The new Maritime Silk Road will stretch between China, Southeast Asia and Africa
China is embarking on a series of initiatives in response to expected flat world trade growth abroad and moderating economic activity at home. These include its recently announced One Belt, One Road plan.
“One Belt” refers to the economic belt along the traditional Silk Road connecting China with Europe. “One Road” is the new Maritime Silk Road between China, Southeast Asia and Africa. The aim is for China to invest in infrastructure along these routes to bolster its overseas trade. This in turn will stimulate production and consumption demand at home.
Beijing has pledged an initial investment of USD40 billion to set up a Silk Road fund
As well as addressing economic headwinds, China hopes to rebalance its economy. Beijing intends to promote the development of a consumption-led economy to supplement its traditional success in exports. It also wants to spur economic growth in its laggard western provinces to complement the economic dynamos in the east.
If all goes to plan, China’s President Xi Jinping predicts One Belt, One Road will lift China’s GDP this year by 0.25 per cent. In the next decade, he estimates annual trade volumes between China and belt and road countries will surpass USD2.5 trillion. The policy is expected to benefit 4.4 billion people in 65 countries.
The plan will have particular relevance for infrastructure development. China has far more steel than it needs. A shrinking construction market at home has meant a surplus is piling up. Meanwhile, many developing countries in Asia suffer from infrastructure deficits. China has the capital, expertise and excess capacity to bridge these gaps. By investing in Asia’s infrastructure needs, China is helping Asian economic development abroad and priming demand for its domestic heavy industry at home.
The policy will reinforce China’s central position in Asian trade and transport. China’s vast transport and shipping sectors would be the biggest beneficiaries, with agriculture, textiles, telecommunications, financial and high-tech sectors also expected to benefit.
In total, 18 provinces and regions have been selected as key development zones, including Gansu, Qinghai, Shaanxi and Shanxi in the west and Inner Mongolia to the north.
Beijing has pledged an initial investment of USD40 billion to set up a Silk Road fund for the construction of high-speed railways, bridges and ports in Southeast and Central Asia. This figure is in addition to the USD64 billion of infrastructure investments already announced.
To cope with the huge funding need, Beijing is launching a new supra-national financial body – the Asian Infrastructure Investment Bank (AIIB). The AIIB has garnered support from 57 countries as prospective founding members. This will create a fund that can be sought by countries to develop infrastructure throughout Asia. China is proposing to provide USD100 billion worth of authorised capital.
From Beijing’s perspective, these developments are part of a bigger picture. This is to encourage the further economic integration of participating countries and the formation of a new regional economic trading and investment bloc. More importantly, it will expand the global use of the Chinese currency, increasing the speed of the renminbi’s internationalisation.
Since China will be responsible for most of the financing, it is likely that some will be provided in renminbi rather than US dollars. The renminbi is already the second largest trade finance currency. In March, it entered the top five most used global payment currencies, according to Swift.
Hong Kong has an active role to play as a financial hub for One Belt, One Road. The territory is already the premier centre for offshore renminbi business, with the largest renminbi liquidity pool outside mainland China.
Last year, renminbi trade settlement handled by Hong Kong banks reached RMB6.3 trillion – an increase of 60 per cent on the previous year. This is expected to grow even further. As trade and other economic activity along the One Belt, One Road expands, so too will the demand for settling in renminbi, initially to mitigate exchange risks.
Beijing’s One Belt, One Road is a short phrase that expresses some big ambitions. The path to success might be long, but China has made an impressive start.