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OTG China – Investing USD 1tn along ‘One Belt One Road’

By Standard Chartered Bank

Summary

The China-led OBOR initiative aims to boost trade and investment growth through better infrastructure connectivity across Asia, extending to the Middle East, Africa and Europe. Simply put, ‘One Belt’ is a modern-day Silk Road, and ‘One Road’ is the maritime equivalent. The OBOR initiative has the potential to channel China’s savings and construction expertise to other countries to resolve their infrastructure bottlenecks, while making more efficient use of China’s excess capacity.

We estimate that official financing for OBOR could potentially top USD 1tn in the next decade. Infrastructure investment entails long-term investment commitments with uncertain returns, and official involvement is indispensable. We expect the recently established Asian Infrastructure Investment Bank (AIIB), New Development Bank (NDB) and Silk Road Fund (SRF), together with China’s policy banks, to play a leading role in supporting infrastructure development at the early stage. The AIIB, in particular, could potentially spur investment by other development banks and ‘crowd in’ private investment.

Commercial banks with substantial footprints along the OBOR are likely to play an important role in amplifying the effects of official funding. China’s strategy needs to be aligned with those of the other OBOR countries. The initiative has raised concerns in both OBOR and non-OBOR countries about China’s political and economic agenda. China-led investment in strategic industries such as telecommunications and energy may raise fears about the country’s expanding influence. To be successful, China needs to improve strategy alignment with other countries, gain the support of local communities, and embrace market principles and transparency. Domestically, China needs to better coordinate the investment plans of local governments to prevent a new round of over-investment.

If implemented effectively, the initiative can boost growth, Renminbi use and commodity demand. The expected infrastructure investment boom will not only lift demand immediately, but also raise potential growth rates by building physical capital. China will also benefit through more effective use of its excess capacity. In particular, we estimate that official financial support for the OBOR initiative may increase demand for crude steel by 200 million tonnes (mt) in 10 years, or 20% of China’s annual production capacity. Commodity-intensive infrastructure investment will also support commodity demand and prices. The initiative may accelerate China’s shift from being the world’s biggest goods exporter to a major capital exporter, and expand the use of Renminbi in international trade, investment and financial transactions.

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