17 May 2018
Belt and Road China Connectivity Index: Made to Measure
By ICBC Standard Bank and Oxford Economics
1.1 Connectivity and our index
In essence, B&R is a multi-generational project that looks beyond infrastructure and is, instead, “rooted in a shared vision for global development” While tackling the infrastructure deficit is a necessary step to unleash inclusive economic development, measuring broader economic benefits is of equal, if not more profound, importance. As a practical matter, both the implementation and longevity of B&R will depend on the realisation of broad mutual benefits across B&R participants. The China Connectivity Index (CCI) is specifically designed to capture these broader economic benefits by quantifying the dynamics of bilateral connectivity between B&R countries and China.
The CCI is a first of its kind research tool offering a unique solution to the challenge of tracking the evolution of the still nascent B&R project. The purpose of the CCI is to build out a dynamic evidence base from which investors and policy makers can assess the high level themes and challenges that emerge from the massive efforts of B&R.
As the first CCI white paper, it is natural and necessary to examine the index from a retrospective viewpoint. We take this opportunity to explore, through the lens of the CCI, what trends and insights can be distilled from the changing nature of China’s connectivity to the B&R countries over the last 10 years. Chapter 2 presents the index framework and previews the headline results of the inaugural index. In Chapter 3, we discuss the key insights from the CCI based on in-depth empirical research. Chapter 4 looks forward to identify themes critical for future B&R developments, and sets out our vision to establish B&R thought leadership…
4. B&R connectivity in the future
Working in partnership with B&R governments to tackle the infrastructure deficit is a key objective for China in the years ahead. The Chinese government is committing substantial funding to several new investment vehicles, as well as bolstering existing institutions with a new mandate to support B&R. It is important to note the bulk of this funding has yet to be deployed, so current CCI results reflect little of this investment.
To support infrastructure development outside of China itself the Asian Infrastructure Investment Bank (AIIB) has the potential to be the most powerful. The AIIB is a multilateral organisation, with 52 members, including several outside of Asia. Total capitalisation of the bank is US $100 billion, with China providing a quarter. The bank has a mandate to finance “Asia-related” infrastructure in member economies. The Bank lent approximately US $1.7 billion in 2016 to nine projects across Asia and the Middle East.
Elsewhere, the New Development Bank (NDB, previously the BRICS Development Bank) also has a mandate to lend for projects that promote infrastructure and development with a significant impact in member countries. Three of the five member economies of the NDB are part of B&R (China, Russia and India), and the bank’s Vice President said in 2016 that expansion to new members was a priority.
China is also acting through new investment funds, over which it will have more autonomy. The Silk Road Fund is a Chinese state-owned investment fund, set up in 2014 with an endowment of US $40 billion from the Chinese government. The fund’s mandate is to upgrade infrastructure along the B&R, and it has so far made three investments – most significantly in the China-Pakistan Economic Corridor, which is discussed in more depth below. In 2016, China set up the Sino-CEE Fund, with an endowment of €10 billion and the aim to leverage a further €50 billion. The fund will focus on Central and Eastern Europe but could extend its operations to other regions for projects supporting China-CEE connectivity.
China has also increasingly permitted the China Development Bank (CDB) to start invest overseas in recent years. The bank was founded in 1994, and at end-2015 had RMB 9.2 trillion (US $1.4 trillion) in loans outstanding. However, the CDB is likely to remain primarily focussed on domestic economic development―supporting transition away from heavy industry in the north-east and financing economic development in western provinces.
Chinese commercial banks are also increasing their financing to B&R projects, supported by official co-financing. For example, the China-Pakistan Economic Corridor (CPEC) is a network of connected projects boosting maritime, rail and road connectivity between the two countries, as well as upgrading utilities infrastructure in Pakistan. Total financing committed across the CPEC is expected to amount to US $62 billion over the period from 2015-2030, coming from a wide range of sources, including commercial and multilateral banks. Analysis of the “big four” Chinese state-owned commercial banks suggests they lent a total of US $90 billion into B&R economies in 2016. However, it not clear how much of this lending related to the infrastructure related objectives of the B&R initiatives, as opposed to more standard commercial activity.
Finally, the initiative has also been formally recognised by the global development financing community. At the B&R summit, a Memorandum of Understanding was signed by the Asian Infrastructure Investment Bank, the New Development Bank, the Asian Development Bank, the World Bank, the European Investment Bank, and the European Bank for Reconstruction and Development. At the summit, Jean-Christophe Laloux, Director-General of the European Investment Bank said “We appreciate the tremendous efforts of all involved and recognise the clear the leadership that China has shown to develop this key initiative”.
Much has already been achieved in boosting B&R connectivity, even prior to the formal announcement of the initiative in 2013. B&R exports are accounting for a steadily rising portion of China’s demand in some key areas, allowing B&R economies to tap into China’s rapid growth. But within B&R there have been some important shifts in relative connectivity between regions – largely driven by changing priorities for the Chinese economy.
The outlook is clearly positive for the future of B&R connectivity. Resources are being marshalled for a substantial financial stimulus to boost infrastructure spending across the B&R regions, while trade, investment and financial sector policies are also being liberalised to unlock potential economic flows.
We expect China’s domestic economic agenda to continue to be a key factor in connectivity developments looking ahead. The growing importance in recent years of services trade, supply chain connectivity, and outward investment in higher value-added economies are all set to persist. So while ASEAN economies may remain the most-connected with China, those in CEE and key tourism destinations are likely to close the gap. Connectivity with commodity-based Middle Eastern and Central Asian economies may fall further if these countries fail to diversify into sectors better-aligned with China’s own priorities.
Trends in the wider global economy should be supportive of B&R connectivity in the years ahead. After several years of very slow global trade growth, data from the first half of 2017 suggests a reinvigoration of global trade activity. With an increasingly-positive economic outlook across many developed and emerging economies, global trade flows and demand for Chinese goods and services should strengthen in the coming years.
But several key sources of risk remain, particularly with respect to an uncertain global geopolitical landscape. An increase in protectionism in key advanced economies could prevent market forces from driving global trade growth, and therefore China’s trade connectivity. In the Middle East, diplomatic tensions could undermine the freedom of movement of goods and people across a key region for China-Europe trade. And slower-than-expected growth in China would cut resources available for B&R investment – even as it makes better connectivity more crucial. Finally, from a political perspective, it will be important to ensure the consensus over economic connectivity between China and B&R being mutually beneficial is sustained, and that partner economies see plenty of direct economic gain.
The China Connectivity Index will be a crucial tool in the years ahead. CCI will remain the key resource for B&R stakeholders seeking to stay informed of connectivity enhancements in the years ahead. This report will be updated on a semi-annual basis, reviewing latest trends in China-B&R economic connectivity, as well as progress made in delivering against policy pledges. Moreover, our work on China Connectivity will be complemented by an ongoing monitoring of economic health in B&R economies. For our initial assessment of economic health in B&R, please see the complementary paper accompany this China Connectivity report.
Please click to read full report.