Why Did China Take the One Belt and One Road (OBOR) Strategy and Initiate the Asian Infrastructure Investment Bank (AIIB)?

27 Jan 17

Why Did China Take the One Belt and One Road (OBOR) Strategy and Initiate the Asian Infrastructure Investment Bank (AIIB)?

By Michael Kon (Aletheia University, Taiwan), Shu-Ming Hsu (University of Taipei, Taiwan) and Long-Sheng Kung (National Taiwan University, Taiwan)

Abstract

This paper draws the following conclusions to explain why China wants to take the One Belt and One Road (OBOR) strategy. They are: (1) China can solve the problem of excess capacity; (2) China can secure energy supply from other countries more safely; (3) China may get rid of the political pressure from the United States. Moreover, the China’s industries can be benefited such as: (1) China’s businesses can expand export trade to overseas markets; (2) China’s construction industries can expand its business to overseas markets; (3) China’s businesses can expand their export trade by direct investment on overseas infrastructures. Also, this paper draws the following findings: (1)The AIIB can help some developing countries expand their infrastructure, and then China can increase its exports; (2) China can show its obligation to and culture friendship with other countries; (3) China can take the chance of expanding its trade with other countries to internationalize its currency; (4) China can take the chance of financing some countries in need of capital to establish the Friendly relationship with them; (5) China’s enterprises can take the chance of investing overseas markets to cultivate their internationalized talents.

Introduction

The economy of China has risen rapidly through the development of several decades. In 2010, China surpassed Japan to become the second economy in the world. At the end of 2014, China’s foreign exchange reserves have been to USD3.84 trillion.  But in recent years, China's economic growth has slowed down because of the rapid rise in labor costs. Besides, because China’s petrochemical, steel and other basic industries are facing market saturation and excess capacity, its economic growth eventually suffered negative influence.

Facing the trend of economic growth slowing down, president Xi Jinping visited Kazakhstan in September 2013. His intention was to put forward the Silk Road Economic Belt strategy and hoped to cooperate with the Central Asian countries for exporting China’s excess capacity on the basis of mutual benefits and win-win deal. Then, president Xi Jinping was invited to make a speech in the Indonesian parliament raising the concept of the 21st Century Maritime the Silk Road on October, 2013. Xi emphasized to cooperate with the countries of the Association of Southeast Asian Nations (ASEAN) on the basis of common development and common prosperity. From the political point of view, the Silk Road Economic Belt and 21st century maritime the Silk Road can be viewed as a response to the America’s “return to Asia Pacific” strategy.

In order to make the One Belt and One Road (OBOR) strategy effective, China initiated to establish the Asian Infrastructure Investment Bank (AIIB). China hopes to use this bank to finance the countries along the OBOR routes to expand their infrastructures and promote their economic growth. In fact, according to the scale of Asian Development Bank (ADB), the ADB cannot release sufficient funds to the countries in need for supporting their infrastructures. Consequently, the AIIB exactly can fill the funding gap. Because of this urgent need for infrastructure and the desire of winning some bidding projects, 57 countries, including developed and developing countries, have become the founding members of the AIIB.

In Table 1 (of the report), there are 24 developing countries. Obviously the ranking of competitiveness and infrastructure are significantly behind developed countries. It also means that there is a lot of room for improvement on the competitiveness and infrastructure in these developing countries. Especially, in most developing countries, the rankings of their infrastructure are lagged far behind the competiveness. Thus, evidently most countries along the OBOR routes are urgently in need of strengthening their infrastructure.

According to the process of economic development in China, strong infrastructure definitely plays a very important role for promoting economic development. Definitely, the government leaders of these developing countries completely understand the importance of infrastructure and try to seek the construction funds from the AIIB or from China due to China’s huge foreign exchange reserves.

Please click to read full report.