Xi Jinping’s ‘One Belt, One Road’ strategy is showing the way to a new world order
Lan Shen says the nearly 60-nation initiative is already reaping benefits, which will multiply if the risks can be better addressed, and participating countries made more aware of the pluses
While still a confusing concept to some in the West, China’s “One Belt, One Road” initiative – launched three years ago – is now gaining significant traction. The ambitious project – effectively linking trade in some 60 Asian and European countries along a new Silk Road – is China’s most important strategic initiative, and a crucial component of President Xi Jinping’s (習近平) foreign policy.
China has signed project contracts worth US$926 billion along the belt and road. A series of cross-border infrastructure projects are under way – such as a new China-Laos railway, a highway in Pakistan and a port in Vietnam – and are expected to expand quickly.
The initiative has already hugely boosted trade and investment. Trade between China and countries along the land and sea-based routes exceeded US$1 trillion in 2015, a quarter of China’s total trade value. Chinese exports to belt and road countries now exceed those to the US and the European Union – China’s top two export destinations – and the gap is widening.
China has developed over 50 overseas economic and trade cooperation zones along the belt and road, and expanded its free trade zones trial from four to seven provinces, including inland regions, which will help push investment projects, simplify cross-border transactions and improve trade liberalisation.
The plan has also accelerated China’s shift from being the world’s biggest goods exporter to becoming a major capital exporter. Outbound direct investment to the belt and road nations grew 23.8 per cent in 2015, and 60 per cent year on year in the first half of 2016.
Another important effect is the internationalisation of the renminbi. China has expanded its bilateral local-currency swap programmes to 21 countries, granted renminbi quotas to institutional investors in seven, and set up renminbi settlement banks in eight countries. These have seen renminbi trade settlement increase to more than 25 per cent of China’s trade early this year, from just 5 per cent at the beginning of 2012.
New financing mechanisms, set up by China, indicate the leadership’s strong commitment to the plan. China has encouraged commercial banks, quasi-official regional cooperation funds and private capital to participate in belt and road projects, to boost limited official resources and make projects more commercial.
The Asian Infrastructure Investment Bank, New Development Bank and Silk Road Fund, together with China’s policy banks, have taken the lead and started to participate in cross-border investment projects.
However, obstacles to the initiative persist. Projects in some countries have been suspended or postponed, highlighting the need for China to address concerns about outcomes and costs. The belt and road is not a foreign aid programme, but a commercial project that requires participating nations to make a long-term commitment and invest.
For better coordination among participating countries, China will need to articulate clearly the economic benefits of the initiative, and demonstrate through existing projects that the strategy will create jobs, and improve trade links and living standards.
Meanwhile, Chinese firms leading the investments need to gain more experience and knowledge in operating and investing in these countries, navigating debt, foreign exchange and geopolitical risks.
These risks can be mitigated if companies conduct project assessments and implement appropriate risk management – using credit insurance protection and overseas investment service platforms.
China could make it easier for private firms to control risks by encouraging multilateral institutions to participate in projects, and continuing to promote international adoption of the renminbi.
The initiative is important to China’s growth prospects, but goes far beyond benefiting China, given today’s economic headwinds. The uncertainty around the US-led transatlantic and transpacific trade deals after Donald Trump’s election victory, and the rising risk of an antiglobalisation push by the US, could renew efforts for alternative regional trade deals.
If implemented effectively, the belt and road initiative will improve global trade and commodity demand at a time of rising uncertainty, bringing a much-needed boost to global growth.
Lan Shen is a China economist at Standard Chartered