As the US deglobalises, China is filling the void, observes Deutsche Bank economist Zhiwei Zhang in this overview of the Middle Kingdom’s One Belt One Road strategy
Here are some messages we take from the 2016 government plan on OBOR:
- Geographic focus on Asia/Europe/Africa. The plan suggests East Asia and Europe are two economic powers that should be better connected, and the vast region between the two has potential to be developed. This is an interesting shift of strategy. China focused more on economic ties with developed countries in the past, as they were China’s main export markets.
- Economic focus on trade and investments. These are the main channels to develop the economic potential under OBOR. Trade liberalisation and facilitation are highlighted in this plan. In a world of rising trade protectionism, this is a positive sign and has been welcomed by many countries.
- Infrastructure investment takes the lead. This is critical to facilitate trade and investments. China has developed capacity in the infrastructure space, such as high-speed trains. Some significant projects are already in the pipeline, such as the high-speed railway in Indonesia and Thailand, and the port in Pakistan.
- OBOR requires massive financing. Infrastructure investments are capital intensive. Projects such as high-speed railways are long-term and require low-interest financing. The plan explicitly aims to develop the Asia bond market and leverage the Asia Infrastructure Investment Bank and the BRICS Development Bank.
First, trade data suggests there is indeed economic potential to develop in this region. China’s trade influence has been rising globally. Such influence may be underappreciated in some regions. For instance, most of the countries in Central Asia and the Middle East are more dependent on China than the US for their export market (see Figure 1).
Third, this initiative will help China to mitigate regional imbalance between its western provinces and the rest of the country. Indeed, provinces such as Guangxi, Yunnan, Gansu and Xinjiang should benefit from such an initiative if trade with their neighbouring countries improves. These provinces have been left behind as the coastal provinces in China enjoyed much faster development in the past (see Figure 2).
China and Pakistan
The China-Pakistan Economic Corridor (CPEC) is one example of what OBOR covers. The CPEC initiative covers a set of infrastructure projects in Pakistan. Highways and railways will be built in Pakistan. The Gwadar Port in Pakistan and China’s Xinjiang province will be connected through such transportation networks, which provide a new route for trade between China and the Middle East. This initiative has been under discussion for many years. It gained momentum after China launched the OBOR proposal.
The CPEC shows how the OBOR initiative can change the economic landscape. It has been well appreciated by international investors. For instance, Moody’s accredited the launch of CPEC as a factor that offsets some negative indicators to deliver a stable outlook for Pakistan. The amount of investment for the infrastructure projects under CEPC was reported at US$46bn back in 2015. 1
It is likely rising with new projects being added in recent years and has recently been estimated at US$62bn. 2
Moreover, if the corridor is effectively completed, some trade flow that currently goes through South-East Asia may be diverted to Pakistan. It would be interesting to see if this brings manufacturing jobs to Pakistan, a country with a UN-estimated population of 189 million and low GDP per capita.
Dr Zhiwei Zhang is Deutsche Bank’s Chief Economist and Head of Equity Strategy, China Research, based in Hong Kong
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