China’s Silk Road drive hits yuan globalisation bump
Time for rethink in Beijing’s new economic diplomacy as currency weakness and suspicions among neighbouring countries
A slowdown in China’s efforts to globalise the yuan is holding back the roll-out of the country’s “One Belt, One Road” initiative, as analysts urge a rethink of Beijing’s new economic diplomacy.
The “One Belt, One Road” push also needed to maintain “a low profile” to counter suspicion among neighbouring countries, said Chu Yin, an associate professor at the University of International Relations in Beijing.
The call for restraint comes amid the slowdown in emerging economies, complex geopolitical situation, and criticism of potential pitfalls in the initiative.
Global investment figures on the back of the “One Belt, One Road” push, though, tell an impressive tale.
Chinese enterprises signed nearly 4,000 project contracts across 60 countries – with a cumulative value of US$92.6 billion – last year. The figure is equivalent to 44 per cent of China’s total overseas project contracts.
Despite the impressive investment figures, there are concerns both within and outside the Chinese government that the initiative may have been “too hasty, too broad, too ambitious and without sufficient preparations for unexpected contingencies,” said Christopher Johnson, a senior researcher with the Centre for Strategic and International Studies in Washington, in a research report.
In addition, steps taken by Chinese regulators to defend the yuan and to stem capital outflows after the currency’s sharp depreciation late last year had raised the cost of currency settlement for Chinese firms conducted overseas businesses, Chu said.
“The use of the yuan as a settlement currency overseas is a problem as the government is very cautious to take bold steps out of fear of shorting the yuan in the offshore market,” Chu said.
He added: “Moves such as draining offshore yuan are a retreat of the currency’s global push. Companies are facing a complicated process in currency settlement along with its very limited use in the region [of Southeast Asia].”
But the slowdown in the yuan’s globalisation could be temporary, said Wang Jiaqiang, a researcher at Bank of China, the biggest foreign exchange trading bank. “As of now, financial stability tops regulators’ considerations and not the yuan’s globalisation.”
China is pushing its initiatives in Kazakhstan and other central Asian countries that have traditionally been strongholds of Russia. Speculation is also rife that Russia is getting worried over China’s increasing presence there as Astana, the Kazakhstani capital, wants to use Beijing’s economic strengths to cut its dependence on Moscow.
Meanwhile, in Southeast Asia, Beijing is challenging the presence of Japan, which has enjoyed strong economic dominance in the region for over three decades.
Almost every province and some cities in China have set up funds or unveiled projects to dovetail with “One Belt, One Road”, but there was no agency like Japan’s Ministry of Economy, Trade and Industry to coordinate overseas investment, an economist at a think tank in Jakarta said.
“The ministries do not share information. Each goes its own way. Without proper communication with local people, it is easy to fuel fears of neocolonialism and speculation about China’s real intentions,” the economist said.
Profits should be the key focus, said Chu. “We should scale back some of the infrastructure projects as many of them don’t make money,” he said, adding that some projects saw returns of about 1 per cent.
Some infrastructure projects were even at risk of default because of the market turmoil in neighbouring countries, accentuated by an economic slowdown in the region and capital flows to the US, Chu added.
“‘One Belt, One Road’ is a high-risk project. We are bound to see some ill-conceived projects in the future, but it is more important to see how many are successful rather than how many fail,” said Chu.
He said China should allow more market access to foreign companies when Beijing itself is reaching out to other global markets. This will help dispel the speculation that the initiatives are self-serving, he added.
“The success of the ‘One Belt, One Road’ relies on how we view it and also how our neigbouring countries treat it.”