China is stepping up efforts to establish two transcontinental New Silk Roads that connect Asia, Europe, and Africa in trade, development, and culture. While promising economic gains, this new framework will require the careful attention of political risk experts on a project-by-project base.
In 2013, President Xi Jinping initiated the idea of building a land-based “Silk Road Economic Belt” and a “21st Century Maritime Silk Road” during his visits to Central Asia and Southeast Asia. The two routes, later referred to as the “One Belt One Road” strategy, are Beijing’s design to revitalize the pre-modern Eurasian trade route that linked the world to China.
In Beijing’s design, “One Belt One Road” will connect China with Southeast Asia, Middle East, Europe and North Africa on land and maritime “economic corridors” (see a detailed explanation of the routes in English here).
More importantly, the Chinese government plans to build these two transcontinental economic and development routes that form “infrastructure, institutions. and people-to-people exchanges” with “policy communication, infrastructure connectivity, trade link, capital flow, and understanding among peoples.”
Beijing will provide financing support for the two New Silk Roads
Since its inception, the “One Belt One Road” strategy has become China’s most important design for long-term international trade and development. It also became a buzzword in the public sector: 20 out of the 34 local governments at the provincial level incorporated “One Belt One Road” with their 2015 government work plans.
While it is unclear if this will remain a mere “slogan” or will turn into a concrete strategic action plan with multi-level engagement from the central and local governments, Beijing is certainly stepping up the efforts to materialize its design.
The plan in fact gained ulterior international attention after President Xi pledged to establish a $40 billion infrastructure fund for the New Silk Roads during a meeting with leaders from Bangladesh, Cambodia, Laos, Mongolia, Myanmar, Pakistan, and Tajikistan ahead of the Beijing Asia-Pacific Economic Cooperation (APEC) conference in November 2014.
The official China Securities Journal later reported that Beijing would also establish a “Marine Silk Road Bank” with a minimum paid-in capital of 5 billion RMB ($816.23 million). On December 29, 2014, one month after President Xi’s announcement, the China Silk Road Fund Limited Liability Company was founded with a registered capital of 61.525 billion RMB ($10 billion).
The company’s shareholders include the China Investment Corporation ($1.5 billion), the China Development Bank ($1.5 billion), the Export Import Bank of China ($500 million), and State Administration of Foreign Exchange ($6.5 billion). Its leadership is chaired by the Assistant Governor of the People’s Bank of China (PBOC), Ms. Jin Qi.
According to Mr. Zhou Xiaochuan, the Governor of PBOC, the New Silk Road Fund LLC is a profit-seeking company that focuses on financing long-term infrastructure projects and promoting open and mutually beneficial business relations in “One Belt One Road.” Notably, the New Silk Road Fund LLC is also welcoming funding from foreign investors.
Existing Chinese Policies to support “One Belt One Road”
Apart from the financing vehicles, Beijing is also paving the way towards the New Silk Roads with free trade agreements and RMB liberalization. In January, the Ministry of Commerce announced that it completed the free trade agreement (FTA) talks with South Korea and had signed a draft agreement with the East Asian country.
The MoC also announced that it will follow the model of the China-South Korea FTA to establish 65 more FTAs with countries along the two New Silk Roads on its agenda. The Chinese government hopes to boost mutual investment activities between these countries and China in order to support the overarching project.
In line with the process, Beijing is setting up new RMB offshore clearing centers across the globe, including centers in the United Kingdom, Germany, France, Luxembourg, and Canada. The Chinese government also signed currency swap agreements with Canada, Qatar, Russia, Switzerland, the United Kingdom, and Brazil, among others in recent years.
Following China’s efforts to liberalize RMB payment in the global market, the Chinese yuan became one of the top five most-used currencies in the world, surpassing the Canadian dollar and Australian dollar, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
If successful, faster transactions in RMB are likely to facilitate economic cooperation among the countries included in the “One Belt One Road” project.
Considering the opportunities and risks of the project
The grand strategy in building New Silk Roads is China’s attempt to export its excessive capacities in sectors such as steel, construction, transportation, and manufacturing. It is also consistent with China’s economic agenda to hedge its foreign-reserves investments, which now heavily rely on the US treatury bill.
The “One Belt One Road” strategy will also likely move the Chinese market in the same direction of booming Asian infrastructure sectors. In fact a 2014 PWC report estimated that the “Asia-Pacific market will represent nearly 60% of global infrastructure spending by 2025.” The project is likely to lead to a continuation of the same market trends in China.
However, interested investors, as well as Chinese companies, should not overlook the complex political and security context along the two Silk Roads.
It is imperative that all parties entering the program fully consider the political risks of doing international projects with Chinese partners given questionable precedents in both private and public sectors, particularly in terms of corruption.
Increased economic ties between Chinese public institutions, private firms, and international partners may in fact lead to new systemic risk on projects that heavily rely on the RMB and transparent trade procedures.
