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The Belt And Road

China’s One-Belt One-Road initiative (OBOR1) is the core element in the nation’s Eurasian foreign policy. This edition of Prospects will discuss OBOR from a high level perspective. A subsequent episode will build on this foundation to define what this ambitious initiative might mean for our portfolio of commodities in the longer run.

China’s four-decade long boom, coupled to its immense geographic and demographic scale, has returned it to its traditional position at the centre of the East Asian economy. Along the way it has built unprecedented reserves of foreign assets; become the largest trading partner of more than half the globe and risen to a leading position in multiple segments of the global manufacturing supply chain. China is the largest single market for everything from cars to mobile phones and e-commerce to international tourism. It is also the largest consumer of a wide range of commodities across the energy, minerals and agricultural fields. Despite this impressive catalogue, there is more to be done, as all of this effort has, at this stage, only raised the living standards of the average Chinese citizen to the middle income level.

To become a prosperous twenty-first century society, the Chinese economy must continue to ascend the value-added chain by building up its innovation capabilities. It must also improve the long run allocation of capital whilst accommodating the rise of consumerism – all while managing the legacies of the old growth model. OBOR helps on all counts.

The origins of the trillion dollar, continent-straddling version of OBOR we see today can be traced back to earlier, less ambitious policies. Some were aimed at developing China’s regional sphere of influence. Others sought to spread the benefits of what was then predominantly coastal economic development into China’s less developed interior provinces.

In the late 1990s, a “Go Outward” policy was instituted, encouraging Chinese firms to invest abroad. In the early 2000s, the Shanghai Cooperation Organisation (SCO) was founded, which systematised high level Chinese engagement with a group of central Asian countries positioned along what is now the “Silk Road Economic Belt”. There was also a “Go West” strategy, aimed at developing China’s poor interior provinces, many of which shared land borders with central Asian nations. In 2009, President Hu tightened relations with central Asia with a range of state visits, high profile investments and economic partnerships. And then, in 2013, President Xi Jinping introduced the names “Silk Road Economic Belt” and “Maritime Silk Road” on official visits to central and south-east Asian nations respectively.

Under President Xi’s sponsorship, serious money began to be ear-marked for projects under the OBOR banner, highlighted by the US$40 billion “Silk Road Fund”. A “Leading Group”2  reporting directly to the State Council was established. China is also the cornerstone investor in a new multilateral lending institution, the Asian Infrastructure Investment Bank (AIIB), which has already funded a number of major projects in OBOR countries.3

From a purely economic standpoint, OBOR provides a signal and a framework for Chinese firms to export their growing expertise in infrastructure, manufacturing and construction. The financing of OBOR projects offers an avenue for diversifying China’s foreign assets away from low yielding sovereign bonds to higher yielding real assets. In the second wave, the increasing prosperity of recipient countries, where shortages of basic infrastructure4are a major impediment to improving the livelihoods of their citizens, will provide expanding markets for Chinese goods. China’s heavy industries, many of which are experiencing excess capacity after a decade of very strong investment sentiment, will enjoy having an additional outlet for their wares in both waves of this journey. This could help soften the blow of the inevitable restructuring that domestic economic rebalancing will entail.

                                                                                                         ----From Dr Huw Mckay

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