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Xi’s New Silk Road Plan

By HSBC Global Research

The recent Asia-Pacific Economic Cooperation (APEC) meeting in Beijing resulted in deals that will have long lasting effects. President Xi Jinping pledged USD40bn for infrastructure investment to build a New Silk Road in the spirit of the centuries-old trading route, comprising a land based economic belt and a maritime route. This follows recent agreements to establish the Asian Infrastructure Investment Bank (AIIB) and the BRICS bank and is in line with the rapid growth of China’s outward investment, which is likely to surpass inflows in 2014.

China’s infrastructure sector has the capacity to meet needs in Asia and further abroad. That investment overseas should also generate demand for China’s exports and help reduce economic slack and disinflationary pressure. The New Silk Road plan should also mean more investment for the less developed central and western parts of the country and generate better long-term returns on foreign reserves.

As we pointed out previously, the still-significant infrastructure gaps in Asia can be met by China’s outward direct investment (ODI) push. The region as a whole should also benefit from increased demand and lower trading costs. Our analysis shows that trade in Australia, Indonesia, Japan, and Korea would increase the most as a result of China’s new strategy. So, while the deals on trade, tariffs and emissions made the headlines at APEC, we believe the New Silk Road plan is likely to have a profound impact on the region.

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