'One Belt, One Road' - hype or reality?

December 25, 2015 08:02
Sir James Mirrlees says that, lacking details, 'One Belt, One Road' is more like a slogan, but even slogans can be powerful. Photos: Xinhua, CUHK

There have been frequent media references to China's “One Belt, One Road” (OBOR) economic initiative, and it has become one of the top media buzzwords in China and abroad.

OBOR, an idea coined by President Xi Jinping in 2013, consists of two sub-initiatives, namely the Silk Road Economic Belt and the 21st Century Maritime Silk Road.

The overall concept is to facilitate closer economic cooperation in the region through infrastructure development and beyond.

The Economist Intelligence Unit estimated that the initiative will “lift the value of trade with more than 40 countries to US$2.5 trillion within a decade, spending nearly US$1 trillion of government money”.

But what remains unclear is what exactly OBOR means and how businesses could potentially benefit from it.

“Many people are talking about 'One Belt, One Road' these days, but no one seems to really understand what it means,” said Sir James Mirrlees, winner of the Nobel Prize in Economics in 1996 and master of Morningside College at the Chinese University of Hong Kong.

Given the limited details available, Mirrlees cautioned that “One Belt, One Road” sounds more like a slogan.

A map published by the official Xinhua news agency outlining the two trade routes is an example.

The map shows 27 stops across the Eurasian continent, with one stop in Africa.

Chinese cities account for 10 of them, but Hong Kong is not on the list.

Mirrlees said he has yet to have a concrete idea of how the initiative will make a difference to Hong Kong’s role as a hub of entrepôt trade and logistics.

However, some businesses appear upbeat about the OBOR initiative even before it takes shape.

Singapore’s United Overseas Bank (UOB), for example, has doubled its cross-border financing to Chinese companies over the last three years.

The bank credited OBOR as a key driver for this growth, saying in a press release that nowadays “Chinese companies expand along the OBOR trade routes”.

Christine Ip, chief executive of UOB Hong Kong, said OBOR would encourage Chinese companies to access new markets such as Southeast Asia.

She said she observed a growing appetite for overseas expansion among Chinese companies, and they accounted for over 40 percent of the total number of companies that UOB’s foreign direct investment advisory unit has assisted with their expansion in countries belonging to the Association of Southeast Asian Nations (ASEAN).

Even though she described ASEAN as a self-sufficient economy, in which UOB’s research shows intra-ASEAN trade will hit the US$1 trillion mark in 2020, she said regional economic initiatives such as OBOR can bring further growth for the region.

“OBOR and other regional economic initiatives [such as ASEAN] are complementary to bring economic growth to the ASEAN region. They will make the pie bigger,” Ip said.

She said the internationalization of the renminbi – together with the stronger trade and investment ties with China as a result of OBOR – would have an impact on the ASEAN region, and possibly beyond, especially in view of the raising of interest rates in the United States.

Ip cited third-quarter statistics showing that 32 percent of China’s trade was settled in renminbi, and she foresees that the proportion will exceed 40 percent by 2018.

“Given the stronger trade and investment ties with China, we do foresee more ASEAN companies using renminbi, which can help to reduce [foreign exchange] volatility and transaction costs.”

Though it might be still early days to predict the impacts that OBOR will bring, what is worth pondering is the optimism around the OBOR initiative, despite the lack of details.

The rise of China in the global economy could be one reason.

China is the European Union's second-biggest trading partner, accounting for 14 percent of total extra-EU trade in goods last year, the European Commission's Eurostat agency said.

The Economist cited China as “the biggest trading partner of four of the [Central Asian] region’s five countries”, with the exception of Uzbekistan.

Since 2009, China has remained ASEAN’s largest trading partner, Singapore’s Ministry of Foreign Affairs said.

Another possible reason for optimism is that China is putting measures in place to make its OBOR vision sound real despite the ongoing slowdown in the country's economic growth.

For instance, the government has created a Silk Road Infrastructure Fund, into which it has injected US$40 billion.

Meanwhile, China – with the support of 50 countries – has established the Asian Infrastructure Investment Bank, which is scheduled to start operations in the second quarter of next year.

These two initiatives could finance the infrastructure projects along the new Silk Roads, and that may boost trade between China and its Silk Road counterparts.

China’s trade performance has been declining.

Last month, its exports dropped 6.8 percent from a year earlier, the fifth straight month of decline, and imports fell 8.7 percent, the 13th drop in a row, Reuters reported.

Having said that OBOR is like a slogan, Mirrlees commented that even “a slogan itself could be very powerful, because it shapes public perceptions”.

“The history of economics has traced a trend of fluctuations. When the economy begins to go badly, people’s perceptions can make things worse,” he said.

“A powerful slogan may turn the tide the other way.”

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