172 million concessional loan for the construction of a smart city in Kenya called the Konza Technology City. The new development will feature a surveillance system and National Cloud Data Center, all to be built by Huawei.

• In April 2019, Pakistan’s government signed a memorandum of understanding with Huawei to build a data center in the South Asian country following Prime Minister Imran Khan’s visit to China. The Chinese government had previously extended a $124 million concessional loan to Pakistan to spend on Huawei technology as part of a “Safe City” surveillance project in Islamabad.

• In February 2017, Huawei signed a strategic partnership agreement with Serbia’s Ministry of Internal Affairs and has been working with the Serbian government on a surveillance project in the capital of Belgrade since September 2018. Huawei has also expressed interest in applying its government cloud system in the country.

Clear Geopolitical Struggle Between the U.S. And China

Fitch Solutions believes that the development of new technology will remain a critical source of tension in U.S.-China relations in the years ahead, and the BRI will continue being a key tool for China to advance its aim of becoming a major technology power. The deployment of infrastructure along the BRI largely excludes U.S. technology, which also raises U.S. concerns about the surveillance of data traffic and the risk of potential interception of critical financial and security information. Chinese technology companies are already highly adept at using artificial intelligence (AI) to power both their internal business processes and, particularly in the case of media-centric players such as Tencent and Baidu, their relationships with customers. The data gathered from both partners and consumers will give Chinese players even more power to influence BRI markets.

Andrew Kitson is the head of Technology Sector Research and Kenny Liew is a Technology Sector Research Analyst at Fitch Solutions.

Abstracted from Fitch Solutions’ special report, “Sustainability Trends: Influencers, Drivers And Implications By Industry,” published July 2019.