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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 infrastructure4 are 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.

One-Belt One-Road 

From an energy and trade security standpoint, OBOR protects and develops critical pipeline infrastructure and transport corridors on land; and it overlooks vital Eurasian shipping lanes on the maritime belt. Vast sums have been invested by Chinese firms to gain a foothold in multiple ports along the Indo-Pacific coast of Eurasia, with clusters of investment centred on major locations including the Straits of Malacca, Sunda, Hormuz, Gibraltar and Bab al-Mandab, as well as Suez. The links between the Belt and the Road (such as the “China-Pakistan Economic Corridor”, which hits the Indian Ocean at the Port of Gwadar) also provide China with alternative routes to reach the European, African, South Asian and Middle Eastern markets. There is also a possibility that northern Australia, a strategically located region with a complementary resource endowment to China’s, could become an important link in OBOR at some point.

With some US$1.3 trillion of projects having already been initiated under the One-Belt One-Road banner, the program is more than seven times the size of the Marshall Plan.

With some US$1.3 trillion of projects having already been initiated under the OBOR banner, the program is more than seven times the size of the Marshall Plan (adjusted for inflation). And as OBOR does not come with a ‘use-by date’, being a stratagem and not a pre-defined package, the gap will continue to grow.

It is too soon to say whether OBOR will turn out to be quite so significant a landmark in global economic history. But whether one considers land mass, population, economic size or coastline, OBOR’s potential canvas, reaching from East Asia to the African Horn and across eastern Europe, dwarfs that of the Marshall Plan.

The ambition of OBOR is clearly significant. Delivering on that ambition will require execution on the ground. At the micro level, Chinese firms will confront a range of risks on a project-by-project basis. These could include diplomatic or regulatory hurdles, cultural misunderstandings and the myriad of different legal systems they will be required to navigate. None of these hurdles are insurmountable; firms of all nationalities encounter such challenges when they move outside of their home market and enter unfamiliar territory. Consistent with the history of outward direct investment, some mistakes will be made and money may be lost. China and their partners should not count on every project proceeding neatly to fruition within the timescale initially envisaged.

In the next episode of this series, we will view OBOR through the micro lens, referencing our bottom up research on the project pipeline, and introducing some preliminary estimates of the steel demand that these projects could create.

1 OBOR is now being referred to by many Chinese official sources as simply the “Belt and Road Initiative”.

2 “Leading groups” are an important tool of very high level decision making within the Chinese government structure, created to advance key policy objectives.

3 The AIIB was established with authorised capital of US$100 billion; it is headquartered in Beijing; and China enjoys 26.06% of the voting rights. China has 4.59% of the votes at the World Bank versus the US’ 16.45%. China has 5.46% of the vote at the Asian Development Bank (ADB), versus Japan’s 12.798%. Other funding vehicles worth noting are the New Development Bank, also known as the “BRICs Bank”, the China Development Bank and the Export-Import Bank of China.

4 The Asian Development Bank estimates that Asia requires US$26 trillion in infrastructure investment by 2030.

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