By Coface

Starting with falling oil prices and financial markets in the winter, the Brexit referendum in the summer and the election of Donald Trump in the autumn, 2016 was punctuated by a series of upsets. Can we hope for more calm – or even improvements in 2017?

Although the end of 2016 was marked by the upsets in the US, with the unexpected outcome of the US presidential elections and the Fed’s long-awaited raising of key lending rates, neither of these events triggered a collapse in the financial markets. In emerging economies, there has even been a detectable uplift in recent months – but can this last?

The fog of uncertainty dominating the economic sphere is unlikely to lift in 2017. The forecasts on the repercussions of the events of 2016 remain unclear. Among these uncertainties are (i) the as yet unknown and unpredictable policies of Donald Trump, both internally and in terms of spillovers (such as the impact on Mexico, where activity is already slowing, with a lowering of Coface’s assessment to B); (ii) the lack of visibility on the future of the United Kingdom, where the terms of its exit from the European Union are yet to be defined; and (iii) the dominance of political risks linked to upcoming elections1 (namely in the Netherlands, France and Germany). In addition to these undetermined risks, are “conventional” hazards, such as concerns over the slowing and rebalancing of economic activity in China and questions on how quickly the prices of raw material will rise. One new factor, however, will be the expected return of inflation, if only as a mechanical reaction from the reaching of the lowest point for raw materials prices in 2016, and even though domestic demand remains relatively restrained.

Despite these risks a number of countries (such as Spain which has been upgraded to A3) are back on track. In Central Europe, Estonia, Bulgaria, Serbia and Hungary are continuing to see their risk assessments improving. In Africa, Ghana (upgraded to B) and Kenya (to A4) are looking more positive, while there are continuing rays of hope for Brazil and Russia. Other countries have adopted good resolutions for the new year. Clearly, voluntary and often painful adjustments will need to be made, but the outlook for the medium term looks much sunnier. Following a difficult year, Argentina, looks likely to start harvesting the fruits of its labours (hence the raising of its assessment to B). Subsequent to a devaluation of its currency and the receipt of an IMF loan, Egyptian companies are expected to see an easing of payment problems, even though a slowdown in growth is anticipated. Turkey, however, remains on watch, as does South Africa, (which has been downgraded to C). Finally, this is the first time since June 2015 that Coface has upgraded more assessments than downgraded.

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By Peter Wong, Deputy Chairman and Chief Executive, The Hongkong and Shanghai Banking Corporation Limited

Peter Wong considers how China's belt and road initiative is truly linking up Asean, and the wider region

In the wake of more isolationist political thinking in the West, with many developed economies turning inward, China is reaching out, seeking stronger trade and investment links with its economic partners.

China's "One Belt, One Road" is a prime example of this reaching out policy. Under the initiative, China aims to trigger demand for materials and goods at home by investing in strategic infrastructure projects abroad, developing economic ties along its old Silk Road to Europe and along newer maritime links in and around Asia and as far away as Africa.

At its heart, the plan is to enhance global supply chains, primarily though debt-financed infrastructure projects, across more than 60 countries. China expects annual trade with these countries to be worth US$2.5 trillion within a decade – up from US$1 trillion in 2015.

Given the economic importance of the Association of Southeast Asian Nations to China, and its geographical proximity, a key focus of the belt and road initiative is Asean’s burgeoning economies. Formed in August 1967, the bloc is one of the most developed economic zones in Asia and beyond.

The year 2016 marked the 25th anniversary of the open-dialogue relationship between China and Asean. Economic relations between China and Asean economies have been growing strongly. By the end of May 2016, the two-way investment had exceeded US$160 billion, with Asean remaining a major destination for Chinese companies.

Bilateral trade has also increased massively, from US$7.96 billion in 1991 to US$472.16 billion in 2015. Asean and China are seeking to double their trade value, setting a target of US$1 trillion by the end of 2020.

The belt and road initiative will play a key role in this, further bringing together two of the world's most dynamic economic regions by strengthening economic linkages among the 10 members of Asean, as well as between Asean member countries and China.

If major Western economies are really going to roll back on their traditional global economic links, China's belt and road policy is set to fill some of the openings that will develop.

For Asean member countries, the initiative will help address an infrastructure deficit, and lift industrial development. While the formation of the Asean Economic Community in 2015 is bringing Southeast Asian economies together as a single market and production base, the belt and road initiative will offer further integration by developing physical infrastructure and a robust trade regime. The region will be ideally positioned to sit at the centre of global value chains.

For China, the belt and road initiative will provide an ideal platform to develop ties with neighbouring Asian countries while fostering the development of its own extensive high-speed rail network as a means to export high-end technology and services. With more than 20,000km of track laid, China has more highspeed railway than the rest of the world combined.

The effort has already made some practical achievements. Among the countries of Asean, Malaysia, Thailand, Laos and Indonesia have joint belt and road deals with China, mainly in railway construction.

There will be a new high-speed rail line running from southern China through Laos to Thailand's industrial eastern coast.

China has given a new pledge to cash-starved Laos for the construction of a US$6 billion railway project linking Laos' capital Vientiane to China's southern Yunnan (雲南) province by 2020. Once operational, the railway will be Laos' longest and fastest line, with an average speed of 160km/h and 60 per cent of the line being bridges and tunnels.

The network of rail links that will connect Singapore and Kunming (昆明) in Yunnan is already taking shape.

Beijing has also won the contract to build Indonesia's first national high-speed rail link – a US$5.1 billion, 150km rail project connecting the capital Jakarta to Bandung, Indonesia's third-largest city.

Infrastructure financing, until now, has been a challenge for most Asean countries. With the exception of Singapore – which has a highly developed infrastructure base – and to a lesser extent Malaysia, the nations of Southeast Asia are by and large confronting major infrastructure financing deficits.

Indonesia, for example, the largest economy in Southeast Asia, now spends just 2-3 per cent of its gross domestic product on its infrastructure. The need for better roads and railways for long-distance distribution and improved urban transport is quite evident.

Fortunately for China's belt and road goals, seed funding for infrastructure projects along the initiative has mainly come from the Chinese government, with support from the Chinese commercial banks.

China has also set up three new financial institutions to help fund the belt and road infrastructure goals: the Asian Infrastructure Investment Bank, the New Development Bank and the Silk Road Fund. Between them, these three institutions have a registered capital of US$240 billion, and they are starting to become active investors along the belt and road routes.

In addition, more than 300 Chinese- funded enterprises have been set up in 26 economic cooperation zones in eight Asean countries, investing a total of US$1.77 billion by October 2016.

Even these combined funding capabilities cannot fully meet Asia's immense need for infrastructure financing. The Asian Development Bank estimates that US$750 billion a year will need to be invested in Asia between now and 2020 as developing nations strive to raise their economic productivity and deal with rising urbanisation.

However, Beijing's drive and financial commitments are sizeable, and will have a significant impact across Southeast Asia. China's belt and road initiative is colossal in scale and ambition, setting out a vision for China’s investment in the coming years.

Implementing the belt and road agenda will require a high level of mutual cooperation, understanding and trust. But with careful analysis and handling of the regulatory, political and financial risks involved, it will provide Southeast Asia and China quality and longlasting economic growth – especially in these times of global uncertainty.

This original article was published on the HSBC web site. Please click to read the full article.

By Wong & Partners, a member firm of Baker & McKenzie International

Background

Malaysia recently concluded negotiations on the Trans-Pacific Partnership Agreement (“TPPA”) with 11 countries, namely United States of America, Singapore, Japan, Australia, New Zealand, Brunei, Canada, Chile, Mexico, Peru and Vietnam. The motion to sign and ratify the TPPA was passed by Malaysian legislature most recently on 28 January 2016. This is in advance of the proposal by the 12 nations to sign the TPPA in Auckland on 4 February 2016. The TPPA seeks to promote greater economic integration, as well as lift entry and trade barriers between the member countries. In particular, the TPPA requires member countries to adhere to commitments to develop the financial sector, unless a member country has negotiated exceptions to such commitments. We have set out the key areas of significance and the potential implications on the Malaysian financial market. …

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By Gisela Grieger (European Parliamentary Research Service)

Summary

In 2013, China launched its 'One Belt, One Road' (OBOR) initiative. OBOR is China’s broadly sketched vision of how it plans to boost regional integration in its wider neighbourhood. The initiative is unprecedented in terms of China's financial engagement and the innovative network-based project design which is intended to contribute to a more inclusive global governance. It contrasts sharply with existing treaty-based integration concepts where the geographical scope, partner countries, strategy, principles and rules were clearly defined at the outset. China's new development vision has been seen as an alternative to regional trade agreements which do not include it; as a strategy for asserting its leadership role in Asia in response to the US pivot to Asia; as an economic outreach towards Asian countries for resolving territorial and maritime disputes by exporting China’s domestic development policies; as a means of tapping into new sources of growth to check the marked downturn in its economy; as a tool for tackling the socio-economic divide between its inland and coastal provinces; and finally, as a venue for addressing security challenges on its western periphery as well as energy security issues. The response to China's regional integration vision has been mixed. While the idea of enhancing connectivity has drawn considerable interest, given the huge infrastructure gaps across Asia, scepticism regarding China's potential hegemonic ambitions has prevailed notably among regional rivals India and Japan as well as the USA. Whether OBOR will be mutually beneficial for China and the EU will depend on the two sides agreeing on the 'rules of the game', including for joint projects in third countries. Potential synergies between OBOR and the EU connectivity initiatives are being explored under the EU-China Connectivity Platform.

In this briefing:
• Geopolitical and economic drivers of China's regional integration strategy
• The One Belt, One Road (OBOR) regional integration initiative
• OBOR's significance for China
• OBOR's significance for the EU
• Outlook
• Further reading

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By CGCC Vision

Following the Chief Executive’s repeated mention of the development of “One Belt and One Road”, the related topics have been the subject of considerable public discussion. The new policy bears endless opportunities for all, and Hong Kong’s legal profession is, of course, no exception.

Elsie Leung, Deputy Director of the HKSAR Basic Law Committee, believes that as a world power, China should pay close attention to its cultural standing, political and legal systems, and the quality of its people. The “One Belt and One Road” national policy advances the democratic rule of law, deepens the cultural system reform and improves people’s livelihood, which is fully in line with the rise of a world power.

The Uniqueness of “One Belt and One Road”
Leung noted that since the “One Belt and One Road” has no preset rules, it enables China to become proactive. Moreover, the concept has a win-win approach without any threshold and is open, inclusive, mutually beneficial and non-exclusive.

Thus, the areas of cooperation between China and other countries along the “One Belt and One Road” are much diversified, while the Silk Road Fund, AIIB, TPP, international financial institutions and development-oriented financial funds can provide the capital and skills for these countries as required.

Embodiment of One Country, Two Systems
Under the principle of “One Country, Two Systems”, Hong Kong is a part of China while having different systems. It has also become an international financial centre as well as a bridge between the Chinese and Western cultures. On this basis, Leung is convinced that China’s “One Belt and One Road” development initiative and “going global” strategy present major opportunities for Hong Kong’s legal profession.

Hong Kong’s Laws have Obvious Advantages
The country’s development will inevitably involve a large number of contracts. Leung believes that by relying on its existing legal status, Hong Kong can strive to make its laws as the applicable law for the contracts and for its courts and other institutions to become the place for contract dispute resolution, thereby contributing the wisdom and efforts of its lawyers.

She added that Hong Kong’s lawyers are not only adept at the details of both Chinese and Western laws, but also gaining deeper understanding of the legal systems and financing methods of Islamic countries. Furthermore, as Hong Kong’s lawyers are bilingual, they are able to accurately analyze the different requirements of the contracting parties, and share their analyzes with Chinese customers to help them make accurate judgements.

Leung also pointed out that because Hong Kong’s lawyers are in constant contact with a large number of businesspeople from around the world and understand their needs, they are high-quality intermediaries whose participation can prevent misunderstandings and effectively contribute to the negotiations between the contracting parties.

She also commended Hong Kong’s sound and fair international legal dispute resolution mechanism, complete procedural rules, and stringent by-the-book disposal of cases, which are fully in line with international practice. Therefore, Hong Kong is well-positioned to build a legal dispute resolution centre that is generally accepted by the international community. She suggested that Hong Kong should establish a legal dispute resolution centre specialised in serving the “One Belt and One Road” initiative.

Looking Ahead to Seek Opportunities
Looking into the future, Leung looks forward to the various sectors submitting recommendations to the HKSAR Government for inclusion in the Policy Address; she also requested the Central Government to include the recommendations in the “13th Five-Year” Plan for implementation. As in the case of the CEPA, it depends on our proactivity to seek opportunities.

This article was firstly published in the magazine CGCC Vision 2016 July issue. Please click to read full report.

By Hitoshi Tanaka, Senior Fellow, Japan Center for International Exchange

A new year has come, but it seems clear that in 2016, the regional order in East Asia will continue to be characterized by a sense of instability. China’s behavior continues to create unease, most prominently through its unilateral construction of artificial landfill islands in the South China Sea, but also through the progress it is making on its regional economic initiatives, the Asian Infrastructure Investment Bank (AIIB) and the One Belt, One Road infrastructure connectivity plan. Meanwhile, the shadow of Crimea hangs over Russian dealings with Asia, and North Korea has yet again tested a nuclear device.

A key question as 2016 progresses will be a familiar one: How best to focus US-Japan cooperation to address both the challenges and opportunities that accompany the rise of China? The time is ripe for intensive alliance consultations regarding future cooperation with China given the relative improvement of Sino-Japan relations over the last year. At the same time, there are six thorny issues that carry the potential to undermine US-Japan cooperation and thus need to be dealt with. Close, careful US-Japan consultation and cooperation is required to ensure that these issues do not create a wedge in the alliance.

1. The Future of US Global Leadership
The world is watching the US presidential election closely for signs of the foreign policy path the next US president will take. A significant amount of the rhetoric from the primaries is concerning—most notably the xenophobic remarks of Donald Trump, which have captured the media spotlight. While it is still a long road to the White House, the kind of debate we have seen so far—which has taken a hostile tone toward certain nations and groups (such as banning Muslims from entering the United States) and has failed to recognize the vital need for international cooperation—is damaging to the long-term credibility of US global leadership. Continued US leadership is critical to maintain and strengthen liberal and free-market values as well as the stability and prosperity of East Asia. The United States, East Asia, and the world need a US president with the stomach for strong global leadership based on deep cooperation and consultation with US allies and partners, rather than one who advocates unilateralist or isolationist thinking.

2. Regional Trade Deals and Economic Governance
The Trans-Pacific Partnership (TPP) deal reached in October 2015 has rightly been hailed as a major achievement in setting common rules for regional economic governance. Now the agreement must be ratified by the 12 signatory states, including the US Congress. In light of China’s efforts to launch the AIIB, roll out the One Belt, One Road initiative, and reach a Regional Comprehensive Economic Partnership with the ASEAN+6 nations, the TPP is critical to the future credibility of US regional leadership. The TPP is not simply a vehicle to facilitate increased trade, but rather a means to shape 21st-century rules for economic governance and to promote and entrench liberal free-market principles in Asia Pacific.

Indonesia’s decision in September 2015 to choose China over Japan to build a high-speed train line between Jakarta and Bandung is illustrative of what is at stake. The US$5.5 billion Chinese proposal was attractive given that it required neither financing nor a loan guarantee from the Indonesian government; in other words, China is taking on almost all of the financial risk of the project, which most ODA providers are not able to do. Three-quarters of the funding will come from China and the remaining 25 percent from Indonesian companies. Indonesian President Joko Widodo, who campaigned on improving welfare for ordinary Indonesians, was thus able to avoid using the national budget for a project in one of the country’s most prosperous areas. But many questions remain regarding the transparency of the proposal and the ability of China to meet international standards, including on labor and environmental regulations. There is already local criticism of the project for its plans to use Chinese workers at a time when Indonesia’s unemployment rate is rising and there are concerns over China’s safety record in light of the crash of a high-speed train in Wenzhou in 2011.

It is thus critical that the United States, Japan, and the broader international community engage with Chinese-led economic initiatives, including the AIIB and One Belt, One Road project, to help steer China toward a greater embrace of international best practices. In this context, it is important to note that the TPP has an open-accession clause to create a clear and transparent process through which other countries—including China, Indonesia, and South Korea—can join in the future. The United States and Japan should actively promote the expansion of TPP membership, especially to these countries.

3. Demilitarizing the South China Sea
The construction of artificial landfill islands by China in the South China Sea in areas such as the Fiery Cross, Mischief, and Subi Reefs, which are also claimed by ASEAN nations, has set back efforts to peacefully negotiate a diplomatic resolution to these territorial disputes. Moreover, the potential for the future construction of a chain of airports, ports, and other facilities on the artificial islands, as well as high-profile attempts by the People’s Liberation Army (PLA) Navy to enforce no-fly zones, risks further militarizing the South China Sea. Such a scenario would be a serious security concern for the region and should be avoided.

One potentially complicating factor is the recent election in Taiwan, where the Democratic Progressive Party (DPP) won a comprehensive victory, with Tsai Ing-wen winning the presidency and the party gaining the majority in the Legislative Yuan. The DPP is known for its pro-independence stance vis-à-vis Beijing and has in the past suggested negotiations between Taiwan and ASEAN nations over the South China Sea. Tsai has also questioned the “1992 consensus” that there is only “One China” with Beijing and Taipei simply maintaining differing interpretations. For the time being, Tsai seems to have settled for a loosely defined continuation of the status quo. But if the DPP government were to push Taiwan toward a more assertive foreign policy stance and articulate a South China Sea policy different from that of the mainland, it could further complicate the issue.

Further military build-up in the South China Sea will undoubtedly feed regional tensions and increase the risk of accidental conflict. Until a diplomatic resolution can be peacefully negotiated between China and the ASEAN countries, it is vital that all parties be alert to China’s incremental changes. At the same time, in addition to continued US freedom of navigation operations—to ensure free passage, uphold international law, and prevent any further unilateral changes to the status quo—the United States and Japan must coordinate and cooperate to persuade China that freedom of navigation in what is a vital sea route for international commerce and the energy security of East Asia, is a shared interest not just for the United States, Japan, and ASEAN countries but also for China itself.

4. North Korea
Four years since he inherited power from his father, Kim Jong-un appears to be drawing from a diverse toolbox to consolidate his grip on power. First, Kim is continuing the country’s nuclear weapons development program. On January 6, 2016, North Korea tested a nuclear device for the fourth time—the second under Kim Jong-un’s leadership. Such tests and rocket launches are a signal to domestic audiences, especially the Korean People’s Army (KPA), that Kim is capable of continuing the country’s technological progress and bolstering military might against hostile external forces. Second, Kim has also purged a number of high-level officials from his father’s cliques (most infamously his own uncle, Jang Song-thaek), replacing them with his own younger loyalists. Notably, these purges have tended to target military men rather than economic planners. Third, Kim has also shown interest in cementing his legitimacy through economic development. Experiments with reforms have taken place quietly in the background, allowing farmers to retain a fraction of their produce to sell on the market rather than being forced to sell everything to state distributors. Kim is also gearing up for the 7th Congress of the Workers’ Party of Korea (WPK), the first time such a meeting has been held in 36 years. It has been speculated that Kim may use the party congress as a platform to launch more serious economic reform measures and to reassert the primacy of the WPK over the KPA.

The region was rocked by North Korea’s most recent nuclear test. This time, the international community must go beyond business-as-usual measures to deal with the North Korean nuclear program. In order to truly alter North Korea’s behavior, economic sanctions, including financial sanctions, will need to be strengthened. Beijing has a big role to play. Irrespective of its apparent change in attitude after the third North Korean nuclear test in 2013, China has continued to provide substantive assistance to North Korea. For any form of sanctions to be effective, though, the international community as a whole, including China and Russia, must fully back them. South Korea, Japan, and the United States must deepen cooperation and adopt a unified approach on sanctions policy as well as on joint contingency planning. From a coordinated trilateral base, the three nations also need to consult with China and Russia to form a united five-nation front to apply greater pressure on North Korea. An immediate restart of the denuclearization process under the Six-Party Talks may be difficult, but without the right measures to pressure and isolate North Korea, nothing will be achieved and North Korea will continue to develop its nuclear arsenal.

5. Russia Policy
Since Vladimir Putin and Shinzo Abe both returned to power in 2012, the two leaders have built a certain rapport and have shown a willingness to deal with the issue of the Northern Territories (referred to as the Southern Kuril Islands in Russia). Putin was even scheduled to visit Japan. But then Russia annexed Crimea in March 2014 and summit plans were put on hold.

Since then, Japan has stuck to its international obligations and imposed sanctions against Russia in concert with the other G7 nations to punish Russia for its violation of international law. However, if it appears that an acceptable agreement can be reached on the Northern Territories, an issue that has blocked the normalization of Japan-Russia relations since the end of World War II, Japan will have no choice but to seize the opportunity. At the same time, it is important that the United States and Japan maintain very close coordination and not allow Russia to utilize the Northern Territories issue to drive a wedge between them. They must also make clear to Russia that any Russo-Japanese cooperation to resolve the Northern Territories dispute will not translate into an acceptance of the annexation of Crimea or any other violation of international law.

Recently, Prime Minster Abe has reportedly expressed the possibly of making a trip to Russia in his capacity as this year’s chair of the G7. There is also talk of a possible trip by Putin to Tokyo by the end of 2016. While continuing to advocate for a peacefully negotiated resolution to the Crimea crisis, given the possibility that the isolation of Russia could push Putin toward China, it may be wise not to preclude some forms of strategic cooperation with Russia in areas of overlapping interest—including on North Korea and Syria.

6. Reducing Okinawa’s Burden
The battle between the Okinawa prefectural government and the Japanese central government regarding the relocation of the US Marine Corps Futenma Air Station continues to intensify. Each side has launched a series of tit-for-tat court battles centering on the legality of the construction of a new base in Henoko to replace Futenma. Backed by their determined governor, Takashi Onaga, local Okinawan protestors are demanding at a minimum that no new bases be built in the prefecture, with a view to reducing the concentration of bases in Okinawa in the future.

The situation has reached something of an impasse. While the United States might be happy to leave this to the Japanese government to deal with as a domestic issue, ultimately the United States will also have to suffer the consequences of Okinawa’s local opposition. Deep US-Japan consultations must continue, which should be conducted as part of regularized reviews of the US forward deployment structure and how it relates to US-Japan alliance goals. There are two important points to keep in mind here. First, while a continued US forward deployment presence in Okinawa is critical to the maintenance of the alliance’s deterrence posture, if the situation is not handled with due sensitivity for local Okinawan concerns, base protests will continue to be a thorn in the side of alliance relations over the long term. Second, the overall US forward deployment posture in East Asia should be evaluated in light of advances in new military technologies and the need to respond to regional security challenges in a dynamic way. A more evenly rotated distribution of US soldiers across the region—a trend that is underway thanks to increased cooperation with partners such as Australia, India, the Philippines, Singapore, and Vietnam—would not only help reduce the burden on Okinawa over the long term, but also be strategically desirable in responding to a range of new threats.

The choices we make now, during this time of regional flux, about how to deal with these six challenges will go a long way toward determining the future regional order. With deep and regularized consultations across all aspects of the alliance—including on security, economic, and diplomatic strategy—not only can the United States and Japan (in conjunction with other allies and partners) deepen the foundation of their cooperation, but they can also guard more effectively against unilateral changes to the status quo and work together with China to steer its rise in a mutually beneficial direction.

Hitoshi Tanaka is a senior fellow at JCIE and chairman of the Institute for International Strategy at the Japan Research Institute, Ltd. He previously served as Japan's deputy minister for foreign affairs.

Reprinted with the permission of the Japan Center for International Exchange.

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By Thompson Chau, The Asia Scotland Institute

In March 2015, China issued a document entitled “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road”, outlining the blueprint of the One Belt One Road Initiative (OBOR). The initiative not only represents a national and coordinated push to expand China’s influence abroad, but is also coupled with a domestic investment drive, involving almost every Chinese province. China’s ambassadors to countries situated from Africa to Southeast Asia are already securing assurances of collaboration on OBOR. Similarly, Chinese provinces have begun to invest in infrastructural projects and construct logistics centres in anticipation of growing trade and interaction with OBOR countries. Described as “the most significant and far-reaching initiative that China has ever put forward”, OBOR will increase the demand for Scotland’s leading export industries, professional services and universities among the regions involved. Along the five routes (shown in Figure 1), five OBOR goals were proposed: policy coordination; facilities connectivity; unimpeded trade; financial integration; and people to people bonds. While Chinese institutions and SOEs (state-owned enterprises) are expected to take the lead, these five areas of connectivity will offer organisations and individuals in Scotland a whole new spectrum of opportunities to play a role in shaping the economic development and integration across the three continents. OBOR is not a solo performance by China. It is a symphony orchestra in which the Scottish bagpipe is surely going to have its part...

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By HSBC Global Research

Beijing’s publication of a detailed plan of action for the New Silk Road initiative confirms its centrality to Chinese policymakers’ thinking in the short and long run. Following on from our earlier reports Building on China's overseas investment (8 August 2014), and Xi's New Silk New Road plan (18 November 2014), this report looks at how the “One Belt, One Road” strategy is starting to become reality two years after it was first announced.

In the near term, the focus will be on infrastructure investment and promoting cross-border trade to ensure that goods, services and capital can flow easily on land (the “belt” connecting China, Central Asia, Russia and Europe) and sea (the “road” linking China to ASEAN, India and Africa). We estimate that the total could reach RMB1.5 trillion. This should help to support fragile domestic and external demand, the factors behind the downward trends in growth, prices and labour market conditions.

This report provides details on the initial projects, which emphasise upgrading transport links. It also looks at current efforts to make trade easier (e.g. faster customs clearance) and discusses different financing options. Apart from the new Asian Infrastructure Investment Bank and BRICS bank, there are ambitious plans to enable Chinese and foreign companies and governments to raise RMB funds in both China and countries along the ancient trading route.

This initiative is mutually beneficial. Countries with weak infrastructure should benefit from China’s expertise in this area and the new markets will generate demand for China’s exports. But major challenges lie ahead. We believe China’s record of overseas investment needs to improve and it will be important to balance the interests of the many stakeholders, public and private, both at home and abroad.

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By HSBC Global Research

The recent Asia-Pacific Economic Cooperation (APEC) meeting in Beijing resulted in deals that will have long lasting effects. President Xi Jinping pledged USD40bn for infrastructure investment to build a New Silk Road in the spirit of the centuries-old trading route, comprising a land based economic belt and a maritime route. This follows recent agreements to establish the Asian Infrastructure Investment Bank (AIIB) and the BRICS bank and is in line with the rapid growth of China’s outward investment, which is likely to surpass inflows in 2014.

China’s infrastructure sector has the capacity to meet needs in Asia and further abroad. That investment overseas should also generate demand for China’s exports and help reduce economic slack and disinflationary pressure. The New Silk Road plan should also mean more investment for the less developed central and western parts of the country and generate better long-term returns on foreign reserves.

As we pointed out previously, the still-significant infrastructure gaps in Asia can be met by China’s outward direct investment (ODI) push. The region as a whole should also benefit from increased demand and lower trading costs. Our analysis shows that trade in Australia, Indonesia, Japan, and Korea would increase the most as a result of China’s new strategy. So, while the deals on trade, tariffs and emissions made the headlines at APEC, we believe the New Silk Road plan is likely to have a profound impact on the region.

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By HSBC Global Research

China is going global: its consumers are travelling abroad, its companies are buying resources from all over the world, and the government is finding new places to invest the country’s USD4trn of foreign reserves. As these trends continue, we think the “next big thing” will be China’s export of capital, especially to infrastructure investment projects in Asia and further afield.

China’s infrastructure boom in recent years has created an economy well suited to designing, building and servicing large infrastructure projects. Although we have argued that there is still plenty of room for China to keep investing in its domestic infrastructure, the peak may have already passed. As such, it makes sense for China to look to overseas markets to put all that capacity to use.

It may not have to look far. We estimate that Asia needs to invest USD11trn in urban infrastructure by 2030. In this report, we update our Asian Infrastructure Measure, and find that while infrastructure development in the region has increased, it is still far below US levels.

At the same time, funding gaps have emerged, especially in Indonesia, India and Thailand. To fill them, Asia may have to rely more on external funding as domestic sources become scarce. With a proposed USD100bn capital base, the China-led Asian Infrastructure Investment Bank (AIIB) offers an alternative source of funding for infrastructure in the region. Spending on infrastructure is essential for growth, so there is potential for a “win-win” situation: China helps to narrow Asia’s funding gap and in the process achieves its own policy objectives, including the internationalisation of the Renminbi.

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