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Sunday, February 17, 2019

Belt and Road: How Mega Project of Six Magical Corridors Spurs Economic Growth

Belt and Road: How Mega Project of Six Magical Corridors Spurs Economic Growth


Boonyong, a Thai rice exporter, looks forward to lowering transport costs when a 845-km rail network connecting China and Thailand gets completed. Currently, his rice products are delivered by road and sea, which takes about three and five days, respectively. 

“It will only take us around 18 hours to send rice to China by train, with the freight cost lowered to about one-third of that of road or sea transport,” said Boonyong, a Thai businessman who sells rice to China at an annual profit of over 50 million yuan ($7.68 million). 

B&R THEME 
Through B&R, China wants to synchronize nearly 4.4 billion people, over 60-countries, take control of 30% of the global economy and a total of $2.1 trillion of gross production focusing infrastructure, trade, policy, finance, and people. 

WHAT IS ONE BELT, ONE ROAD (OBOR) OR BELT AND ROAD (B&R) 
In 2013, China’s President Xi Jinping announced Silk Route Economic Belt (SREB) and the 21st century Maritime Silk Route (MSR) during his visits to various states. The composition of these two initiatives was named Belt and Road or “一带一路” or “Yídàiyílù” in Chinese. 

Silk Road Economic Belt (SREB) is planned to link China with Europe through central and western Asia; and the 21st Century Maritime Silk Route (MSR) is intended to connect southern China with South East Asia and Africa by sea. 

SIX (6) ECONOMIC CORRIDORS 
China is mulling six economic corridors to give a strong impetus to integrated economic growth between Eurasia and Africa: 

Corridors are set to run through China-Mongolia-Russia, New Eurasian Land Bridge, China-Central and West Asia, China-Indo-China Peninsula, China-Pakistan, and Bangladesh-China-India-Myanmar, said vice premier Zhang Gaoli. 

CHINA-PAKISTAN ECONOMIC CORRIDOR 
China-Pakistan Economic Corridor (CPEC) is the first of six corridors to start construction. This “fate changer” project is deriving a huge $51 billion investment in infrastructure, energy, and railway along with creating thousands of job and investment opportunities. 

It is about 20% of Pakistan’s GDP, divulges the scale and scope of the project. The whole project could add up to about 4.5% to Pakistan’s GDP, enlarging an overall GDP growth of 9% of the country. 

The construction of CPEC is being progressed on fast track basis and just about half of the project has already completed. Keeping in the significance of CPEC for both China and Pakistan, special troops have been deployed for its security, overseen by Pakistan armed forces. 

WHY GWADAR PORT IS SO VITAL 
Gwadar Port, core of the CPEC, would help China to transport oil of $200 million/day ($73 billion/annum) from over 100-days to just about 30-days, besides other trade and strategic advantages. Gwadar, 18m, is the deepest port (9m; nearly double of Jebel Ali) in the world and could facilitate an 120-births or ships against Jebel Ali 67-births. 

We could imagine that if Jebel Ali Port with 9m depth and 67-births can make GCC grow to such extent, how greatly Gwadar Port with 18m and 120-birth can lead to Pakistan growth. 

PARTICIPATING COUNTRIES 
70-countries have actively participated in scheme and 30-countries have already signed cooperative agreements with China to build B&R jointly. There are around 900 deals in negotiation valued at $890 billion, including a rail link between Beijing and Duisburg, a transport hub in Germany. 

PROJECT FINANCING 
China is expected to invest an estimated sum of eye-watering $900 in 60-countries included in the program to shore up road, rail, and maritime trade by creating economic corridors. Infrastructure construction in Asia would require an annual investment of around $730 billion from 2015 to 2020. 

It has been financed by Silk Road $40 billion, Asia Infrastructure Investment Bank (AIIB) $100 billion, and the incorporation of New Development Bank (formerly BRICS Development Bank) with an initial capital of $50 billion and to be increased up to $100 billion. B&R is backed by beefy China’s foreign exchange reserves valuing at about $3.2 trillion as of August 2016. 

Chinese Ministry of Commerce tells that in 2015, Chinese enterprises invested nearly $15 billion in 49-countries within the framework of Belt and Road cooperation, a year-over-year increase of 18.2%. 

CHINA IS ALREADY REAPING BELT AND ROAD BENEFITS 
In the next five years, China’s imports are expected to exceed $10 trillion, outwards direct investment (ODI) to reach $500 billion, and Chinese outbound tourist visits will also rise to 500 million. 

TOURISM TO FETCH REVENUE OF $200 BILLION 
Belt and Road has a great potential to bring total revenue of $200 billion in tourism to countries engaged. In an ongoing tourism festival, a tourism official said that 150 million Chinese tourists are expected to visit Belt and Road countries in the next five years. 

“Another 85 million tourists from those countries are expected to visit China, bringing revenue of up to $110 billion, he said at the Silk Road International Tourism Festival in Lanzhou, Gansu Province.” Between China and B&R countries, over 25 million tourists travel annually and the market is anticipated to expand quickly as the projects link more than 60-nations. 

TACKLING INDUSTRIAL OVER-CAPACITY 
China is facing acute industrial over-capacity and OBOR provides a great opportunity to block this monster dilemma. In 2014, China signed 44% of its new engineering projects with Belt and Road countries and the figure has escalated to 53% in the first 05-months of 2016. 

TRADE WITH B&R COUNTRIES EXCEEDS $600 BILLION IN FIRST 08-MONTHS OF 2016 
During the first eight months of 2016, China’s trade with Belt and Road countries have surpassed $600 billion, 26% of China’s total trade volume. For the same period, China has invested up to $10 billion in Belt and Road countries through AIIB and Silk Fund. 

Deputy Head of Ministry of Commerce said that Chinese companies have established over 50-trade and economic cooperation zones in B&R countries, investing over $15.6 billion, earning host countries tax revenue of $900 million and creating 70,000 jobs. 

YUAN INTERNATIONALIZATION 
Trough B&R, China visualizes “more capital convergence and currency integration” and gradually lessening dependence on US dollar. The B&R countries will be pushed to trade in renminbi heading to yuan internationalization. 

Some countries such as Russia, Mongolia, Kazakhstan, Uzbekistan, Vietnam, and Thailand are already broadly using renminbi for trade. “By the end of 2014, offshore renminbi deposits amounted to ¥1.6 trillion and offshore renminbi bonds reached ¥350 billion – a trend supported by the belt-road initiative. Moreover, this initiative calls for establishing a renminbi-nominated Asian bond market." 

Targets 6.5% GDP Growth, 25-million New Jobs, and Reducing Poverty by 70 million 
In 13th Five Year Plan, President Xi Jinping targets 6.5% annual GDP growth. Close down middle-income economic trap, raise annual per capita income to $12,600, create 25 million new jobs, and reduce poverty in rural areas by 70 million through urbanization policies. 

CHINA’S ECONOMY 
According to China Bureau of Statistics, China’s GDP grew by 6.7% on y-o-y in first three quarters of 2016, to reach $7.87 trillion. 

Foreign trade declined for the same period by 1.9% to $2.61 trillion; exports dropped by 1.6% ($2.14 trillion) and imports plummeted by 2.3% (7.47 trillion yuan). 

However, China continues to retain its global leading position on trade in goods with a rise in global market share from 11.2% in 2013 to 13.8% in 2015. 

Foreign direct investment in (FDI) shoed a growth of 6% in 2015 and reached at $136 billion, ranked in top-3 in world, UN report says. 

CHINA-AFRICA COOPERATION 
Last year, in December, President Si announced at Johannesburg Summit in South Africa 10-major China-Africa cooperation plans worth of $60 billion in the next three years. 

Vice-Foreign Minister Zhang Ming said at a news conference that China and Africa have signed at least 243 cooperation agreements of various kinds worth $50.7 billion since the summit. 

“Among these agreements, Chinese companies’ direct investment and commercial loans to Africa surpass $46 billion, accounting for 91 percent of the total volume,” he said. 

CHINA DEBT CRISIS 
At the close of 2015, China reported total debt of 168.48 trillion yuan ($25.59 trillion). However, Li Yang, a Chinese expert is convinced that this debt is controllable and China would not suffer from debt crisis as the government owns enough assets to handle debt risk. 

Li said that even taking the debt of local governments’ financing platform into account, the amount of total government debts at the end of 2015, reaching 56.8%, was still below the warning line of 60% set by the European Union. 

In contrast, the current debt ratio of the Japanese government has surpassed 200%, and that of the US government and French government is over or around 120%. 


Chinese capital goes beyond Belt and Road


If Belt and Road needed a boost in momentum, it came in the middle of 2017 when the Chinese leadership met hundreds of representatives of foreign governments, including 29 heads of state, at a forum in Beijing to discuss progress and map the direction of the programme for the coming two years.

Addressing international concerns over the geopolitical implications of the scheme, which is now widely seen as the cornerstone of Chinese foreign policy, topped the agenda. 

These concerns were summed up by India, which did not send a representative to the forum. The Indian government has made little secret of its displeasure over one of the most high-profile Belt and Road projects: the China–Pakistan Economic Corridor, including the development of the port of Gwadar. Explaining the south Asian power’s lack of attendance at the event, a government representative said, “No country can accept a project that ignores its core concerns on sovereignty and territorial integrity.”

Beijing used the forum to respond to negative reactions to Belt and Road infrastructure projects. Some of these developments are large enough to have deeply transformative impacts, including significantly raising China’s political influence in the countries and regions where they take place.

The sale of land at Hambantota in Sri Lanka for the development of a port city is perhaps the most high-profile recent Belt and Road deal to become mired in controversy. The Sri Lankan government’s proposal to sell the rights to Chinese state-owned interests on a 100-year lease stirred local sentiment to a level that threatened to completely undermine the project.

Hambantota is located about 250 km southeast of the port of Colombo. Export–Import Bank of China (China Exim Bank) originally provided a loan of more than USD1 billion for the development of the port, which is being constructed by China Communications Construction Company. 

The Sri Lankan government said it needed to hand over the facility to China on an extended lease because debt instalments and interest payments on the original loan were eating up one-third of the revenue of the Sri Lankan Ports Authority.

Various local groups, including politicians and unions, objected to the deal, saying it effectively amounted to the creation of a Chinese colony in the country. However, the sale went ahead as planned, with Hong Kong-listed China Merchants Port Holdings (CMPort) acquiring an 85% stake in the port for USD1.12 billion.

In his opening remarks at the forum, the Chinese president, Xi Jinping, focused on the significant benefits of Belt and Road projects in terms of filling infrastructure gaps in developing economies. He introduced five basic principles of Belt and Road that stress the initiative as a driver of peace, prosperity, people-to-people contact, and cultural exchange, as well as being a catalyst for trade, investment, and digital innovation. More than USD12 billion in development aid for countries along official Belt and Road routes was promised, separate from funding committed for infrastructure projects.

The focus on the principles and the promise of aid points to a more sophisticated approach by the Chinese leadership to engagement with foreign governments and people, which makes some effort to accommodate political, social, cultural, and economic concerns. This is new territory for China and an area in which its Communist Party leadership has limited experience.

Despite challenges with certain projects, the forum clearly demonstrated the continuing high level of interest in Belt and Road. The heads of state who attended the forum included Russian president Vladimir Putin, Indonesian president Joko Widodo, Malaysian prime pinister Najib Razak, and Philippine president Rodrigo Duterte. 

Outside the forum, an ongoing and sustained effort on the part of numerous governments around the world – and their maritime administrations and ports – to court Belt and Road funding and projects is evident. 

Next to allaying concerns over the effects of the projects, Xi’s opening remarks made clear that the focus of the programme would stay with the development of infrastructure linking Belt and Road countries with China, including ports, maritime and inland water transport, railways, and roads.

Additional funding

An additional USD113 billion was announced in funding for projects. This included an increase of USD14.5 billion in the pledged capital of USD40 billion for the Silk Road Fund and an additional allocation of USD43.5 billion by domestic Chinese lenders specifically for Belt and Road projects. China’s two main policy banks, China Exim Bank and China Development Bank, also pledged new dedicated lending worth USD36.3 billion for ‘overland’ Belt and Road projects. 

Much of the lending for Belt and Road projects only started in 2016 and the amount of Chinese capital that has actually made its way to these projects is still relatively small.

According to Washington’s Brookings Institute, the capital that left China by the end of 2016 went to less risky and more developed markets than those on the official Belt and Road list. A significant amount of funding is also going to less developed but resource-rich countries that are not on official Belt and Road routes.

“China is a very significant funder of infrastructure in the developing world, but it is happening everywhere, not just along the Belt and Road,” said Brookings Institute economist David Dollar. “There is significant Chinese investment in risky, non-OBOR [One Belt, One Road] countries such as Angola, the Democratic Republic of the Congo, and Venezuela. The common theme is that China has been willing to invest in risky environments in search of natural resources. So far, OBOR has not been an important factor in the allocation of [outward direct investment].”

The policy banks have also been lending heavily to non-Belt-and-Road markets, such as Latin America, and it is clear that the large port operators are not restricting their investments to Belt and Road routes. 

CMPort, a major implementer of Belt and Road policy, recently outlined its intention to create a sizeable footprint in Latin America. In September, it purchased Brazil’s TCP group, which operates the container terminal concession at the port of Paranaguá. The port has an annual capacity of 1.5 million teu, which will be increased to 2.4 million teu upon completion of an expansion scheduled to finish in the second half of 2019.

“The acquisition of TCP will allow the group to expand its business to the Latin America region and further consolidate its position globally,” the company said in its statement announcing the deal.

“Furthermore, the investment will provide the group the opportunity to make use of the marine transport hub of TCP to develop its logistics network, export/import and industrial zone and potential residential projects, and related financial service platforms, allowing for greater commercial synergies within the group.”

The expectation is that funding for Belt and Road projects will gear up over the course of next year. Project lending by the three multilateral development banks that support the programme – the Asian Infrastructure Investment Bank (AIIB), the New Development Bank (created by the BRICS in 2014) and the Silk Road Fund – started in 2016. 

The AIIB has a founding membership of 57 countries and financial firepower of up to USD100 billion and the New Development Bank has a total authorised capital of USD100 billion. Following the announcement at the Beijing forum, the Silk Road Fund has pledged capital of USD44.5 billion.

The Chinese government is keen to track and emphasise the global impact of the programme, and set up a series of indices to do just that in July. The Shanghai Shipping Exchange indices cover shipping and rail and include a trade volume index; a freight volume index; and a maritime Silk Road freight index that separately tracks coal, minerals, crude oil, and containers. 

“The purpose is to track trade and investment activity between China and Belt and Road countries to help assess the effectiveness of China’s efforts to open up,” said Beijing-based Xu Yating, a China economist with IHS Markit.

Southeast Asia to benefit

From a geographic point of view, southeast Asia is one of the regions that has benefited the most from Belt and Road. This is particularly true in terms of Chinese infrastructure investment, notably in the ports and the shipping sector.

The strong focus of the programme on the region is due in large part to its proximity to China, rapidly expanding export sectors in several of its economies, and the strategic location of some of its countries close to the Strait of Malacca. The region’s strong natural resource base and favourable demographics are also important factors.

Seven out of 10 heads of government from the Association of Southeast Asian Nations (ASEAN) attended the Beijing forum. Many of these countries are in strong export growth mode and keenly aware that in order to reach targets and compete well enough to keep growing, they need to reduce logistics costs as a percentage of GDP. This means finding external sources of investment for logistics infrastructure, particularly ports, and links to industrial and consumer hinterlands.

At the end of 2016, China and Malaysia agreed to bilateral deals of about USD34 billion, including a USD13.75 billion 20-year low-interest loan to Malaysia to finance the East Coast Rail Link project. A visit by Philippine President Rodrigo Duterte to Beijing at the end of 2016 resulted in a USD24 billion package of investment and credit facilities.

“With bilateral trade between China and ASEAN having grown from USD9 billion in 1991 to USD346 billion in 2015, the Belt and Road initiative has become a significant geopolitical priority for ASEAN countries,” said Rajiv Biswas, IHS Markit chief economist for the Asia Pacific.

Major Chinese-invested projects in southeast Asia include the expansion of Kuantan Port, the development of Samalaju Port and the Melaka Gateway project, all in Malaysia, Tanjung Sauh Port at Batam Island in Indonesia, and Maday Island in Myanmar, where an energy terminal and oil and gas pipelines linking to southwest China’s Yunnan province have been put in place and a high-capacity container terminal and large industrial zone are planned.

A port alliance between 11 Chinese and Malaysian ports has also been set up to support bilateral co-operation in port operations and technology.

The combination of high GDP growth and decrepit port infrastructure in many countries, together with south Asia’s strategic location close to the oil-producing Middle East, makes the region a major destination for Belt and Road investment.

South Asia is home to the programme’s highest-profile project, the China-Pakistan Economic Corridor and development of the port of Gwadar. China has bilaterally committed to invest USD62 billion in Pakistan to fund the development of Gwadar and a road and rail network to effectively link China to the Arabian Sea. Developments such as industrial parks are also part of the project.

Elsewhere in southern Asia, Sri Lanka is a major recipient of Belt and Road investment, including the development of Colombo International Container Terminal – a facility that has filled a major infrastructure gap in terms of handling Indian transhipment cargo – and the much wider Hambantota port city development, also being undertaken by CMPort. New projects in Bangladesh are also expected.

Beyond these two key regions, east Africa, central Asia, and the Mediterranean and Balkans regions in Europe are prime targets for Belt and Road project investments. But despite publication of an official list of countries, finding the right conditions – such as suitable local partners – to support viable long-term projects is an important factor for Chinese banks and port developers to take on projects. 

These firms are tasked with implementing the vision, but they also have commercial objectives that need to be met. It is not clear whether the tools and influence from the Chinese leadership are enough for lenders and developers to accept the financial and project risk premiums that accompany investments in poorer countries along the designated routes at the level needed to realise the full vision of the programme.

With the relatively limited amount of Chinese capital ending up on designated Belt and Road routes, it will be interesting to see how the map of projects develops ahead of the next Belt and Road forum in 2019.


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