By Chen Dongxiao, President, Shanghai Institutes for Int'l Studies

The much anticipated inaugural Belt and Road Forum for International Cooperation has been successfully concluded, producing a fair number of agreements. More importantly, Chinese President Xi Jinping announced at the closing ceremony that China would host the second Belt and Road Forum in 2019, marking the institutionalization of the forum as a brand-new platform for closer international cooperation.  As a formal attendee at this important event, I have witnessed the keen interest and enthusiasm on the part of all the participants and the press corps with respect to the forum per se and its positive outcomes.

Contrary to the doubts of some international media outlets and observers in the past few years, all the participants that I talked with praised the event itself and China’s relentless efforts to translate the Belt and Road vision into a detailed blueprint and remarkable achievements. In my view, this contrast between what naysayers had anticipated and the highly positive evaluations I heard at the conference is attributable to three factors. First, all the outcomes of the Belt and Road Initiative presented during the forum, including a long list of 76 items comprising more than 270 concrete results in five key areas, have far exceeded expectations and reinforced a sense of gain on the part of the countries and regions along the two routes, increasing their confidence and dispelling initial suspicions. Second, a new concept of international cooperation based on the principle of “extensive consultation, joint building, and benefit sharing”—the New Silk Road Spirit, or in my own phrase, a Belt & Road Initiative Doctrine — has begun to take shape as a governing norm for Belt and Road cooperation, creating a reassuring effect among all relevant parties. Third, the Belt and Road Initiative is now converging with other major development agendas, such as the United Nations’ 2030 Agenda for Sustainable Development and the Paris Agreement on Climate Change, indicating that instead of reinventing the wheel, Beijing’s effort aims to complement and enhance existing international economic cooperation and global economic governance. So the initiative is, to some degree, leading the way in strengthening current multilateral cooperation.

As a milestone event, the first forum has been not only about stocktaking but more importantly about sound planning for expanded international cooperation. In order to steer the Belt and Road Initiative toward greater success, I think greater efforts should be made in the following aspects.

First, improving expectation management, i.e., shaping, coordinating, and stabilizing domestic and international expectations concerning the Belt and Road Initiative will maximize the positive effect of economic policy and minimize possible negative side effects. Four years of achievements and experience have made it clear that as a “project of the century” with a vast span in time and space, the Belt and Road Initiative not only promises huge immediate and potential business opportunities and economic interests but also presents a variety of political, economic and security risks and uncertainties. As a market entity, the enterprise should strike a balance between seizing every opportunity available and guarding against possible risks. As a policy entity, the government should effectively and regularly communicate information and policies on the Belt and Road Initiative so as to help market entities reduce miscalculations in their decision-making.

Second, it is vital to reduce the constraining effect of institutional transaction costs on the Belt and Road Initiative. On the one hand, history shows that an essential indicator of the efficacy of international cooperation is whether such cooperation can substantially reduce the transaction costs between and among partners with diverse policies, regulations, standards and laws. Those incurred costs are also defined as institutional transaction costs. That is why policy consultation at the governmental level is always given precedence and “dovetailing” of policies, rules and standards is regarded as an institutional safeguard for enhancing further cooperation. On the other hand, as one of the means to reduce institutional transaction costs, policy consultation at governmental level involves potential resource re-allocation and interest redistribution among all stakeholders, and is sure to encounter considerable obstruction unless there is broad-based social consensus and approval.

Therefore, it makes strategic sense to working on the consensus-making and confidence-building by strengthening people-to-people bonds and promoting cultural, educational, science and technology, think tank, and personal exchanges between China and countries along the routes. Just like philosophy of traditional Chinese medicine goes, opening the human body’s main and collateral channels will ensure the smooth circulation of vital energy. Strengthened people-to-people bonds, which function as the social basis for reducing transaction costs, will facilitate the reconciliation of policies, rules, and standards among all stakeholders.

Third, sustain the provision of public goods for the Belt and Road Initiative. Such an epochal project requires the steady supply of public goods, including a peaceful environment and sound institutions, to create any positive “spillover” effect. Therefore, all stakeholders in the project, including national governments, international organizations, enterprises and nongovernmental organizations need to make their respective input. National governments should provide adequate security and legal safeguards by leading the efforts of policy coordination and strategy synergy. Meanwhile, international organizations, enterprises, and nongovernmental organizations should be actively involved in policy consultations on trade and investment connectivity in order to promote greater transparency and benefit sharing in rule-making and expand the institutional spillover effect of Belt and Road cooperation. Continued provision of public goods for the Belt and Road Initiative also requires recruitment of high-caliber thinkers and innovators to provide intellectual support, creating an “Intellectual Silk Road.”

Last but not least, a sense of collective identity needs to be fostered.  The history of the evolution of human society has shown that a common historical memory and shared experience of concerted efforts constitute the basis of a collective identity, which, if strengthened, can reduce or even resolve conflicting interests and ideas. Coordinating policy consultation, trade promotion, infrastructure connectivity, financial cooperation and people-to-people exchanges will enable all stakeholders in this grand project to raise their awareness of burden sharing and increase mutual trust. It is not only a viable way to break through the traditional pattern of international politics, which is all about interest, but also an integral part of the effort to build a community of shared destiny.

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By Professor Frank Chen, City University of Hong Kong

Against a background of rising costs, Chinese manufacturing is on the move —— to the US and Southeast Asia. Professor Frank Chen, Head and Chair Professor of Management Sciences, investigates latest trends and how a record inflow of Chinese investment is helping revitalize the American economy.

When the then President-elect Donald Trump met Alibaba executive chairman Jack Ma in January 2017, he characteristically said he had a “great meeting”. They discussed one of the incoming President’s favourite topics, American jobs. The headline news? One million new US jobs to be created.

“We’re focused on small business,” Ma told reporters after the meeting. “We specifically talked about ... supporting one million small businesses, especially in the Midwest of America.”

Ma said that Alibaba’s expansion would focus on products like garments, wine and fruits, with a special focus on trade between the American Midwest and Southeast Asia.

Of course, Alibaba has clout. With more than 10 million active sellers as of 2015, the company estimates its China retail marketplaces has contributed to the creation of over 15 million job opportunities.

The meeting came against a background of stalled US reshoring (US companies returning to their homeland) whilst Chinese investment remains buoyant. Every year since 2012, Chinese investment in America has exceeded investment flows in the other direction. And in 2016 Chinese companies’ investment in the US economy was at a record US$18 billion. This embraced sectors from entertainment to micro-electronics, information technology, household appliances, and hotels. The investment went beyond financial sector mergers and acquisitions to include the building of new manufacturing plant on green or brown field sites.

The world’s workshop?

As early as 2010, Bloomberg Business Week ran the title “Why Factories Are Leaving China”. Chief Economist at the Industrial Bank, Lu Zhengwei, dates the shift to 2012, when China’s services sector overtook manufacturing for the first time as the biggest contributor to nominal gross domestic product. At the time this was heralded as a milestone towards industrial restructuring.

“The process began to get serious a long time ago… When we spoke highly of the increasing role of the service industry in our economic structure, it had already kicked in. That was 2012,” Lu said, adding that China’s high taxes and high land costs are now turning business away.

China’s manufacturing base is indeed transforming. Lower end manufacturing is moving offshore to Southeast Asia countries such as Vietnam, Indonesia and African countries such as Ethiopia, whilst higher value added manufacturing is encouraged against a background of increasing automation. The heyday of China’s manufacturing boom is long gone. These were the 1980s and ’90s, and especially the years after China joined the World Trade Organisation in 2001. In these years, the gains to China’s manufacturing base can often be directly correlated to losses in the US. Some sources state that the US trade deficit with China cost 3.2 million jobs between 2001 and 2013.Manufacturing was eager to relocate from the advanced economies, and within a decade China was the world’s second-largest economy.

Southeast Asia boom

A confluence of political and economic factors is now producing another decisive shift — away from China. On both sides of the Pacific, government policy is playing a role. In China, Beijing has encouraged labour-intensive businesses to move elsewhere as it tries to steer the economy towards higher value-added services and automation. In the US, President Trump has suggested that a tariff barrier may be placed between the two countries, and encourages “Made in America”. The question remains, who by?

For China, the new policy means less emphasis on shoes and apparel. Vietnam has overtaken China to become the largest producer for Nike shoes. Garment exports from Southeast Asian nations to the EU, US, and Japan have been very strong in recent years, sharply contrasting with the performance from China. Companies such as Eclat Textile, Taiwan’s largest apparel company, are pulling out of China completely due to deteriorating business conditions and surging wage costs.

Even the high-tech sector is affected. More than 50% of Samsung smartphones are now assembled in Vietnam, and one more Samsung factory is currently under construction. It is reported that 80% of Samsung’s China capacity will be moved to Vietnam. When such giants move, so do their immediate supply chain partners, sooner or later, followed by secondtier and accessory suppliers. The result — many Vietnamese companies are also intensifying investment in the electronics supporting industry.

Exodus

The exodus of Chinese manufacturing goes hand-in-hand with a surge of outbound investment. This is up more than 50% in the first 11 months of 2016 from a year earlier, with manufacturers involved in more than a third of China’s overseas mergers during that period. At the same time, China’s private sector investment at home rose just 3.1%.

The prospect of reaching a Trans-Pacific Partnership (TPP) agreement accelerated such supply chain shifts. TPP would make Vietnam an open economy and a favourable destination for FDI. With other ASEAN countries intent on joining too, a pattern similar to 1990s’ Pearl River Delta was emerging with countries such as Indonesia introducing economic stimulus packages to encourage foreign investment, and keeping currency at low levels. The whole regional block was poised to replace the Pearl River Delta region, benefit from lower labour costs, and emerge as the world’s low cost manufacturing centre.

President Trump’s abrupt cancellation of TPP has now thrown doubt on the viability of importing to the US. In the short-term, reshoring and FDI in the US should gain renewed impetus. But one thing is for sure, these manufacturers will not be returning to China.

FDI trumps reshoring

Ironically, Foreign Direct Investment seems to be playing a much greater role in the American manufacturing revival than the much-vaunted US reshoring phenomenon.

“The US Reshoring phenomenon, once viewed by many as the leading edge of a decisive shift in global manufacturing, may actually have been just a one-off aberration,” says Patrick Van den Bossche, A.T. Kearney partner and co-author of an April 2016 Reshoring Index study. Industries vulnerable to rising labour costs in China have been successfully relocating to other Asian countries, rather than returning to the US, the report confirms. Vietnam has absorbed the lion’s share of China’s manufacturing outflow, especially in apparel. US imports of manufactured goods from Vietnam in 2015 were nearly triple the level of imports in 2010.

2016 Record - breaking Chinese investment in the US

January In the largest China-Hollywood deal to date, conglomerate Dalian Wanda Group Co. acquires production and finance company Legendary Entertainment for US$3.5 billion.

April Omnivision Technologies, whose camera sensors have been used in Apple Inc.’s iPhone, is acquired by a consortium of Chinese private equity firms including CITIC Capital Holdings, Hua Capital Management and Goldstone Investment Co. for US$1.9 billion.

April Tianjin Tianhai buys Ingram Micro for US$6.07 billion. The deal marks the largest Chinese takeover of a US information technology company to date.

June Qingdao Haier Co. spends US$5.6 billion to buy the appliance division of General Electric, giving the Chinese appliance manufacturer an opportunity to boost its presence in the US market.

September Anbang Insurance's, one of China's largest insurance companies, completes a US$6.5 billion deal for Strategic Hotels and Resorts.

October Chinese conglomerate HNA agrees to pay private equity firm Blackstone Group US$6.49 billion for a 25% stake in Hilton. The move is part of HNA's efforts to enhance its global tourism business.

'Made by China' in America

China companies are entering manufacturing in the US in a variety of industries.

Paper In June 2014 Shandong Tranlin announced it would invest about US$2 billion to build a pulp and paper factory outside Richmond, Virginia.

Textiles The Keer Group has built a US$218 million cotton yarn factory in South Carolina, and “are now hiring in places where cotton was king”.

Construction Machinery SANY has made a US$60 million investment in office and manufacturing space for construction machinery in Georgia.

Computers Lenovo opened a computer production plant in North Carolina in June 2013.

Auto Parts China's largest auto parts maker, Wanxiang Group, has 28 factories in 14 US states with 6,500 employees.

Garments In October 2016, Chinese garment manufacturer Tianyuan Garments Co. made a US$20 million investment to produce clothes for brands like Adidas, Reebok and Armani — the first Chinese manufacturer to make clothing in the US.

Paper In April 2016, Chinese paper products maker Sun Paper Industry said it was opening its first North America factory in South Arkansas, investing more than US$1 billion to construct a new bio-products mill that would create 250 local jobs.

Steel Pipe Tianjin Pipe has invested more than US$1 billion in a steel pipe plant in Texas, designed to produce 500,000 metric tons per year of steel pipe that is used in the oil and gas industry.

This article was firstly published in “CITY BUSINESS Magazine (Spring 2017)” by College of Business, City University of Hong Kong magazine. Please click to read the full article.

By Sourabh Gupta, Senior Fellow, Institute for China-America Studies

In September 2013, a five-point proposal to jointly build a New Silk Road Economic Belt was unveiled by President Xi Jinping in Astana during his 10-day visit to Central Asia. A month later he also outlined a complementary vision of a 21st century Maritime Silk Road during a speech to the Indonesian parliament.

On May 14-15, the presidents of Kazakhstan and Indonesia were both on hand in Beijing, along with 27 other heads of state or government, to collaboratively chart the next steps forward with President Xi at the Belt and Road Forum for International Cooperation. Earlier in March 2015, a Vision and Action Plan listing a set of guiding principles and cooperation priorities and mechanisms had been released.

When the Belt and Road Initiative (BRI) is fully realized, it will comprise a far-flung network of highways, railways and connectivity corridors, both brick-and-mortar and digital, as well as a set of port infrastructure and blue economy projects that link China by road and sea as far as Europe and Africa via South, Southeast and Central Asia and the Middle East. Tellingly, it is being billed as the “project of the century.”

The logic of the initiative is at once both simple and revolutionary. In resurrecting the ancient silk routes that had embodied the spirit of peace and cooperation, openness and inclusiveness, and mutual learning and mutual benefit, China aspires to preserve and consolidate the ideals of the United Nations-centered, post-World War international order that it had fought to create. Equally, by reviving the spirit that underlay these ancient routes, China also aspires to write – and share – a bright new chapter in global development that is informed by the growth model that facilitated its meteoric rise and lifted hundreds of millions out of poverty. This emphasis on growth and development is particularly apposite at a time when the global economy is constrained by a relative lack of growth drivers.

International cooperation on production capacity-sharing and between China and other middle income, developing and less developed countries forms a core element of BRI. Detractors have branded this as a barely transparent attempt to offload its excess and outdated production capacity to susceptible neighboring countries. Such criticism is misplaced. To the contrary, such production capacity cooperation is informed by China’s own successful post-1978 model of industrial development and upgradation. That model was premised on two cardinal tenets.

First, as an agrarian, labor abundant but capital and resource scarce economy, China’s industrial structure needed to conform to its prevailing – not preferred - factor endowments. Corresponding investments that would jumpstart growth, notably direct investment in human and physical capital rather than soft institution-building, too, had to be geared to near-term domestic realities rather than abstract rich society prescriptions or a one-size-fits-all model. As this investment in human and physical capital accumulation translated into a virtuous cycle of growth and poverty reduction, industry would need to upgrade its existing structure and scale the production value-chain at a rate that was as swift as China’s rapid level of development.

Second, trade liberalization and market forces were to be the primary mechanisms for resource allocation. Yet due to infrastructure deficiencies, institutional shortcomings, rent-seeking, and a general lack of competition, industrialization-led development could not be left to market forces alone. Active industrial policy was a necessary complement. As industry scaled the product-sophistication ladder, government’s interventionist touch and its accompanying hard and soft infrastructural enhancements, too, needed to evolve to facilitate such an upgrade of the production base. And until China attained middle-income status, this symbiotic relationship between activist policy and production structure would need to flexibly adapt to the country’s rapid level of development.

The success of China’s three decade-long experience with production capacity management can be originally attributed to the international production capacity transfer that it received at the outset from its foreign partners as it opened-up to the outside world. Huge competitive strengths have been amassed over the past decade-and-a-half in sectors such as electronics, construction materials, railways, machinery, aviation and maritime engineering. By moving these production lines abroad as part of BRI, China can now pay it forward and assist its developing and less-developed country partners to create jobs, improve industrial capacity, and stimulate growth on lines that bear a resemblance to China’s own industrial jump-start in the 1980s.

In Central Asia, such production capacity cooperation could range from co-funding and construction of strategically important trans-border transportation corridors, and industrial and digital logistics hubs, as well as fertilizer and synthetic fuel plants. In Africa, production capacity cooperation could crack the development bottlenecks of backward infrastructure, human resource limitation, and inadequate finance. By facilitating agricultural modernization and industrialization, it could also rid these countries of overdependence on commodity exports as their solitary growth driver.

Much as the relocation of East Asian labor-intensive industry to lower-wage China stirred a virtuous economic cycle that went much beyond mere capital accumulation, so also China-Africa production capacity cooperation and transfer can create a sum bigger than its parts. Far from being a new form of colonialism, as the critics have panned it, the transfer of industrial capacity and world-class infrastructure will reduce transaction costs in Africa and enable these countries, as ex-chief economist of the World Bank Justin Yifu Lin has pointed out, to unleash a dynamic upward spiral of growth and development in sectors where they enjoy latent comparative advantages.

The open-ended design, the level of ambition and the long-term vision that underpins BRI attests to President Xi’s resolve to elevate peaceful development to the forefront of China’s economic diplomacy. The reference to the ‘belt’ and ‘road’ concepts in the reform document that was unveiled after the 3rd plenary session of the 18th Central Committee meeting in November 2013 also attests to the transitional imperatives facing the Chinese economy – particularly the need to derive domestic growth drivers beyond its successful but dated producer-side model. That model, which China now seeks to export to its developing-country peers, had been authored by Deng Xiaoping exactly 35 years earlier at the 3rd plenary session of the 11th Central Committee meeting in November 1978.If the ‘belt’ and ‘road’ is to be Xi Jinping’s lasting legacy 35 years down the line, he must engineer an analogous rebalancing of the Chinese growth model to a more consumption-led one with the same political acumen and zeal that Deng displayed four decades earlier. When China ultimately serves as a ‘consumer of last resort’ for the increasingly sophisticated industrial-goods exports of its rapidly growing developing and less-developed country partners, BRI will truly have bolted the development strategies of numerous countries, sought out complementary win-win advantages, and realized the common development and prosperity that it had envisioned for a vast chunk of humanity. Success abroad must first begin at home.

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By Professor Houmin Yan, Dean of the College of Business at the City University of Hong Kong

As the protectionist spirit takes hold across the North Atlantic, Dean Houmin Yan describes how China’s One Belt One Road project is promoting connectivity and collaboration across Eurasia using the Public-Private-Partnership model, and how China is emerging as a surprise champion of global free trade.

The globalization project is due for a reset. With the United Kingdom’s impending exit from the EU and the accession of the Trump Administration in the United States, the two countries who have held aloft the torch of free trade over the past two centuries are lurching onto an opposing tack. Protectionism rather than free trade is the new mantra. As globalization enters a new era, the mantle of free trade champion is passing — surprisingly — to China.

Europe is in flux. For the people of the United Kingdom, the conflation of the four European Union freedoms — the free movement of goods, of services, of capital and of people, was one freedom too many. In a continent with widely disparate economies, that fourth freedom — and the reality of open borders — was stunningly rejected by Brexit. Whether the peoples of Europe will follow suit is now down to this year’s elections in various European countries.

Walls or open markets?

On the other side of the Atlantic, President Trump is putting America First. Symbolic of the new  protectionist spirit, a wall is being built. Peter Navarro heads up the White House National Trade Council with a strategy to renegotiate existing trade deals and scrap bad ones. This means “no” to the Trans-Pacific Partnership, and at the very least a renegotiation of the North American Free Trade Agreement. Meanwhile, at the Davos Economic Forum in January, China President Xi Jinping upheld the benefits of globalization and open markets. In the midst of the Brexit and America First mayhem, China’s One Belt One Road (OBOR) project is emerging as a bulwark of world free trade.

China's first direct freight train to UK

Seamless logistics are central to the free trade project. The day after British Prime Minister Theresa May stood up to finally offer a definition for Brexit in January 2017, the first direct goods train from China to the United Kingdom arrived in London. The end of an 18-day journey, of 12,000 km, with two changes of gauge, the service passed through Kazakhstan, Russia, Belarus, Poland, Germany, Belgium and France before entering the UK via the Channel Tunnel. The train hauled 34 containers packed with £4 million worth of clothes, visible proof that One Belt One Road is reaching out to the metropolitan heartlands of the United Kingdom and Europe. This train is just one of 14 dedicated rail routes linking China directly to European nations.

Win-win scenario

At the heart of the OBOR project is China's strategy to promote connectivity and collaboration across Eurasia. “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st century Maritime Silk Road” by the National Development and Reform Commission (NDRC), released in March 2015, speaks a language very different to the Trump protectionist mantra. It talks of mutual benefit, and seeks “a conjunction of interests and the ‘biggest common denominator’ for cooperation so as to give full play to the wisdom and creativity, strengths and potentials of all parties.” According to Beijing, this is the classic win-win scenario. OBOR fosters collaboration, leveraging each country’s advantages in technologies, management and resources. Overall, the vision is to reform production structure. China’s high quality of services and resources will flow to the OBOR countries, and push forward supply-side structural reform to the benefit of all.

Public-Private-Partnerships

The driving force behind the new Silk Road is the tried and tested Public-Private-Partnership (PPP) model, which is being pursued at full steam ahead. According to a joint statement released by the China Securities Regulatory Commission and NDRC in December 2016, PPP infrastructure projects established for at least two years may now raise funds by issuing asset-backed security products. Given that there are more than 10,000 China PPP projects, with an investment of more than US$1.85 trillion, PPPs are set to gain significant leverage along the Silk Roads in 2017.

The PPP model has been chosen for several reasons. They are excellent vehicles for underpinning the finance and management of large scale infrastructure projects. Their transparent tendering mechanisms facilitate the OBOR project selection process, and the variety of models available such as build-operatetransfer (BOT) or concession, can be adapted to suit various kinds of project. Risk management is another area where the PPP model scores. Governments tend to be more expert in areas of legally related risk, whilst the private sector excels in managing financial and operational risks. Finally, the long-term framework of OBOR projects, typically some 20 to 30 years, means that government plays an important role as guarantor to underwrite the project’s success.

Chain morphs to matrix

As North America, the Pacific region and the United Kingdom face uncertain and increasingly protectionist futures, OBOR is a major growth point for international trade with China at its fulcrum. China is building on existing strengths. Some of the fastest rates of growth in GDP are in countries along the OBOR corridors, and China is already the largest trading partner of many of these countries. The growth points are at the European end destinations, and that is where the dedicated direct goods train services are beginning to play their part.

This is not however merely a new version of the traditional supply chain system, to produce in the east and consume in the west. The recent Fintech surge, the advancement of logistics systems, the use of multi-channels in marketing, and the ubiquitous presence of e-commerce, are resulting in more fragmented, diversified demand in the production process. Both production and consumption are going global. The chain is morphing into a matrix.

Is the loss of manufacturing really a loss?

As part of this process, many countries along the old Silk Roads are reinventing themselves as major producers. Take Bangladesh, a lead player in the manufacturing industry in South Asia. Its population of 160 million has enjoyed strong economic growth, with a GDP of over 6% p.a. over the past six years. Garment factories have moved here from China in large numbers. Protectionist wisdom would see this as a threat to the incumbent manufacturing nation. But is China really suffering?

As the world’s largest importer of textile raw materials, China possesses a high level of automated textile processing industry and has excess capacity. The shift of the manufacturing industry to Bangladesh actually benefits China's export of textiles. It releases excess capacity in production, and accelerates the transformation of manufacturing industry towards higher value added industries. From a classic supply chain perspective, allocating the production process to a low-cost country, enhances the overall efficiency of the chain. So, the OBOR infrastructure investment, reduces the cost of logistics and trade, and encourages industry transformation.

The Marshall Plan

How should we understand One Belt One Road, compared to two other global projects, the 1946 American Marshall Plan and the 2014 European Union “Juncker Plan”? Opinion remains divided on the post-World War Two Marshall Plan. Some view it as an American act of benevolence, helping a  devastated Europe to get back on its feet. Others as an expedient means to creating a market for America as it retooled its factories from war production to domestic goods. The plan certainly also had a political dimension, acting as a bulwark for supporting western democracies at a time when the Iron Curtain was coming down over Europe, and the threat of Soviet expansion was very real. It necessitated strong leadership from the US, who provided support in finance, technology and facilities, and spawned international institutions. The plan created a template for stronger European cooperation, later enshrined in the EU, and has proved influential down to the present day.

The Junker Plan

The 2014 Junker Plan arose in very different circumstances. This large-scale infrastructure investment plan was designed to unlock public and private long-term investments in the “real economy”. After seven years of stagnation, the aim was to kick-start the European economy by investing in energy, transport infrastructure and other socially-beneficial assets. So far there are seemingly positive consequences: A European Fund for Strategic Investments to develop the real economy has been set up. New investment has flowed to the 27 member states to the tune of EUR138.3 billion in the first 18 months. But mid-term the jury is out. Europe remains in crisis. There are unprecedented levels of youth unemployment in Greece and Spain, and vast flows of refugees have entered Europe from Syria and Africa at levels that cannot be comfortably assimilated under a multicultural model. Looking ahead, a stagnating European economy and the rise of nationalistic political parties with overtly protectionist agendas threaten regional unity.

One Belt One Road

One Belt One Road differs from the Marshall Plan in that it was not prompted by an outright crisis. There was however an economic slowdown in China post-2009, and the OBOR initiative can be seen as a stimulus to China’s flagging State Owned Enterprise sector. Like both predecessors, it is ambitious and of vast scope. More than 60 countries from Asia, Africa and Europe are involved, including many developing countries with diversified economic environments. Funding infrastructure is vital. A Silk Road Fund and Asian Infrastructure Investment Bank have been set up to encourage private companies to invest, and produce a flow of policies, infrastructure, trade, finance and capital, connecting people of many countries. The new Silk Roads seek to create win-win situations within expanding regional economies.

Long-term PPP

OBOR is powered by long-term PPP agreements between government and private entities for the provision of public services and the development of infrastructure. Responsibilities and returns are shared by both sides. A private sector strong in analysis, innovation, operation, and risk control provides funds. And long-term PPP contracts will address the issue of under-maintenance of public infrastructures.

Results are impressive: To date, the People’s Republic of China Ministry of Finance has approved 232 model projects, with a total investment of 802.54 billion Yuan. The total number of archived projects is 9,285, with a total investment of 10.6 trillion Yuan. Overall, the private sector accounts for nearly 40% of project participation.

Hong Kong

In all of this, Hong Kong has a crucial part to play. The region’s well established financial and legal systems, together with mature logistics and retail service sectors, provide an excellent platform. In partnership with countries possessing less developed systems, Hong Kong can be a leader in OBOR. And the College of Business at CityU is set to play a key role. The new International PPP Specialist Centre of Excellence for Public Transport Logistics will develop OBOR research projects, international policy briefs, and share PPP best practices and international PPP standards in public transport logistics.

The Wheels of Commerce

It has been said that a volume of Jewish history is equal to half the history of Western civilization, a volume of Henan history is equal to half of Chinese history, and a volume of Silk Road history is equal to half of the history of globalization. But the Silk Roads are not confined to history. A new chapter is being written, and in a disrupted world, One Belt One Road policies, infrastructure, trade, finance and capital, are lubricating the wheels of commerce. At odds with the North Atlantic protectionist zeitgeist, and driven by a still expanding China economy, OBOR is a vital contributor to global economic growth. As the world reaches for the global reset button, China and the countries of the ancient Silk Roads play a pivotal role in keeping the wheels of commerce turning.

This article was firstly published in “CITY BUSINESS Magazine (Spring 2017)” by College of Business, City University of Hong Kong magazine. Please click to read the full article.

By Gerard Burg, Senior Economist, National Australia Bank

In May, China hosted a summit for a range of global leaders to promote the Belt and Road Initiative – the multi-decade, global infrastructure plan first outlined in 2013. Despite positive rhetoric surrounding the initiative, it has achieved only modest results to date – with competing priorities both domestically and internationally impacting on the project.

What is the Belt and Road Initiative?

The Belt and Road Initiative (BRI) is a broad (and somewhat loosely defined) infrastructure program (including roads, railways and ports along with power generation and fuel pipelines) linking China and a broad range of countries in Asia, Europe and Africa. It is intended to develop land based trade links across Asia to the Middle East and Europe (which has been likened to the Ming Dynasty’s Silk Road) and maritime links with South East Asia and East Africa.

The initiative has economic and political goals – supporting growth and development (particularly in underdeveloped parts of Asia and Africa) and fostering closer relations between these countries and China. The decision by the United States to withdraw from the Trans Pacific Partnership and the likely increased importance of the Regional Comprehensive Economic Partnership may support these efforts.

Finally, the BRI also has a role in China’s domestic policy as well – aiming to address excess industrial capacity through both increased demand for Chinese products in neighbouring countries (although this may only occur over the longer term), as well as the potential to transfer excess industrial capacity to these regions – similar to the early stages of China’s industrial development in the 1980s, when it imported surplus capital equipment from Germany and Japan among others.

How Effective Has the Initiative Been?

The relatively short history of the Belt and Road Initiative makes it difficult to objectively assess the success of the program. This is particularly the case where political and economic objectives of the initiative can diverge.

From a trade perspective, there has been limited increase in trade values since the BRI was introduced. Two-way trade with BRI countries rose from 24.8% of the total in 2012 to 25.8% in 2016 – albeit this was slightly below a peak of 26% in 2014. The share of exports has gradually risen over time – up from 24.5% in 2012 to 27.9% in 2016 – while import values from BRI countries have fallen. At least some of this decline reflects commodity price trends over this period.

Trade with BRI Countries

Similarly, investment in BRI countries is yet to substantially increase – with total non-financial investment in 53 BRI countries falling by 2.0% in 2016 and contracting further in early 2017 (down by 19% yoy in the first four months of the year). This may reflect the competition between short and longer term priorities at a governmental level – with Beijing implementing tighter controls last year to curb capital outflows. It is also worth noting that the large cost and long lead times of major infrastructure projects means that year-on-year comparisons may not provide the most accurate picture of growth in the BRI.

Investment in BRI Countries

Investment in BRI countries is not entirely infrastructure related. Singapore received the largest level of investment for a BRI country in 2016 – despite the country’s highly developed and sophisticated infrastructure. Similarly, authorities have recently cracked down on investment by Chinese firms in unrelated sectors – most notably the purchases of European football clubs. More generally, poorly invested funds increases the risks associated with China’s already high debt levels, along with the often higher levels of sovereign risk associated with some BRI countries.

China’s state-owned enterprises have been heavily involved in BRI investment, with data from the State-owned Assets Supervision and Administration Commission noting that 47 central government SOEs have been involved in almost 1700 projects in BRI countries since 2013. There have been concerns that government pressure has influenced SOEs to invest in unprofitable projects – raising long running concerns around both the sustainability of Chinese debt and the reform of SOEs. This means that there are substantial risks (in addition to the much touted benefits) to China’s economy from the initiative.

Who is Supplying the Funding?

Data published in the Financial Times suggests that the China Development Bank – one of the three state-owned policy banks – is the single largest source of funding for BRI investment – with outstanding funding of US$110 billion at the end of 2016 – around 38% of the total. The four major state-owned commercial banks have lent a combined US$150 billion – just over half of all BRI lending. Perhaps surprisingly, relatively little funding has come from either the Asia Infrastructure Investment Bank (AIIB) (US$2 billion) – the Chinese established multi-national development bank – or the Silk Road Fund (US$4 billion) – a state-owned investment fund established to support the BRI.

Funding Sources for BRI Investment

At the recent BRI summit, President Xi announced a further US$113 billion of funding, which is likely to be delivered via the Silk Road Fund, the China Development Bank and the Export-Import Bank of China. However, the Chinese government needs other countries to provide funding via the AIIB; it cannot afford the vast sums reported (as high as US$8 trillion in coming years) on its own.

Conclusions – What Does the BRI Mean for Australia?

Based on current data, the BRI has had only a modest impact in boosting China’s trade and investment links – compared with the considerable ambition of China’s government. There remain long term challenges, balancing competing political and economic objectives that may run counter to each other.

Australia is not currently considered one of the BRI countries; however as a signatory to the Asian Infrastructure Investment Bank, it has a direct link into the initiative. Some have called for greater involvement in the project, including suggestions that BRI could fund infrastructure and development projects in Northern Australia. That said, the history of previous attempts to develop this region have been patchy at best.

Others have suggested that the input demands for infrastructure construction could underpin longer term demand for Australia’s resource exports. We would urge caution in such an assessment – as China’s vast overcapacity in sectors such as steel production are too large to be absorbed by near neighbours, while the longer term outlook for China’s domestic demand is likely to be relatively weak. We would argue that the BRI is unlikely to provide another mining boom for Australia.

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By He Yafei, former Vice Minister, Ministry of Foreign Affairs of China

This is really the best of times and worst of times. With the rise of a large number of developing and emerging countries and relative decline of “advanced countries”, the global convergence of power is accelerating and the balance of power continues to tip in favor of the developing countries. This big picture provides a useful prism through which a clearer view of the world today and tomorrow, including the future of globalization, global governance and the global liberal order, becomes clear in our minds.

Liberal order in crisis

Without any doubt, a crisis has been raging across the “liberal democratic world” for some time with “black swan events” appearing in the U.S. and in many European nations. These have wreaked havoc with the political eco-system in the Western world, weakening the centrist and progressive forces that used to underpin the U.S.-led postwar world liberal order.

The challenges to liberal order as well as liberal democracy come from both within and outside, mostly from within, which raises many questions as to whether the U.S.-led and U.S.-defined liberal order can survive.

Among challenges from within, first and foremost is the loss of credibility of economic neo-liberalism as the governing ideology for global economic order since the 2008 financial crisis, which has made many countries turn to the East, in particular to China, for new ideas and concepts.

Next naturally are the “Trump Phenomenon” and its copycat versions in European countries, though the result of French election has given people some relief as Europe stares into the abyss of EU disintegration.

President Trump has been in office for a bit more than four months, during which his pronouncements and actions, together with his midnight tweets, are perceived both at home and abroad as risking an end to the role by the U.S. as guarantor of this liberal world order. His view of American decline and his instinctive contempt for the norms and values of liberal democracy, long held as sacrosanct by Western nations, is too blunt to miss or to ignore. Hence comes the question: Will the US continue to provide global commons in this new era of globalization or will it backpedal and go into an isolationist Mode Vivendi as has been the American tradition? That is why Francis Fukuyama repeatedly asks that “irksome” question of “do we still live in the liberal international order” as he gives talks and writes about the fast dismantling of that order based on liberal democracy.

China offers an alternative?

The Belt & Road Initiative is both a national developmental strategy and an innovative initiative by China to global governance offering huge opportunities for greater cooperation among countries concerned on the basis of equality and mutual benefit. The widely acclaimed success of the recent B&R Forum of International Cooperation in Beijing testifies to its popularity worldwide. The number of countries (and regional and international organizations) that have signed MOUs on B&R with China had increased to 68 by the closing of the forum.

Nevertheless, B&R has been viewed with deep suspicion – some in the West portrayed the initiative as China’s attempt to grow its sphere of political and economic influence, with a hidden agenda to overthrow the current international system of liberal democracy.

Here we have to distinguish between two things that are not really related. The liberal democracy and liberal order as defined in the Western narrative are indeed under siege and in crisis, because politically and economically they has been used or abused to impose a Western model of governance onto other nations regardless of their domestic conditions, including the “Washington Consensus” and “Responsibility to Protect”. It has also been followed rigidly in Western countries themselves for capital-holders to extract as much profit as possible from the society —overlooking the negative impact it has on some segments of the populations, especially those who have only unskilled labor to offer. The French economist Thomas Piketty in his famous book entitled “The 21st Century Capital” described this ugly phenomenon in great detail.

The widening gap and exacerbating conflict between the rich and the poor have been blamed on globalization per se. The fact that governments in those countries failed to address this glaring problem has been conveniently forgotten.

Here lies another reason why China’s proactive B&R proposal is so popular.

There are at least two things that make B&R an attractive proposition. One is that this idea of new international cooperation is deeply rooted in the success of China’s economic growth and its domestic governance, including the enormous efforts in poverty reduction and elimination. China was successful in lifting over 700 million people out of poverty in the last four decades.

The other is the fact that China’s success has been achieved by taking its own path of development with strong institutional guarantees from government led by the Chinese Communist Party. In other words, China has not followed the governance model of neo-liberalism offered and sometimes imposed by Western nations. Other developing countries and emerging markets, as well as many advanced industrial nations, have come to the conclusion that China offers an alternative model, though by no means to be simply copied, to economic growth and good global governance. B&R is a solid example.

President Xi solemnly promised at the B&R Forum that the new Silk Road will be “the road of peace, prosperity and innovation with inclusiveness and civilization integration”. B&R is also offered as a way to deal with the serious global challenges of peace deficit, governance deficit and development deficit.

It is quite clear that B&R has nothing whatsoever to do with the decline or non-decline of the liberal order or liberal democracy as claimed by some scholars and experts in the West. If there is anything about B&R that can contribute to the future of global governance and world order, it is the inherent opportunities of that proposal to further democratize international relations and make globalization an equal process for sharing benefits among all nations and therefore more sustainable.

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By Carey YANG Qiuyu, The Belt and Road Research Center, Qianhai Institute for Innovative Research (QIIR)

Before the Belt and Road Initiative, China has close trade relationship with Southeast Asian countries, especially ASEAN countries. With the completion of the ASEAN Economic Community in the end of 2015, the world's seventh largest economy with 640 million people will bring an unlimited potential market. The gradually maturing development of the ASEAN Economic Community has provided a great platform for the construction of 21st Century Maritime Silk Road. The Belt and Road initiative also prioritizes the ASEAN countries during the development. That is to say, trade markets of ASEAN will all go into a rapid development phase for some time in the future.

Although the ASEAN economies have made unremitting efforts to improve the economy and trade of their members, their economic and trade conditions polarize seriously. Additionally, the volume of trade between member countries' and China is extremely unbalanced…..

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By Penelope Marbler and Lea Shan, French Institute for International and Strategic Affairs (IRIS)

Chinese investments in infrastructure are mainly located in Africa and Asia

• Many Chinese infrastructure investments are directed to African countries.

Ethiopia has received three loans worth more than $380bn from the Chinese government and the Export-Import Bank of China for the development of infrastructure in the country (two road construction projects and upgrading the electric grid system). In December 2016, China has also partnered with Gabon to develop a 111-km highway project in the capital Libreville. The country seeks to further develop the relationship in infrastructure, minerals and technology. The development of ICT infrastructure is also present in Zimbabwe, where the government seeks Chinese funding and technology (partnership with Huawei Technologies notably).

• Asian countries see the OBOR initiative positively.

The Philippines is planning to borrow $3.4bn from China. At least three infrastructure projects have been agreed between China and the Philippines, especially for the irrigation, water supply and railway projects. The country has an ageing infrastructure and aims at developing its economy with a target growth rate of 8% and is willing to foster its relationships with China. Vietnam seeks infrastructure investments coming from the AIIB, with a total investment across of circa $50bn. Indeed, the country encounters traffic congestion, waste treatment and urban transport infrastructure issues. Thailand is also willing to develop infrastructure projects, especially the railway activity. In the Arab Peninsula, the United Arab Emirates (UAE, Dubai notably) wants to diversify its energy mix by developing a massive “clean coal” project worth $2bn. This project is backed by funding coming from Chinese banks and government ($1.4bn); the construction is expected to be built by Chinese workers and to be completed in 2023.

Geopolitical Conflicts And Risks

• Geopolitical conflicts arose from Chinese infrastructure investments.

Sri Lanka’s people protested in January 2017 against the construction of a port and an industrial zone by China in the southern part of the country (Hambantota). In fact, Sri Lanka concluded a 99-lease of the port to an 80% Chinese-owned company that will create an industrial zone. This project plans to move thousands of people, thus leading to conflicts between the local population and the government.

• Some risks can also be underlined.

For instance, India is not part of OBOR. At some point, the growing economic relationships between China and Bangladesh can be an advantage for India, as it can reduce poverty in Bangladesh and thus decrease the number of illegal Bangladesh migrants into India. But on the other hand, ignoring global trade through OBOR can be a challenge for India, as the country cannot ignore its foreign policy if it wants to become a global power. Indeed, OBOR aims at bolstering connectivity through infrastructure, new institutions and integrated market. Nevertheless, India seeks other alternatives, such as planning to start air cargo transportation between India, Afghanistan and Iran, which is a way to compete the China-Pakistan Economic Corridor.

• Plus, Chinese investments abroad can be negatively perceived.

This is the case in Australia, where the Chinese growing influence in Papua New Guinea brings uneasiness in the Australian local community. Indeed, Papua New Guinea signed a MoU with China to build a series of processing and manufacturing plants.

• OBOR can also face a technical risk.

For example, there is no interconnection between the different railway systems of the countries concerned.

Further Thoughts

• The aims of OBOR are diverse.

OBOR is first a Chinese economic tool to leave the surplus of domestic industrial overcapacity and give it to other countries in need; as well as a way for China to diversify its energy projects. This initiative is also a means for the country to accelerate the internationalization of the renminbi, shifting from a merchandise exporter to a capital exporter place. Secondly, OBOR has an external reason: foster trade connectivity and create an alternative to the trade rules imposed by Western countries (i.e. challenge the US, Europe and Russia activities in Southern and Central Asia). Indeed, one example can be the Chinese high-speed rail network, as it has become the world leader in just a decade. China is now exporting its railway knowledge as a diplomatic tool to spread its influence in the other countries (Ankara-Istanbul in Turkey, Jakarta-Bandung in Indonesia).

• OBOR can call into question the establishment of a new zone of influence, as the US appears to be no longer the guarantor of the global economic system.

OBOR is a way to shift the rules of world trade, as Pacific and Atlantic are historically dominated by the US. With the idea of linking three continents together, OBOR could allow China to extend its soft power both in the culture and in the economy.

• New forms of cooperation are also emerging with OBOR.

The International Finance Corporation (member of the World Bank Group) signed a master agreement to bolster investments in emerging markets projects, especially in Asia’s infrastructure sector.

• Plus, some policies will change, notably the place of Israel in the case of Europe.

Israel could be the mediator between the world’s leading powers in terms of economic and trade integration and cooperation, as Israel is in a very strategic place in the view of the OBOR initiative.

Chinese companies have completed some projected in Europe, such as the Ankara-Istanbul highspeed railway in Turkey. Nevertheless, Western countries are facing a dilemma: should they accept all the Chinese investments in infrastructure, or should they protect their national interests at all costs? Indeed, the China Investment Corporation has acquired a 61% stake in the British National Grid’s gas division, which worth £13.8bn. The presence of Chinese entities is seen more and more often, with leading investors such as Fosun.

• What appears challenging in the OBOR initiative is that there is no one definition of OBOR, as the action plan seems colossal.

The core of the action also remains vague, as it appears to be more a vision than an action. In addition, even if China has invested a lot in infrastructure all over the world, the IMF pointed out the urgency to invest in soft infrastructure, meaning to strengthen fiscal and monetary frameworks, to continue to reform SOEs, to develop a policy against financial risks and to improve macroeconomics statistics.

Nevertheless, the initiative of creating a new form of financing trade through the AIIB can be considered as a major change in the globe, as it can be viewed as a model that other countries should follow. Indeed, some journalists evoked the possibility of the creation of a Europe-led “Africa Infrastructure Investment Bank” (source: FT). This institution could lead to the development of the agriculture and the industry, as well as creating employment for the high number of African workforce. It is also advantageous to Europe as it has special historical bonds with Africa and that Europe has the capacities to create a win-win situation.

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By United Nations ESCAP – Economic and Social Commission for Asia and the Pacific

Key Messages:

Economic conditions stabilized in the Asia-Pacific region in the second half of 2016. Resilient domestic demand and policy support have resulted in the region’s developing economies growing at a steady pace of just below 5 per cent annually despite a sluggish global economy and weak trade growth. Indeed, with developed economies losing some of their recovery momentum, the region’s high and steady growth rate, led by China and India, has arguably been an anchor of stability for the struggling global economy. The outlook for 2017 is broadly positive based on China’s rebalancing-led moderation being offset by an expected return to positive economic growth in the Russian Federation, sustained high economic growth in South Asia supported by moderate inflation, and increased public investment in South-East Asia and the Pacific.

Stable economic conditions provide an opportunity to make progress on the productivity and inclusiveness fronts, particularly in the context of implementing the 2030 Agenda for Sustainable Development. While the region continues to lead global economic growth, output expansion from globalization and technology has not been translated into commensurate increases in decent jobs in a number of countries. Relatively slow employment growth and a persistently high share of vulnerable employment have contributed to rising income inequality. As the region undergoes further structural transformation, efforts to lift productivity and innovation should be matched by measures to enhance worker skills and social protection. Moreover, appropriate policies should ensure that productivity gains derived from technological progress are passed on to workers through higher real wages.

Despite recent stability, the likely impact of some risks for the near-term economic outlook should not be underestimated. Bouts of financial volatility can re-emerge given the uncertain external environment, including policy uncertainties in major economies in the wake of the forthcoming installation of a new administration in the United States of America on 20 January 2017 and the negotiations in Europe related to the planned exit of the United Kingdom of Great Britain and Northern Ireland from the European Union (referred to as Brexit), and vulnerabilities on the domestic front, such as in corporate and bank balance sheets. External demand is likely to remain weak, and there is concern that prolonged weakness in global trade could be a drag on productivity growth and the integration of developing countries into global and regional value chains. Trade protectionist measures and sentiments, which are already on the rise, may increase further, harming export-oriented Asian economies and negatively affecting private investment.

While low inflation and an easing in financial market conditions have allowed monetary authorities to lower policy rates, a prudent stance is needed given the partial recovery in global oil prices and high private debt and currency exposure in some economies. To propel investment, improve efficiency in the allocation of investment resources and ensure financial stability, banking supervision and regulation along with macroprudential frameworks should be strengthened. In this vein, deleveraging and restructuring efforts in countries such as China and India should contribute to enhanced financial stability and higher productivity.

Fiscal policy can and should play a proactive role in supporting domestic demand and in meeting long-term development priorities. While ensuring long-term fiscal sustainability, there has to be greater emphasis on the quality and composition of public expenditures, rather than simply on aggregate budget deficits and public debt levels. Public infrastructure outlays are deemed particularly effective in supporting domestic demand and addressing structural bottlenecks in the current environment of weak external demand, weak private investment, low borrowing costs and benign inflationary pressures. Improving public financial management, reforming State-owned enterprises and enhancing tax revenues could considerably strengthen fiscal positions on a sustainable basis.

Tax policy can also be particularly effective in nurturing a more balanced society with less extreme inequalities. The population-weighted Gini coefficient, based on household income estimates, has increased by almost 30 per cent in the region between 1990 and 2014. Rising inequality has triggered broad concern and social debate, and promoting inclusive development has become a key priority of countries’ national development strategies. Taxes, and in particular progressive personal income tax, can be a main policy tool for direct redistribution of income and wealth in a society. Taxes can also provide critical public revenues for financing public investments in health care and education, as well as for funding social protection and welfare schemes.

Better economic governance, as reflected, among other things, in the effectiveness and integrity of public institutions is a fundamental element in managing structural transformations, undertaking progressive tax reforms and moving towards a sustainable development path. Effective economic governance can go a long way in enhancing investment that is currently weak; in promoting productivity and innovation that underpins sustained economic growth; and in accelerating poverty reduction and mitigating inequalities, including through progressive tax reforms, that needs consistent policy attention. The role of better and more effective governance in improving development outcomes, especially through public resource management and financial markets, will be explored in detail in the forthcoming issue of the Economic and Social Survey for Asia and the Pacific for 2017.

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By Junhua Zhang, Shanghai Jiao Tong University

Since 2013, the 'One Belt, One Road' (OBOR) initiative has become the centrepiece of China's economic diplomacy. The essence of OBOR is to promote regional and cross-continental connectivity between China and Eurasia. The 'One Belt' and 'One Road' refer to China's proposed ‘Silk Road Economic Belt’ and ‘Maritime Silk Road’. Connectivity covers five major areas of interest: policy coordination, infrastructure construction (including railways and highways), unimpeded trade, financial integration and people-to-people ties. Among these, infrastructure construction is the dominant feature of the New Silk Road.

While the historical Silk Road was an upshot of bottom-up trade activities, driven mainly by nations outside China, the OBOR initiative is designed by China's ruling elites. It represents the first major attempt by China to design and implement a cross-continental mercantile strategy and will surely have significant global and geopolitical consequences.

OBOR is a product of Chinese neomercantilist thinking. Today's neomercantilism differs from the mercantilism of the 17th to early 20th century, when merchants were often complicit in the imperialism of the great powers in pursuit of increased political power and private wealth. Neomercantilism today is much more constrained, thanks to national and international legal frameworks, reluctance to engage in armed conflicts, as well as a greater widespread appreciation of human rights.

Chinese neomercantilism endorses global trade and its institutions while also pursuing a government-led globalisation strategy to accumulate capital and wealth for the nation. China's strategy clearly preferences state-owned enterprises (SOEs) and is focused on establishing free trade areas — similar to the China-ASEAN Free Trade Area which came into effect in 2010 — with Central Asia and South Asia.

So what is driving China's OBOR initiative?

Many of China's production sectors have been facing overcapacity since 2006. The Chinese leadership hopes to solve the problem of overproduction by exploring new markets in neighbouring countries through OBOR. The OBOR initiative will provide more opportunities for the development of China's less developed border regions. China also intends to explore new investment options that preserve and increase the value of the capital accumulated in the last few decades. OBOR has the potential to grow into a model for an alternative rule-maker of international politics and could serve as a vehicle for creating a new global economic and political order.

But there are significant risks associated with China's OBOR strategy. China's neomercantilism lacks sensitivity when addressing some issues in host countries, particularly regarding culture, environment and ethnicity. Beijing's authoritarian approach may also impede effective cooperation with democratic countries.

The China-Pakistan Economic Corridor (CPEC) project is a prime example of the risks and challenges facing China. CPEC is a combination of transport and energy projects and includes the development of a major deep-sea port offering direct access to the Indian Ocean and beyond. Plans for CPEC were officially formalised in April 2015. According to the agreements of both sides, total costs for the projects currently under construction amount to US$46 billion. Should all the planned projects be implemented, the combined value of the projects would be equal to all foreign direct investment in Pakistan since 1970, and would be equivalent to 17 per cent of its 2015 GDP.

The Chinese leadership sees Pakistan as one of its most longstanding and committed allies. This is why CPEC is being treated as a poster child for the OBOR initiative. Still, many uncertainties exist which could topple the project. CPEC faces domestic political opposition in Pakistan, with infighting between provinces and the central government over the allocation of investment. A more serious issue is that of security. On the Chinese side, the East Turkestan Islamic Movement (ETIM) is hindering Chinese efforts, while on the Pakistani side the Pakistani Taliban and other anti-state militant groups pose an immense threat to construction crews and could disrupt the flow of goods.

With this in mind, in the short term, China's OBOR initiative will likely only deliver very modest results despite immense investments. It is still hard to predict whether China's OBOR projects will be effective over the medium-to-long term as this depends on the responsiveness of both governments to challenges, as well as the external environment.

Still, OBOR marks the beginning of a new economic diplomacy for China as it shifts towards being an active driver of the regional and global economy. Whether China's neomercantilist expansion policy will meet expectations, remains to be seen.

This article was firstly published on East Asia Forum based out of the Crawford School of Public Policy at the Australian National University. Please click to read the full article.