OBOR: will it reboot the Chinese economy? Pravakar Sahoo is Associate Professor at the Institute of Economic Growth (IEG), Delhi Introduction The Chinese President Xi Jingping mooted the idea of the New Silk Road and 21st Century Maritime Silk Road initiatives in 2013. Later, in November 2014, the One Belt, One Road (OBOR) concept was officially unveiled at the Asia Pacific Economic Cooperation (APEC) meet with the establishment of a $40 billion silk fund. The OBOR project has two parts. One Belt will be a land based economic corridor slated to run from Xian in Shaanxi province, China, traversing through Central Asia and Europe before terminating at Venice in Italy. The belt involves significant investments to develop road and rail infrastructure along this corridor along with other ancillary facilities like high speed fibre optic cables for better communication and energy pipelines. The One Road, on the other hand, refers to the 21st Century Maritime Silk Road-a sea based route, originating from Quanzhou in Fijian province China, passing through the Strait of Malacca in order to reach Nairobi (Kenya), before merging with the land based route at Venice. Investments are likely to be undertaken in development of ports in the participant countries along with initiatives to simplify procedures of transporting goods across the borders. The regions to be covered under the two initiatives comprise about 40 to 60 countries consisting of about 65% of the world's population generating 30% of the world's GDP. It is believed that the OBOR is likely to be completed in time for the 100th anniversary of the establishment of the People's Republic in China, in 2049. A beginning has been made with the operationalization of the $40 billion Silk Road Fund in February 2015. This Fund is being backed by the China Investment Corporation (China’s sovereign wealth fund), China Development Bank, the Export-Import Bank of China and the State Administration of Foreign Exchange. It is expected to fund infrastructure and industrial corridor projects in participant countries. The Karot Hydropower project in Pakistan is the first recipient of this Fund. Other institutions likely to invest in OBOR projects include the AIIB and the BRICS New Development Bank. Chinese average growth, which has remained at nearly 10% per annum over the last three decades, started showing signs of slowdown since early 2014. Rising labour costs, declining global demand for exports leading to excess capacity in factories, weakening of stock markets and rising income inequality within the country are some signs of overheating of the Chinese economy. Initiatives of the scale of the One Belt, One Road Project will therefore be of great significance for China and the rest of the world, not only economically but also geopolitically. OBOR: economic implications for China Creating demand for heavy industries in China: the four major objectives of the OBOR are development of road and rail infrastructure; high speed fibre optic cables and energy pipelines; development of ports in the participant countries and establishment of trade logistics and institutions. Further, the OBOR initiative seeks to achieve policy coordination between participant nations through inter-governmental cooperation, macro policy correspondence and special communication mechanisms. A prime focus of the OBOR initiative is to improve physical connectivity via massive infrastructure investment that will raise demand in certain industries and development of trade between China and participant countries. The OBOR initiative intends simplification of trade related procedures and customs cooperation, reducing barriers to trade and investments within participant countries. Given that most of the countries covered under the OBOR project are developing countries that need quality infrastructure, large investment will be made in infrastructure which in turn would raise demand for products such as steel and cement. Some of the industries like construction machinery, petrochemical and materials, high speed railways and wagons, telecommunication equipment and pipelines will see increased demand as well. As most of the OBOR infrastructure projects would be funded by China and institutions supported by China, such demand orders will go to Chinese companies that have thus far been saddled with unutilized capacity due lack of demand. China is the largest steel and cement producer in the world, but most of the factories run with excess capacities in the last couple of years owing to weak global demand. In fact, what China needs from now onwards is giving a boost to aggregate demand to sustain even 7% growth rate. Higher demand in these heavy industries will lead to higher production which in turn is likely to generate millions of jobs across entire value chains. The OBOR initiative will re-boot China’s factories not only in using installed capacity but also expanding in future thereby contributing to exports, jobs and forex. China in recent years has developed great expertise in building infrastructure projects abroad. In fact many Chinese companies are actively involved in many road and high speed rail construction projects in Asia, Africa, Europe and South America. Implementation of the OBOR initiative will throw open opportunities to such companies. Another sector where China is likely to gain significantly is renewable energy, especially solar energy. With green energy gaining currency among countries across the globe, China would seek to leverage its newly acquired technical knowhow and available natural resources to make the best use of the opportunity afforded by the OBOR initiative. China is home to about 90% of the world's rare earth deposits-the most critical raw material for solar panels. As Chinese companies expand internationally, particularly in participating countries, demand for various financial and non-financial services will rise, providing thousands of jobs to the tertiary skilled workforce of China. Exports for infrastructure projects from Chinese companies to participant nations will mostly be financed by Chinese institutions (like the New Silk Road Fund, China Development Bank and China Exim-Bank) or Chinese dominated financial institutions (like the AIIB and the BRICS New Development Bank), along with private entities like Maritime Silk Road Fund Management Center. China is likely to use its $4 trillion forex muscle power to finance such institutions. If these institutions operate on market principles, China is likely to derive additional benefits by investing its forex reserves in such projects. At present the rate of return on capital is every low in China, therefore it’s an opportunity for China to use its capital in productive way and also help the internationalization of the renminbi. By advancing renminbi denominated loans or credit lines for projects importing Chinese goods, China would be able to broaden the international usage of its currency. Regional integration for trade and investment: with regional connectivity as the main focus, the OBOR project is likely to further the integration of South and South East Asia with Central and West Asia and Europe. Other than the OBOR initiative, China has been involved in negotiations with quite a few countries for regional connectivity, such as the high speed rail link from Beijing to Moscow via Kazakhstan; road corridors under the nomenclature of Bangladesh-China-India-Myanmar corridor; and road connectivity with Thailand. Once completed these corridors will complement the OBOR corridor, effectively linking South East Asia directly with Western Europe through OBOR, thereby facilitating not only trade, commerce and investments but also cultural exchanges with the focus on people-to-people contact and tourism. The OBOR initiative will help Chinese firms to get more market access, especially in Western Europe where they have not been so successful. Over time Chinese companies are looking to move forward in the global value chain by transiting from low-end, low-quality manufacturing to high-end, high-quality manufacturing. Such companies therefore are in need of markets that will have viable demand for their products. China is attempting to provide an opening for such companies, especially in countries of Europe and Central Asia, by making them partners through OBOR instead of confronting their restrictive trade and investment policies. OBOR will further China’s interest in Central Asia. China is already a major trading partner of Central Asian countries, especially in the energy sector. Several Central Asian countries like Turkmenistan, Uzbekistan and Kazakhstan, along with Russia, are well connected with China through various hydrocarbon pipelines. China has provided about $3 billion to Turkmenistan, $10 billion to Kazakhstan, and has promised about $25 billion to Russia as either loans or as advance payment for future oil supplies. On the back of such investments China has been able to squeeze out concessions for not only Chinese hydrocarbon entities, but also preferential treatment for trade and investment. Chinese energy firms (for example CNPC and CNOOC) have begun encroaching the markets of existing domestic firms of central Asian countries. For example, Gazprom of Russia has been losing its market share in the lucrative Central Asian hydrocarbon pipelines business to the pipeline arm of CNPC. With the implementation of the OBOR corridor it is expected that Chinese firms will follow the footsteps of their hydrocarbon siblings. In return for investments made for building infrastructure like road, railways, airports and ports, along with communication infrastructure like cross country fibre optic trunk lines and mobile towers in participant countries, Chinese firms will bargain exclusive fiscal concessions along preferential treatment, not only vis-à-vis other countries but also against domestic firms. Such concessions will reduce China’s cost of doing business in such countries, thereby boosting the competitiveness of Chinese products. Spin-offs from such a boost is expected to be felt globally. As infrastructure within the Belt and the Road develops, industrial corridors are likely to be established along the same. Construction of industrial corridors is likely to have a domino effect in the entire Belt and Road. With quality infrastructure in place, transaction costs in such industrial corridors will be minimized, leading to higher production, employment and profits. Therefore all participant nations would seek to attract capital to invest in such corridors even though it is likely that China will fund such investments initially. Opportunity for balanced growth across provinces in China: China’s industrial development in the last four decades has been mostly concentrated in eastern coastal regions. Today, the coastal eastern and south eastern provinces of China enjoy superior transportation systems, possess the bulk of the country's natural resources and have better industrial infrastructure. The world class key cities of Beijing and Shanghai are located in this region. OBOR projects cover about 16 provinces while the Silk Road economic belt includes provinces like Ningxia, Chongqing, Szechuan, Guangxi, Yunnan and large parts of Inner Mongolia, the 21st Century Maritime Silk Road includes provinces like Jiangsu, Zhejiang, Fujian, Guangdong, Hainan, Shandong etc. Some of these provinces are relatively less prosperous compared to eastern provinces. Further, the recently launched infrastructure projects in western China and regions bordering Mongolia will be absorbed into the OBOR scheme. Therefore, the implementation of the OBOR economic belt will help the interior and western China to undergo significant development in terms of infrastructure and industrialization. The focus of such development is likely to go into the building of roadways, high speed railways, airports and ports, thereby improving the connectivity of such provinces with rest of China. OBOR: implications for strategic and foreign policy issues It is well known that China aspires to be known as a major world power rather than to be known merely as a regional power. India, Vietnam and Japan feel threatened both politically and economically by China due to her aggressive posturing on bilateral, regional and global issues. Her meteoric economic rise has made western powers, in particular the United States, nervous about maintaining the hegemony enjoyed by them in global affairs. The differences in socio-economic ideologies between the two countries have brought them to loggerheads at many international fora. In recent years, the USA has endeavoured to develop or improve its relationships with countries of the Asia Pacific, especially with China’s neighbours like India, Vietnam, Japan, Philippines etc, with dual objectives of containment and engagement with China. The US also concluded the Trans-Pacific Partnership negotiations which includes Japan, Australia, Canada, Mexico, Vietnam, Malaysia but not China. Along with the formal objectives of OBOR, there exists some implied objectives which seek to benefit China and its industry. As has been noticed with other global multilateral initiatives and institutions like the Marshall Plan of the 50s, the Asian Development Bank (ADB), International Monetary Fund (IMF) etc, the principal funding country gets a significant political voice in the recipient or participant countries’ domestic and international policies. For many observers, in the East and the West, the OBOR initiative of China appears to be a tool to further the country's political and economic interests both in Asia and in the rest of the world. For example, China has long-standing disputes with many of its neighbours like India and Vietnam. By increasing economic influence through OBOR initiatives, China would aim to settle such disputes in her favour. Economically, China appears to have dual objectives to promote such lineage between countries and continents. The Chinese economy has slowed down over the last couple of years leading to excess capacity in Chinese factories. By promoting investments in the course of implementation of OBOR projects, it is expected that new opportunities and markets would be created for Chinese firms which would have a multiplier impact on production of goods and services domestically, thereby creating more jobs and higher incomes for the Chinese populace. Given her huge foreign exchange reserves, totalling about $4 trillion, China is in need of avenues to invest so as to earn a reasonable return on the same. Also, with most of the projects (in initial phases at least) to be financed by Chinese financial institutions like China Investment Corporation, China Development Bank etc, and China-dominated institutions like the Asia Infrastructure Investment Bank and BRICS New Development Bank, it is being commented by many observers that China is attempting faster internationalization of her currency, the renminbi. Thus it quite apparent that China has a grand vision in promoting OBOR; a vision which seeks greater roles for China (both political and economic) in the international community. There has been a mixed response by the international community with regard to the OBOR project. While most of China’s neighbours, especially the ones in Central Asia like Mongolia and Kazakhstan, are quite upbeat about the prospects and the benefits of such an initiative as it would lead to significant Chinese investment in infrastructure, along with modern technologies for extraction and utilization of their domestic natural resources. Similar views are held by countries along the 21st Century Maritime Silk Road. Countries like Sri Lanka, Myanmar and Maldives have openly supported the Chinese twin initiatives by offering several concessions to Chinese companies. However, the countries with which China has long standing disputes like India, Vietnam etc, along with western developed countries like USA and Australia view the OBOR initiative with suspicion. It is in this backdrop that China seeks to expand her influence not only in Asia but across Africa and Europe, with the One Belt, One Road as the weapon. Finance is likely to be the primary instrument of this policy. Infrastructure construction is an expensive affair with large capital requirements and long gestation periods. China through her various agencies and institutions will provide much of the financing required at least in the initial stages. Most of the recipient countries are either developing countries or under developed nations. Also many of such countries, especially those in Central Asia and the Middle East are or would be in the process of rebuilding their economies post-civil wars. Financing at such a critical juncture is likely to give China a big say in the direction of not only their economic but also foreign policies. Experience with Bretton Woods institutions like IMF and World Bank corroborates this argument. In countries like Myanmar, Maldives and Pakistan, existing policies are being tweaked to suit Chinese interest post receipt of aid or investment. China also expects to improve her relations with the European Union. The latter’s economy is going through a very bad phase with low consumer demand and high unemployment. It is reported that the EU intends to invest €315 billion on infrastructure across the group over the next 10 years, to be financed by and large by the private sector. The OBOR project gives China an opportunity to build and upgrade the infrastructure without over-straining the relationship with euro group. Investments in the projects will generate employment, stimulating domestic demand in the region. Chinese companies on the other hand gain market access in the European Union, something that China has found rather hard to get. Traditionally an ally of the US, the EU of late has been increasing her engagement with China much to the agony of the US. The recent decision by several major EU countries like France, Germany, Italy and the UK to join the AIIB, in spite of stiff American opposition, points towards the recognition of China by EU as a credible economic power. The OBOR initiative is further likely to deepen the mutual trust between the EU and China. Such mutual trust will give rise to greater cooperation among the two economic powers in both economic and strategic matters. Conclusion Overall, China’s OBOR initiative is grand and if implemented successfully over time, it would certainly reboot Chinese economy which has been slowing down in recent years. What is most important for the Chinese economy today is boosting aggregate demand for its industries and that is possible through OBOR which will create opportunities for trade and investment for Chinese firms. Though OBOR is a grand idea, things are easier said than done. Although domestically China will be able to achieve its objectives of the OBOR initiative, execution of cross national projects will be full of potholes. Countries along the Belt include some of the most underdeveloped and volatile regions of the world like Pakistan, Iran, Iraq, Syria etc. Pursuing infrastructure projects with some countries will not only involve significant financial and political challenges but also involve serious security implications. In sum, the OBOR initiative is a centrepiece of China’s foreign policy and domestic economic strategies. It is aimed at rejuvenating two ancient trade routes and further opening up markets within and beyond the region In order to make the OBOR successful, China is keen to offer more economic and financial assistance to regional countries and beyond through connectivity programmes, technical exchanges and the building of infrastructure.
What is most important for the Chinese economy today is boosting aggregate demand for its industries and that is possible through OBOR