Ini­tia­tive backs growth along Belt, Road

China Daily (Canada) - - VIEWS -

Launched by Pres­i­dent Xi Jin­ping in Septem­ber 2013, the Belt and Road Ini­tia­tive is de­signed to im­prove global con­nec­tiv­ity and phys­i­cal in­fra­struc­ture to better link China with the rest of Asia, and Europe, theMid­dle East and Africa. The ini­tia­tive en­vis­ages the cre­ation of mul­ti­ple eco­nomic cor­ri­dors un­der the Silk Road Eco­nomic Belt and the 21st Cen­tury Mar­itime Silk Road.

In the past four years, the Belt and Road Ini­tia­tive has grad­u­ally gained trac­tion with new­pro­jects and fi­nanc­ing com­ing on stream, such as the flag­ship 418-kilo­me­ter rail link with Laos and the $46 bil­lion China-Pak­istan Eco­nomic Cor­ri­dor, and the estab­lish­ment of the Asian In­fra­struc­ture In­vest­ment Bank and the Silk Road Fund. While it’s hard to quan­tify the to­tal num­ber of projects and amount of fi­nanc­ing, the China Devel­op­ment Bank said it alone had re­served $890 bil­lion for more than 900 projects in 2015, high­light­ing the mag­ni­tude of the un­der­tak­ing.

In­deed, while new­mul­ti­lat­eral in­sti­tu­tions such as the AIIB have started to play an ac­tive role in project fi­nanc­ing, most of the fund­ing for the ini­tia­tive’s projects is ac­tu­ally bi­lat­eral. In ad­di­tion to that from the China Devel­op­ment Bank and the Ex­portIm­port Bank of China, we es­ti­mate that the “big-four” State-owned banks ex­tended $90 bil­lion loans to the economies along the ini­tia­tive’s two routes in 2016. Thus, bi­lat­eral fi­nanc­ing from China’s com­mer­cial and pol­icy banks dwarfs mul­ti­lat­eral fi­nanc­ing and we ex­pect that to re­main the case in the fu­ture.

Nev­er­the­less, even the com­bined an­nual bi­lat­eral and mul­ti­lat­eral fi­nanc­ing flows, in­clud­ing those from international mul­ti­lat­eral in­sti­tu­tions (such as the­World Bank and Asian Devel­op­ment Bank) are mod­est com­pared to in­fra­struc­ture spend­ing and needs in the vast re­gion cov­ered by the ini­tia­tive (the Asian Devel­op­ment Bank es­ti­mates the an­nual in­fra­struc­ture in­vest­ment needs at $1.7 tril­lion un­til 2030).

That said, the ini­tia­tive-gen­er­ated in­fra­struc­ture will ben­e­fit some of the least de­vel­oped parts of the world, and im­proved in­fra­struc­ture should fa­cil­i­tate trade and in­vest­ment, cre­ate new­mar­ket de­mand and con­trib­ute to global devel­op­ment. While we es­ti­mate the re­gion cov­ered by the ini­tia­tive will con­trib­ute 80 per­cent of glob­alGDP­growth by 2050, up from 68 per­cent in 2016, our fairly con­struc­tive pro­jec­tion of growth in the re­gion is sub­ject to down­side risks, in­clud­ing those from global trade pro­tec­tion­ism and, do­mes­ti­cally, from sup­ply side con­straints, which, how­ever, can be re­duced by in­fra­struc­ture devel­op­ment, and re­gional trade and in­vest­ment col­lab­o­ra­tion.

Of course, China needs to make sure its en­gage­ment with other coun­tries does not be­come un­bal­anced. Es­pe­cially, it needs to en­sure its man­u­fac­tur­ing ex­ports to the economies along the two routes do not crowd out do­mes­tic pro­duc­tion and re­sult in trade deficits that could lead to eco­nomic and/or po­lit­i­cal ten­sions. In fact, while the share of China’s ex­ports to the re­gion cov­ered by the ini­tia­tive has grown steadily, from 23 per­cent in 2010 to 28 per­cent in 2016, the share of China’s im­ports from the economies along the two routes has fallen in re­cent years (mea­sured inUS dol­lars) — partly be­cause of the drop in com­mod­ity prices, though.

We ex­pect Chinese con­struc­tion com­pa­nies to largely ben­e­fit from the ini­tia­tive through new­sources of de­mand abroad, but we don’t ex­pect it to have a ma­jor im­pact on mop­ping up ex­cess ca­pac­ity in China’s heavy in­dus­try, be­cause the an­nual de­mand for heavy in­dus­trial prod­ucts in the ini­tia­tive-gen­er­ated projects will be small com­pared to the scale of over­ca­pac­ity in China’s heavy in­dus­tries.

In con­clu­sion, China has de­voted sig­nif­i­cant amounts of po­lit­i­cal cap­i­tal, en­ergy and fi­nan­cial re­sources to the ini­tia­tive, and it has made some no­table progress over the past four years. And although the ini­tia­tive’s short-term macro im­pact is likely to be mod­est, if well man­aged, we ex­pect it to sup­port long-term growth and devel­op­ment in the economies in­volved. The ini­tia­tive can also in­crease China’s international in­flu­ence by pro­vid­ing a plat­form for it to en­hance its role in global fi­nan­cial gov­er­nance, and even­tu­ally help the in­ter­na­tion­al­iza­tion of the yuan by en­cour­ag­ing its use in both trade and fi­nan­cial trans­ac­tions, al­beit un­der the con­di­tion that China lib­er­al­izes its cap­i­tal ac­count.

... we ex­pect it to sup­port longterm growth and devel­op­ment in the economies in­volved.

The au­thors are econ­o­mists with Ox­ford Eco­nom­ics.

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