10 Aug 2017
"One Belt, One Road" – Connecting Asia Pacific
By NORD/LB Norddeutsche Landesbank
One Belt & One Road (OBOR) – In 2013 the Chinese president, Xi Jinping, first introduced the idea of OBOR during a visit to Kazakhstan, mentioning the need for a “New Silk Road Economic Belt” (One Belt). Later the same year in Indonesia, he outlined the “21st Maritime Silk Road.” (One Road). Two years later Beijing’s plan has met major milestones, with projects in various countries along the belt and the road having begun. These projects range from the acquisition of ports in Europe and building new railroads in Eastern Europe to the construction of highways, gas pipelines and even nuclear power plants. Around 60 countries will be impacted by Beijing’s initiative.
Unsurprisingly, the growing economic and political influence of China does also have critics. Additionally, many countries along the Belt and the Road lag behind when it comes to economic and political freedoms. Furthermore, potential conflicts with big political and/or economic players such as the US, Russia, India, Japan and the European Union should not be underestimated. These aspects need to be included when assessing the impact of Beijing’s strategy (see SWOT analysis). China has committed a total of about USD 100 billion to OBOR, through three infrastructure funds – the Central Asia-focused Silk Road Fund (USD 40 billion), the new Asian Infrastructure Investment Bank (AIIB) (USD 50 billion), and the BRICS-led New Development Bank (USD 10 billion). The modern and efficient infrastructure networks that the OBOR project aims to create will have large economic impact and positive wider consequences. Currently, the majority of the countries involved have underdeveloped infrastructures, low investment rates and, therefore, low per capita incomes. However, boosting economic activity with the support of Chinese-financed investment projects focused on infrastructure such as railroads, highways and pipelines may only create short-term effects. For OBOR to be a success for those countries involved, efforts also have to focus on domestic activity beyond infrastructure. Decision makers in the countries along the Belt and the Road have to focus on their comparative advantages. These might be, for example, lower labor costs, natural resources or their geographic position. Also, many doubt that OBOR is solely focused on economic activity. Especially within its maritime projects, China aims to expand strategic bases in countries such as Sri Lanka and Saudi Arabia, which were once supported by countries including the USA and India.
OBOR – Consequences for the shipping sector Since China’s mammoth OBOR project also includes a maritime component, it may also reshape the global shipping sector. Looking at the map above, the Maritime Silk Road (MSR) is designed to connect China’s coast to Europe through the South China Sea and the Indian Ocean. As part of this strategy major sea ports along the Belt and the Road should be connected. Obviously, China is not only focused on trade and expanding production. However, today the sales opportunities within the maritime part of the OBOR project seem to be more attractive than the land route. There are a greater number of countries along the shipping route compared to the land connection. It also incorporates the already fast-growing ASEAN economies. In the light of the growth slowdown and its different model, Beijing has to find new markets for products that are “Made in China”. Recently central government decision makers have begun several strategic initiatives related to the maritime industry: China is now involved in ports and terminals (such as Port Said in Egypt). Recently Chinese shipping company COSCO bought a 67% stake in the Greek port of Piraeus. The Port of Singapore Authority (PSA) is already a well-known player in European northrange ports. In Pakistan the Gwadar deep-sea port was built by Chinese investors. Beyond these projects, Australia will also benefit from the MSR as a huge amount of raw materials will be needed to build all of the infrastructure and production projects along the route. That is why the MSR initiative could drive growth momentum for the global shipping industry, which is now suffering from nearly a decade of crisis. However, the container sector, which currently has a huge overcapacity problem, will only benefit from OBOR over the long term. The bulker market could be the first to see potential rising demand as well as project carriers in the multipurpose sector. Investments in terminal equipment and the use of capital goods may also benefit this niche. Looking globally at the MSR project, the goal is ultimately to raise China’s stake in global trade and profits for Chinese companies. China recently merged two liner companies to create COSCOCS. As part of this, a new dry bulk giant has been launched, integrating the relevant shipping assets of both partners. Additionally, a Chinese consortium has placed orders for mega bulkers, which will be delivered in 2018. Once there are more details on the impact of the MSR, other shipping-market participants will be able to plan, and current market leaders may be willing to support the project. For example, COSCOCS will be part of a new liner alliance from 2017 on.
Not only China – Cooperation in Asia is the key for success!
Besides the legitimate queries around China’s dominance of the project, it is also important to question the ability to accomplish the huge task of connecting more than a continent solely through OBOR. In this context, it is important to note that it is not only Beijing that has big plans. Within ASEAN countries, for example, there are also a variety of infrastructure investment projects aiming to improve trade and economic cooperation links.
- Indonesia’s Masterplan for Acceleration and Expansion of Indonesia (MAEI) focuses on transport, telecommunication and energy. One major goal is the development of so-called economic growth centers via industrial clusters and special economic zones. Within this subcategory the planners aim to connect centers of economic growth via roads, ports and airports. Indonesia has also recognized the advantages of international trade logistics and aims to establish international hubs by opening up to international partners. One very important goal is further integration with the various ASEAN markets.
- Already in 2010, Malaysia launched its Economic Transformation Programme (ETP), aiming to achieve the status of a high-income economy by 2020. With its open economy focused on trade, especially exports, and its interconnections with China, Malaysia could be one of the main beneficiaries of the OBOR project within ASEAN. The 21st Century Maritime Silk Road is a particular focus for Malaysian decision makers.
- With its National Comprehensive Development Plan 2011-2030, Myanmar aims to attract investments in labor-intensive industries and infrastructure projects. Myanmar is one crucial partner for China’s OBOR project because Beijing wants to access the Indian Ocean from Yunnan. Hence, it does not come as surprise that a lot of the OBOR-related projects already under way are in Myanmar. One example is the building of a deep-sea port on the Bay of Bengal.
- Vietnam’s Masterplan on Economic Restructuring (2013-20) mainly focuses on privatizing state-owned companies. However, Vietnam is also following its Master Plan for Vietnam seaport system development, which runs until 2020 and aims to improve the infrastructure of its ports. Additionally, the country plans to invest in its airports. With government approval for the Hon Khoai deepwater port, Vietnam is aiming to create an important strategic port, which also has the potential to attract overseas investment.
- Recently, India announced the “Blue Economy Strategy”, in which Delhi is focusing on cooperation with small Indian Ocean states (such as the Maldives, Seychelles and Mauritius). India is offering these smaller countries development assistance, while also trying to strengthen links to ASEAN economies. However, compared to China India seems to lack substantial capital, infrastructure and technologies.
- Thailand holds a strategic position within the OBOR project because it will be ultimately linked to China, both through the SREB (via railroad) and the MSR (such as via the port of Laem Chabang). Furthermore, the Thai Canal – or Kra Canal – which plans to create a shipping route between the Indian Ocean and the South China Sea, is a project with large potential.
Outlook – Breaking the bottleneck for growth?
Combining the OBOR project with country-specific initiatives and Asian megatrends, it can be said that the bottleneck stopping higher, sustainable growth may be broken. Despite the risks associated with such a big project and the diversity of the countries involved, the economic potential of emerging Asia might be enlarged significantly. For this to happen it is vital to build interconnectedness between the economies involved. This could do more than help the global shipping industry. Despite other political, more nationally oriented discussions in the US and several European countries, they are all waiting for a growth stimulus from the global market. Although some caution is warranted, rising economic activity in the countries along the Belt and the Road could also prove to be a catalyst for global growth.
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