June 30, 2016

China's One Belt One Road is an attempt to physically and economically unify Europe and Asia and $890 billion in deals are a start

There are 900 deals under way on China's One Belt One Road initiative. The deals are worth $890 billion, such as a gas pipeline from the Bay of Bengal through Myanmar to south-west China and a rail link between Beijing and Duisburg, a transport hub in Germany. China says it will invest a cumulative $4 trillion in OBOR countries, though it does not say by when. Its officials tetchily reject comparison with the Marshall Plan which, they say, was a means of rewarding America’s friends and excluding its enemies after the second world war. OBOR, they boast, is open to all. But, for what it is worth, the Marshall Plan amounted to $130 billion in current dollars.

President Xi’s chief foreign adviser, Yang Jiechi, has tied OBOR to China’s much-touted aims of becoming a “moderately well-off society” by 2020 and a “strong, prosperous” one by mid-century.

Mr Xi seems to see the new Silk Road as a way of extending China’s commercial tentacles and soft power. It also plays a role in his broader foreign-policy thinking. The president has endorsed his predecessors’ view that China faces a “period of strategic opportunity” up to 2020, meaning it can take advantage of a mostly benign security environment to achieve its aim of strengthening its global power without causing conflict. OBOR, officials believe, is a good way of packaging such a strategy. It also fits with Mr Xi’s “Chinese dream” of recreating a great past. It is not too much to say that he expects to be judged as a leader partly on how well he fulfils OBOR’s goals.

Third, OBOR matters because it is a challenge to the United States and its traditional way of thinking about world trade. In that view, there are two main trading blocs, the trans-Atlantic one and the trans-Pacific one, with Europe in the first, Asia in the second and America the focal point of each. Two proposed regional trade deals, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, embody this approach. But OBOR treats Asia and Europe as a single space, and China, not the United States, is its focal point.

In April a Chinese shipping company, Cosco, took a 67% stake in Greece’s second-largest port, Piraeus, from which Chinese firms are building a high-speed rail network linking the city to Hungary and eventually Germany. In July work is due to start on the third stage of a Chinese-designed nuclear reactor in Pakistan, where China recently announced it would finance a big new highway and put $2 billion into a coal mine in the Thar desert.




A financial structure to support it has also taken shape. In 2015 the central bank transferred $82 billion to three state-owned “policy banks” for OBOR projects. China’s sovereign wealth fund backed a new Silk Road Fund worth $40 billion and the government set up the AIIB with $100 billion of initial capital. The bank is not formally part of OBOR but the loans approved at its first general meeting—roads in Pakistan, Tajikistan and Uzbekistan, for example—are all in Silk Road countries.

Now the rest of the Chinese state is mobilising. Two-thirds of China’s provinces have emphasised the importance of OBOR for their development. For example, Fuzhou, the capital of coastal Fujian province, has told its companies to “start businesses in the countries and regions along the maritime Silk Road”; it has set up a free-trade zone to attract firms from such countries in South-East Asia. Many big state-owned enterprises (SOEs) have an OBOR department, if only in the hope of getting money for their projects.

As a result, China’s foreign direct investment (FDI) is increasingly going along the Silk Road. In 2015, by official reckoning, its FDI in OBOR countries rose twice as fast as the increase in total FDI. Last year 44% of China’s new engineering projects were signed with OBOR countries. In the first five months of 2016, the share was 52%.

China’s approach to investment seems to be changing, too. Its OBOR contracts are now more likely to involve Chinese firms managing the infrastructure they build, rather than (as in the past) building them and simply handing them over. In theory, this should give China an interest in working for the long term in Silk Road countries.

There are reasons for thinking the new Silk Road will be completed. Most important, Asia needs new infrastructure—about $770 billion a year of it until 2020, according to the Asian Development Bank. This demand should eventually ease today’s worries about a lack of projects. Bert Hofman, the World Bank’s chief in Beijing, adds that individual countries will benefit more if they align their plans with one other and with China. It does not pay to plan and build separately.

Next, China needs OBOR. At home, its businesses are being squeezed by rising costs and growing demands that they pay more attention to protecting the environment. It makes sense for them to shift some manufacturing overseas—as long as the infrastructure is there.

SOURCES- Economist

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