Inside China’s One Belt One Road initiative

Readers will be familiar with the banner headline ‘One Belt One Road’ and its derivative or alternative names – OBOR, Belt and Road, the new Silk Road. For all the hype and hope that has come with it since it began to take shape in President Xi Jiping’s mind back in 2013, it should not be thought of as anything less than a major policy framework for the Chinese government that responds to a number of important economic and political goals as well as economic and social realities.

The framework is intended to be a game plan that can play out on the domestic, regional and transcontinental level. That it is a Chinese initiative with uniquely Chinese drivers should not undermine the very real opportunities its implementation will provide to the public and private sector players who not only lie along its route, but who can contribute to it or take advantage of what it will provide.

OBOR is a common sense and not very innovative response to the universally accepted idea that economic and social progress can be dramatically affected by greater connectivity and greater ease of connections. And for a large part that means more and better hard infrastructure – pipelines, railways, ports and airports. The OBOR framework is holistic, in that it recognises that transport infrastructure is nothing if it doesn’t respond to the needs of all potential users – local, regional and global. The Chinese have long seen the need to build future market capacities and develop stable wealthy economies that can be the consumers of the future, so this framework will encompass projects in power generation, mining, logistics, manufacturing, retail and leisure. There are virtually no investments along the belt/road corridors that cannot be branded OBOR.

TRANSPORT SHINES

Investment in the transport sector and rail (both freight and high-speed) in particular are the high-profile pieces of the puzzle that will generate emblematic OBOR projects, but they are by their nature hugely complex and long-term adventures that require a level of regional and intraregional co-operation that will take time to build. In the meantime, with the blueprint firmly in mind, Chinese construction companies, the state-owned railway companies and equipment providers will focus on achievable developments which work within the domestic economy in which they are set. So what appear to be isolated rail projects in Vietnam, Thailand, Myanmar, Iran, Saudi Arabia, Kenya, Ethiopia or Pakistan will all, in the end, feed a demand for and drive projects which genuinely connect regional economies and ultimately connect the east coast of China with the rail networks and ports of Europe.

In each of these countries there are large-scale rail projects which have been commissioned and involve Chinese interests. For the most part these are the state-owned construction companies, infrastructure operators and equipment manufacturers (CCCC, CHEC, CMEC, CSR/CNR and so on). China has always privileged state-to-state commercial arrangements, so the counterparts in these projects are most likely to be local state enterprises and enterprises that enjoy significant state connections and support. But there is a place for the Chinese and non-Chinese private sector – not in the major civil works contracts and maybe not in rolling stock, but in engineering, logistics, signalling and high-value operating technologies.

The development of ports and port infrastructure – natural railheads – is a key OBOR objective. China has already invested heavily in the port of Piraeus (COSCO), it has built infrastructure around the port of Mombasa, is in talks with the port of Antwerp and is more controversially behind the development of deep water ports in Sri Lanka, Pakistan and Djibouti. While these port developments no doubt serve a broader Chinese interest they also create genuine local employment and local investment opportunities.

Apart from the scale of the ambition of the OBOR framework there is little new about the projects themselves: these are conventional infrastructure projects and to this extent they are mainly built within the context of the demands and interests of a single country. What is new is China’s engagement: Chinese companies will build, finance and operate the infrastructure – alone, in the absence of local capacity, or in co-operation with local state and private enterprises. The key feature of this engagement is the willingness to support investments which fall within the financial resources of the Chinese economy.

SECURING FINANCING

Much has been made of the establishment of the multilateral Asia Infrastructure Investment Bank (AIIB) in Beijing, but this is only one of – and perhaps the smallest of – the institutions which the Chinese government has mandated or established to provide financial support. The government has earmarked $40 billion to be invested through The Silk Road Fund. The Fund has an initial capital of $6.5 billion invested through its founding shareholders: two sovereign wealth funds – the State Administration of Foreign Exchange (SAFE) and China Investment Corporation (CIC) – and two policy banks – the Export-Import Bank of China (CEXIM) and China Development Bank (CDB).

CDB was in the recent past the biggest lending institution in the world, providing as much funding as the World Bank institutions combined and it, as a policy bank, has been mandated to focus on restructuring and supporting sectors of the Chinese economy which are in overcapacity – precisely the sectors that the OBOR initiative is intended to assist.

The official export agency, China Export & Credit Insurance Company (Sinosure), has similarly been mandated to support Chinese exports on OBOR projects. China has marshalled its very considerable financial capacity through the re-direction of existing policy institutions and the creation of new infrastructure/OBOR institutions. These will allow China to go at it alone on certain projects and to kickstart projects which the development institutions – World Bank and others – are unable to sanction. But China recognises that for the infrastructure needs of the countries affected by OBOR even its financial resources will be insufficient and collaboration with the international community and the harnessing of all sources of capital will be necessary. China participates in the Asian Development Bank, African Development Bank, European Bank for Reconstruction and Development and various Eurasian developmental institutions – and its establishment of AIIB, although a sign of frustration with its ability to influence other multilateral bodies, is just part of its engagement and recognition of the role of the multilaterals.

Although OBOR is a framework for the building of land and sea connections, it will also contribute to and benefit from the extraordinary growth in air traffic across the Asia/South-East Asia/Asia and Eurasia space. Air traffic growth in the region has its own drivers – not least the development of a sufficiently affluent customer base – but OBOR projects which create new business and leisure destinations will create new demand.

Given the distances involved, there is a natural demand for business jet services and in time, particularly in China itself, there is a significant opportunity for general aviation as airspace is demilitarised. The growth of air traffic will provide opportunities to companies providing ground services as well as the sophisticated electronics that are required for airport operations.

As recently as last month, China and the Czech Republic signed a strategic partnership in which the magic words Silk Road and OBOR were mentioned. The Czech Republic is one of 16 European states that have concluded co-operation arrangements with China. Many pre-date the OBOR initiative, but all will be re-aligned to emphasise the connection of any investment with the overall framework.

In the end, OBOR is part of the broader Going Out policy and should very much be seen in the context of China’s engagement with the rest of the world and in particular the West.