Presented by Thomas Chan, China Business Centre, The Hong Kong Polytechnic University on 29 Oct 2015

This is a presentation for the Conference on Silk Road Strategy (Series II): Focus on Tajikistan” organised by the China Business Centre, The Hong Kong Polytechnic University and the Silk Road Economic Development Research Center.

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By Standard Chartered Bank

Summary

The China-led OBOR initiative aims to boost trade and investment growth through better infrastructure connectivity across Asia, extending to the Middle East, Africa and Europe. Simply put, ‘One Belt’ is a modern-day Silk Road, and ‘One Road’ is the maritime equivalent. The OBOR initiative has the potential to channel China’s savings and construction expertise to other countries to resolve their infrastructure bottlenecks, while making more efficient use of China’s excess capacity.

We estimate that official financing for OBOR could potentially top USD 1tn in the next decade. Infrastructure investment entails long-term investment commitments with uncertain returns, and official involvement is indispensable. We expect the recently established Asian Infrastructure Investment Bank (AIIB), New Development Bank (NDB) and Silk Road Fund (SRF), together with China’s policy banks, to play a leading role in supporting infrastructure development at the early stage. The AIIB, in particular, could potentially spur investment by other development banks and ‘crowd in’ private investment.

Commercial banks with substantial footprints along the OBOR are likely to play an important role in amplifying the effects of official funding. China’s strategy needs to be aligned with those of the other OBOR countries. The initiative has raised concerns in both OBOR and non-OBOR countries about China’s political and economic agenda. China-led investment in strategic industries such as telecommunications and energy may raise fears about the country’s expanding influence. To be successful, China needs to improve strategy alignment with other countries, gain the support of local communities, and embrace market principles and transparency. Domestically, China needs to better coordinate the investment plans of local governments to prevent a new round of over-investment.

If implemented effectively, the initiative can boost growth, Renminbi use and commodity demand. The expected infrastructure investment boom will not only lift demand immediately, but also raise potential growth rates by building physical capital. China will also benefit through more effective use of its excess capacity. In particular, we estimate that official financial support for the OBOR initiative may increase demand for crude steel by 200 million tonnes (mt) in 10 years, or 20% of China’s annual production capacity. Commodity-intensive infrastructure investment will also support commodity demand and prices. The initiative may accelerate China’s shift from being the world’s biggest goods exporter to a major capital exporter, and expand the use of Renminbi in international trade, investment and financial transactions.

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By Lawrence J. Lau

Economic analysis tells us that voluntary free trade benefits both the exporting and the importing countries. It also tells us that direct investment, which is necessarily long-term in nature, and long-term portfolio investment benefit both the investor and the investee countries. So on this basis, both international trade and long-term cross-border investment should be encouraged and promoted. What new initiatives can be undertaken to enhance the growth of international trade and long-term cross-border investment, and in so doing enhance the growth of the world economy as a whole?

The United States, as the largest trading nation in the world, in terms of goods and services, and China, as the second largest trading nation in the world (the largest in terms of goods alone), can jointly provide leadership in global trade promotion initiatives. Similarly, the U.S. and China, as the two largest countries of origin as well as destination of foreign direct investment can also jointly provide leadership in facilitating cross-border direct investment.

Even though for the economy as a whole every trading country is supposed to have a net gain from international trade, trade does create both “winners” and “losers” inside every country. One vexing problem of long standing for governments worldwide is how to redistribute the gains from international trade among their citizens so that everyone, or almost everyone, receives a net benefit. Unless the “losers” can feel that they have also benefited from international trade, they will oppose the expansion of trade and further opening of the economy. This is a problem that we shall attempt to address in Sections 2 and 3.

The harmonisation of product standards is also a long-standing issue in international trade—if standards can become more harmonised, it will facilitate trade, reduce transaction costs and lower the prices of many imported goods. Another major issue is the redefinition of the rules of origin to take into account the fact that the same product is today processed at or includes components and parts from many different economies so that it cannot be properly considered to have originated solely from the location of the final assembly and packaging. There is a crying need for the revision and simplification of these rules and to base them on the relative value added of different economies to a finished product. The treatment of cyber trade is also becoming a hot issue as it has been increasing by leaps and bounds, both within as well as across economies.

The growing proliferation of free trade areas (FTAs) around the world also raises the concern that the world trade system may once again become fragmented. A mechanism for open accession by countries or regions which are not original signatories to specific free trade agreements will help to avoid the increasing fragmentation of the world trade system. There is also a need to facilitate long-term cross-border investment flows, especially considering the vast differences in saving rates and demographic conditions across different economies. Bilateral or multilateral investment treaties based on the principle of national treatment can be very useful in this regard.

Finally, it may be helpful to the reduction of global carbon emissions by imposing a global tax on imports that depend on the carbon content. The tax rate does not need to be high, but such a tax will send a signal that the entire world will be working together to prevent climate change. All of these issues will be discussed.

This is the time for developing innovative ideas! This is the time to consider the next generation of enhancement of the world trade and investment systems!

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By Lawrence J. Lau

The age of the Renminbi is just beginning. In order to understand the rise of the Renminbi, it is important to realise that the centre of gravity of the World economy, in terms of both GDP and international trade, has been gradually shifting from North America and Western Europe to East Asia, and within East Asia from Japan to China, over the past couple of decades. China has become the second largest economy by GDP as well as the second largest trading nation in the World. The Chinese economy has also been growing and continues to grow at much higher rates than North American and European economies and Japan. China, with a national saving rate in excess of 40%, is a potential large foreign direct and portfolio investor to the rest of the World.

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By Stuart Larkin, Institute of Southeast Asian Studies

Executive Summary

The Asian Infrastructure Investment Bank (AIIB) is one of two new China-led multilateral development banks launched during 2014, along with the US$ 40 billion Silk Road Fund. They join an existing array of institutions for China to export capital and together they signal a quantum step up in the country’s international financial expansion.

The Silk Road Economic Belt and the 21st Century Maritime Silk Road together envisage a comprehensive trans-Eurasian network of economic corridors and maritime trade routes (with the inferred market penetration), with the countries of Eurasia and the maritime Asia Pacific invited to join a “community of shared destiny”.

The AIIB’s purpose is to lead on implementing this “Belt and Road” vision, and become an instrument of “soft power” by providing “public goods” to address the region’s “funding gap” with its infrastructure loans. AIIB’s multilateral structure is for inclusiveness to help alleviate political opposition and fear of China’s rapid rise.

The AIIB plays a role in China’s domestic economic restructuring by exporting capital. The country needs to drain its domestic economy of surplus savings to improve returns on investment and raise the efficiency of resource allocation at home.

China’s US$ 4 trillion of foreign exchange reserves can be drawn on to finance infrastructure development for a return superior to those of US Treasury bonds. But the AIIB will also play a role in channelling Renminbi savings overseas by selling its own bonds in the home market as well as developing the offshore Renminbi market by securitizing its project loans.

Effective redress of regional (and global) infrastructure finance markets requires considerable managerial, technical and diplomatic skill. If successful, China will become a major player in global finance.

“China’s “Great Leap Outward”: The AIIB in Context” by Stuart Larkin, first appeared in ISEAS Perspective No.27, 2015. Reproduced here with the kind permission of the publisher, Institute of Southeast Asian Studies, Singapore http://bookshop.iseas.edu.sg

By Fung Business Intelligence Centre

While the Belt provides ample opportunities for sourcing resources and commodities from the West and Central Asia, the emerging South and Southeast Asian countries along the Road are potentially vast consumer markets. It was estimated that countries along the Belt and Road would create an “economic cooperation area” that jointly account for 64.2%, 37.3% and 31.4% of the world’s population, GDP and household consumption respectively. The report also pointed out that in implementing the “One Belt One Road” initiative, business opportunities would be seen in sectors such as infrastructure construction, finance, trade and logistics, distribution and retail.  

Please visit the Fung Business Intelligence Centre website for the full report.

By Zhao Hong, Institute of Southeast Asian Studies

Executive Summary

In 2013, Chinese President Xi Jinping unveiled plans for two massive trade and infrastructure networks connecting East Asia with Europe. While Southeast Asian countries may laud some of Beijing’s initiatives, their view of the long-term trajectory of their economic relations with China is also tinged with caution, for two reasons.

First, as the economic size and power of China have expanded tremendously relative to Southeast Asia since the 1990s, this growing asymmetry alone worries some in the region, and poses an important obstacle to China’s ability to convince ASEAN countries that its intentions are benign.

Second, ASEAN countries may worry that being overly dependent on China economically would allow Beijing to use its dominance to undermine their foreign policy. For example, the Philippines, the second largest Southeast Asian state by population, seems to be excluded from the Maritime Silk Road.

For China, the construction of “One Belt One Road” is the primary strategic objective for the coming years. It cannot be easily separated from the South China Sea question, especially in view of the new round of dispute escalation since April this year. Therefore, it is essential for China to still (or at least significantly reduce) the security concerns of ASEAN countries.

Although there exist some problems between China and ASEAN countries, especially disputes over maritime territory, Beijing sees the development of its relations with ASEAN as a priority in China’s foreign diplomacy. The New Maritime Silk Road and the establishment of the Asian Infrastructure Investment Bank (AIIB) manifest China’s long term commitments to the region, suggesting that the importance of ASEAN in China’s overall diplomacy layout is on the rise.

Indeed, as the largest country among the claimant states in the South China Sea and a major power in Asia Pacific and the world, China should exercise more leadership in facilitating joint development in the South China Sea. This holds prospects for longer term territorial compromises and can become an underpinning factor for peace and stability in the region.

“The Maritime Silk Road and China-Southeast Asia Relations” by Zhao Hong, first appeared in Trends in ISEAS Perspective No.35, 2015. Reproduced here with the kind permission of the publisher, Institute of Southeast Asian Studies, Singapore http://bookshop.iseas.edu.sg

By Zhao Hong, Institute of Southeast Asian Studies

Executive Summary

In 2013, Chinese President Xi Jinping unveiled plans for two massive trade and infrastructure networks connecting East Asia with Europe: the New Silk Road and the 21st Century Maritime Silk Road (“one belt one road”). The plans aim to reinvigorate the ancient Silk Roads with a modern network of high-speed rail, motorways, pipelines and ports stretching across the region.

The idea of the New Silk Road and the New Maritime Silk Road was raised because China’s domestic economy is experiencing structural changes that reflect a “new normal” of slower but better quality growth.

More importantly, it signals a shift in China’s strategic thinking and foreign policy towards prioritizing the relationship with neighbouring countries. Hence, it has many implications for Southeast Asian countries.

China’s extension of the New Silk Road diplomacy is driven by both economic and political considerations. It is eager to participate in the construction of ports and other related facilities in Southeast Asia and hopes that outward infrastructure investment will help boost production capacity in its iron, steel, aluminum and cement industries for export purposes.

China sees a huge potential in upgrading infrastructure in Southeast Asian countries and is hence supportive of Chinese companies’ participation in such projects. The competition among Chinese provinces for much of this business is likely to launch a new round of investment projects. Some of China’s local governments have been lobbying and organizing activities for preferential policies and financial support from the central government since the Maritime Silk Road initiatives were announced.

Beijing’s new Maritime Silk Road initiative poses an attractive vision of countries working together in pursuit of mutually beneficial cooperation. This initiative appears all the more seductive when it fits with the Master Plan on ASEAN Connectivity and President Jokowi’s vision of maritime power. Nevertheless, there are a number of challenges that China will have to deal with.

Indonesia is the largest country in Southeast Asia and shares many common interests and visions with China in the context of the New Maritime Silk Road initiative. The two countries can strengthen cooperation on transport infrastructure construction as well as on security.

ASEAN countries badly need more infrastructure investment and perceive that multilateral and private sector organizations are not acting fast enough to meet their needs. However, while China has tried to reassure its neighbours that its rapid rise is accompanied by peaceful intentions, there is no guarantee that this will be the case in the long term. There exists a deep-rooted fear among Southeast Asian countries that China has plans that go beyond building roads, laying railways, upgrading ports and boosting trade.

“China’s New Maritime Silk Road: Implications and Opportunities for Southeast Asia” by Zhao Hong, first appeared in Trends in Southeast Asia No. 3, 2015. Reproduced here with the kind permission of the publisher, Institute of Southeast Asian Studies, Singapore http://bookshop.iseas.edu.sg

By E Zhihuan, Chief Economist, Bank of China (Hong Kong)

In light of the recent global economic landscape, the Chinese government launched the Belt and Road Initiative, a national strategy that represents a new form of cooperation. The initiative is expected to turn a new page in international cooperation, create new synergy for the world’s economic growth, and provide Hong Kong with new opportunities for development.

Four innovations of the Belt and Road Initiative

Regarding international cooperation, the initiative presents four key new ideas:

Driven by multiple cooperation mechanisms, the initiative aims to build a community of shared interests through improving infrastructure and connectivity. This innovative concept and type of economic cooperation is significantly different from the traditional ways of regional cooperation.

The initiative focuses on building six major economic corridors, including the New Eurasia Land Bridge, China-Mongolia-Russia and China-Pakistan Economic Corridors, to enhance the flow of capital and talent around the world.

Under the “One Country, One Policy” principle, China has signed Memorandums of Understanding and formulated roadmaps with countries along the Belt and Road, which sets a new example of international cooperation.

Multilateral financial institutions such as Asian Infrastructure Investment Bank and New Development Bank have been established to raise capital for construction projects.

If the Belt and Road Initiative is implemented smoothly, the region will account for half of the world’s GDP in 20 years’ time, becoming the new driver for global economic and wealth growth.

Five opportunities for development under the Belt and Road

In driving the Belt and Road projects, Hong Kong can play to its collective strength and grasp new opportunities:

Hong Kong can serve as a platform for infrastructure investment and management. The Belt and Road will bring about strong growth in infrastructure investment along the route. When choosing partners in infrastructure investment and management, Hong Kong can give priority to countries with close trade ties with China, or countries which are politically stable, having good cross-border cooperation and strong industrial complementarity.

Countries along the Belt and Road are rich in natural resources with huge reserves in oil and natural gas, presenting high utilization potential. The development of industries such as petrochemical, metallurgy, deep processing, mining, mechanical manufacturing and electronics will accelerate, creating business opportunities for Hong Kong enterprises.

Over the next ten years, bilateral trade between China and countries along the route will exceed US$2.6 trillion. Hong Kong can leverage its advantages in trade, bonded trade, offshore trade, re-export and transshipment trade, with a view of facilitating the flow of trade and goods along the Belt and Road.

The Belt and Road initiative encourages Chinese enterprises to invest along the Silk and Road. Last year, related direct investment reached US$14.8 billion. Hong Kong enterprises can provide professional services such as financing, consultancy, accounting and engineering to Chinese enterprises. As such, enterprises from both sides can capitalize on their own advantages and collaborate on the success of the investment projects.

There will be advantages and opportunities for Hong Kong’s financial sector. Hong Kong can accelerate the establishment of an integrated financial platform serving the six major economic corridors and draw up an integrated financial solution. With a pool of talent from around the world, Hong Kong should strive to become a major overseas operational centre of organizations such as the Asian Infrastructure Investment Bank and a leading international financing platform. As the world’s largest offshore renminbi centre, Hong Kong can offer a range of renminbi financial products and asset allocation tools to the Belt and Road, thereby further enhancing its function as an offshore market.

While capitalizing on opportunities, businesses should not ignore the potential risks. To enhance their core competitiveness, they have to effectively manage the political and economic risks under the Belt and Road Initiative.

This article was firstly published in the HKGCC magazine “The Bulletin” August 2016 issue. Please click to read the full article.

By PwC

PwC B&R Watch: Review of capital project and deal activity in the countries that fall under the Belt & Road Initiative (B&R). The review finds that over US$490bn of projects and deals were announced in 2016 across seven core infrastructure sectors (Utilities, Transport, Telecoms, Social, Construction, Energy and Environment). A third of all these were in China, with the remainder spread across the rest of the B&R region.

• PwC B&R Watch finds a positive picture in 2016, with an increase in the volume and the average dollar value of infrastructure projects.

• In China, the average project size increased by 14% - largely driven by public expenditure on infrastructure as a central pillar of economic policy.

• M&A activity points to a decline in volume and dollar value, reflecting a flight to quality and renewed focus on project economics.

The review uncovers striking growth in the size of capital projects across the B&R region. The value of the average project was 47% higher than in 2015.

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