All roads lead to Beijing as we look at China’s generation defining “One Belt, One Road” policy, an endeavour that, if successful, will interweave the economic destinies of 3.8 billion people (over half of the global population), across 65 countries. The cost is projected at a mindboggling USD 4 trillion – equivalent to launching 27 International Space Stations, building 10 complete US interstate systems, or digging 180 Chunnels (the Channel Tunnel between the U.K. and continental Europe). No matter how you slice it, China is primed to head-up the largest infrastructure investment project the world has ever seen. The aim is to expand China’s capabilities as a growing regional and global superpower. This means potential investment opportunities for decades to come.
Unfortunately the most significant economic development in the decade is widely misunderstood and underappreciated in the West.
Seldom people know what One Belt, One Road – or OBOR – stands for. The project is overlooked and under-reported. Either the Chinese government needs a better PR-firm on the case or people in the West need to do a lot more reading. Probably both.
One Belt One Road
OBOR is a development strategy and framework, unveiled in 2013 by the president of the People’s Republic of China, Xi Jinping. It focuses on connectivity and cooperation among countries primarily between the People’s Republic of China and the rest of Eurasia. It consists of the land-based “Silk Road Economic Belt” and oceangoing “Maritime Silk Road”. The strategy underlines China’s push to take a bigger role in global affairs. But along that “Road” there are an awful lot of countries that will gain tremendous benefit from the kind of investment that China is going to make. Projects include railways, roads, bridges, ports, energy-plants (hydroelectric, wind-power, solar farms), pipelines etc.
What drives China?
In the West we need to guard against using clichéd understandings about China, whereby we think we have an understanding of what China is doing. We think we know how the Chinese think, and we stereotype. The Chinese are very strategic and intergenerational thinkers, planning decades in advance, unlike anything we do in the West. The groundwork is laid over many years.
So what drives China? Over the past 15 years half of global growth was directly or indirectly related to what was happening in China. This is now behind us. Demographically China is no longer growing. In fact, starting in 2016, the labour-force started to shrink. China’s big ability to generate productivity gains out of its labour-force is slowly but surely disappearing.
Should China do exactly as the governments in the West?
Foreigners may recognize the state China is in, and think they know the answer. The overcapacity and the bad debt problem, can simply be solved by printing more money and expanding budget deficits to keep growth at a certain level. In essence, do exactly what the governments in the West would do. Interestingly China doesn’t seem to be going down this path. The inter-generational thinking and the centrally planned economy lead to a different approach to Economics and Social Planning. OBOR is the main thruster of China’s economic rocket in the medium term.
OBOR addresses 4 existential objectives that arose out of China’s experience in 2008:
- Internationalisation of the Renminbi. One of China’s stated aims, which we all ought to be conscious, and maybe slightly fearful of, is that China wants to displace the US dollar as the mainspring of the world economy. To give a parallel, the Pound Sterling was eclipsed by the US dollar in 1955.
- Help reform the state owned enterprises (SOEs). The SOEs are pushed out into the international arena which will make them more efficient.
- Do not disturb trade relationships (and geopolitical relationships). In particular with the US. China takes the US very seriously. However, trade and geopolitical relationships are bidirectional, and there is someone at the other side of those relationships who seems to be highly antagonistic and intends to disrupt just about anything.
- OBOR’s humongous draw on natural resources will lay the foundations for China’s future access to an control of natural resources. Bear in mind that 40% of China’s primary energy supply is coal. Though this needs to change, for now, from a medium term standpoint, China needs to go down this road. On the one hand by providing funding, on the other by creating – so called – seigniorage (the ability to use own currency for purchase resources globally). This is also a way for China to make the Renminbi the international currency.
Does Internationalisation of the Renminbi mean de-Dollarization?
In 2008 China learnt that being dependent on US banks and the US dollar to finance its trade was a nonstarter. If China wanted to continue growing in a stable manner – stability is paramount -, it could not depend on the US dollar. It had to move its trade to Renminbi. And it did so successfully. China moved from settling 0% of its trade in Renminbi 5 years ago, to 25% today. By stimulating more and more countries in Asia to use the Chinese currency for trade, it is affecting oil, gold and currency markets worldwide. Combined with the aggressive selling of US treasury, Chinese actively is trying to bring the Renminbi into the international realm, trying to settle as much trade as possible with domestic currency and bypass the US dollar. All for stability.
Potential Red Flags
Besides the rewards it is also important to point out potential issues:
- Conflict escalation in the South China Sea region.
- Depending on the stance the USA takes, resources could be diverted from the OBOR towards military assets.
- Political goals interfering with capital allocation and project execution. What if Beijing is unhappy with the political choices and policies of countries they invest in?
- Potential risks for the Chinese banking system. Ultimately Chinese banks will finance OROB. Since a lot of the 56 counties are sub-prime, the banks must have factored in a fairly high exposure to non-performing loans.
China will have to make an extra effort in order to improve its image as a benign and peaceful power. Whilst using the OBOR to boost its economy, China can promote its culture and knowledge through enhanced people-to-people-partnerships. Multilateral relations which will enhance through OBOR can be used to eradicate distrust. The initiative should not be viewed as a “zero sum game”. Because whilst the project will brings massive economic benefit to China, it also facilitate development of other countries. Thus the Silk Road initiative should be looked as an attempt to further globalize the world.