31 July 2018
In 2013 he announced his “One Belt One Road” (OBOR) project. It is designed to revive the old trading routes of the silk road. The belt is the sea route emanating in China and weaving its way via southeast Asia, the Horn of Africa and the Suez Canal to Europe. The Road are several land routes connecting China to western Europe: One via Central Asia as well a Northern path via Siberia and Russia.
There are side routes like the China Pakistan Economic Corridor (CPEC) linking China to the port of Gwadar and the Arabian Sea.
OBOR’s dimensions are gigantic: It comprises 68 countries, 62 percent of the world’s population, 75 percent of global natural resources and around 30 percent of the world’s GDP.
There has been much argument about China’s motivation behind the mega project and about the benefit to the transit nations.
The reasons behind China devising this project are manifold. While it is true that a land route could potentially cut the maritime shipping time of Chinese goods to Europe in half, this is only partially what OBOR is about. There are many other reasons: Easy access to natural resources, the use of China’s overcapacity to build infrastructure elsewhere, relocation of some production facilities to more low-cost countries and last but not least the internationalization of the Renminbi.
The latter goes hand in hand with the RMB reaching reserve currency status in 2016 when it was included in the IMF’s basket of currencies.
The project is a manifestation of China’s long term economic and geopolitical vision, which goes well beyond access to resources like we have seen in Africa and Latin America:
For instance, China is a founding member of the Shanghai Cooperation Organization (SCO). Its aim is co-operation in the realm of security, the economy and politics.
The more the US withdraw from the multinational stage the more the SCO is bound to increase in importance. China was also quick to form the BRICS bank and more importantly the Asian Infrastructure Investment Bank with its headquarters in Beijing.
Despite vehement opposition by the Obama administration, European countries, South Korea, Australia and many others rushed to join the endeavour.
Xi Jinping was onto something in 2013. There is a huge need to build infrastructure in Asia Pacific. A 2017 study of the Asian Development Bank estimated investment needs reaching $15 trillion over the next decade.
OBOR has already seen massive investment. The dimensions are so great that multilateral lending institutions and private sector banks have also been invited to participate.
For the latter, things are not always easy, as the time horizons and creditworthiness of projects and countries prove difficult. These are classic project financings, which need to be supported by strong cash-flows and guarantees.
Various experts and institutions estimate that OBOR could give the recipient countries GDP a lift of between 0.5 – 5.5 percent per annum – depending on the country.
However, the impact is not entirely positive: The former chief economist of the World Bank, David Dollar, is concerned about negative impacts on countries with weak governance systems, such as Cambodia and Pakistan.
He is more optimistic about countries with strong administrative capabilities like India, Indonesia, Vietnam and some central European countries, who would be able to assert their national interests and manage their debt effectively.
IMF President, Christine Lagarde, warned this April that countries should not forget their debt management principles in the rush to build new infrastructure.
Pakistan is a good example. Project costs have increased and China has replaced Japan as the country’s biggest creditor. Pakistan’s current account deficit has ballooned over the last five years.
There is also the famous example of Sri Lanka, which had to cede the port of Hambantota to the Chinese to repay its debt.
Djibouti may well be next in line to hand over a port. Having debt repaid in kind is not unusual when dealing with China. The Center for Global Development (an independent think tank) identified Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan und Tajikistan as particularly vulnerable in that context.
Still, there are positive impacts of OBOR. Last year Pakistan’s economy grew by an astounding 5.8 percent. The country now has to ensure that growth rates are sustainable and not a one off during the construction phase. It also desperately needs to get a handle on its debt management.
To answer the question in the title: OBOR can have a positive impact on the participating countries’ economies. However, they need to ensure that whatever is built leads to sustainable growth, the projects employ domestic labor (not only Chinese labor as has happened throughout Africa), corruption is kept to a minimum and above all that they do not fall into a debt trap. All of the above requires sound governance, which is where the expertise of the likes of the World Bank could be useful.