China’s next big thing

China’s economy is slowing down. The world’s second largest economy is now seeing its annual GDP (gross domestic product) growth rate settle at a less spectacular 6-7 percent, after a decade of stellar growth hovering at 10-11 percent. The Philippines has in fact managed to overtake it as the fastest-growing economy in all of Asia.

There are external and internal reasons for this. Externally, the overall global economic slowdown has taken a toll on the demand for China’s manufactured exports, once the main propeller of its economy. Meanwhile, its own labor costs have zoomed owing to a shortage in workers, tracing to the one-child policy that has constricted its current generation of workers. China’s leaders have seen the need to do something different—and fast—if it is to forestall its economy losing steam and possibly falling into a downward spiral.

Enter One Belt One Road (Obor), an ambitious, even grandiose, initiative that McKinsey and Company describes as one of the biggest stories in Asian business today. Announced in late 2013 by Chinese President Xi Jinping, Obor calls for massive investment in and development of trade routes in the region, stretching all the way to Europe. It seeks to bring back the glory days of the ancient Silk Road, the thriving trade with Europe of centuries past named after the product that dominated China’s active commerce then. It is a core element in China’s new proactive foreign policy hinged on trade links in two trajectories. One is the “Silk Road Economic Belt,” a land-based trade link to Europe running across Central Asia and Russia. The other is the “21st Century Maritime Silk Road,” a sea-based trading route connecting China and Europe via Southeast Asia, India and Africa.

In essence, Obor hopes to integrate Asia, Africa and Europe through closer diplomatic, commercial and financial cooperation, in an unprecedented effort that will bring together up to 65 countries. It would encompass 4.4 billion people or two-thirds of humanity, well over half of global GDP, and an estimated 75 percent of known energy reserves. Five areas of cooperation are targeted: infrastructure, trade, policy, finance and people. The price tag is staggering, particularly for the infrastructure development component, estimated to require some $2-3 trillion. It has been likened to the Marshall Plan that rebuilt Europe after World War II, but 12 times bigger in magnitude.

Among the specific projects are upgrading of the port of Piraeus in Greece, a bullet train from Belgrade to Budapest, and a network of rails, roads and pipelines starting in central China and stretching westward all the way to Belgium. An 8,000-mile cargo rail route between the Chinese city of Yiwu and Madrid is already underway. China also plans to build a $46-billion economic corridor consisting of a pipeline, rail, roads, bridges and more through Pakistan to connect northwest China to the port of Gwadar on the Arabian Sea. This will provide alternative routes for its energy imports from the Middle East besides traditional sea routes. To show how important these land routes are, the first freight train to travel from eastern China to Tehran in Iran via Kazakhstan and Turkmenistan completed the journey early this year in 14 days, less than a third of the time it would take by sea. Also in the blueprints is a high-speed rail system to connect China with Southeast Asia. On the African continent, over 1,000 projects including 2,233 kilometers of railways and 3,350 kilometers of paved highways have been reported by Beijing. Early this year, plans were announced to build a series of transport grids consisting of railroads, bridges and roads linking 54 African countries.

The scale of infrastructure development being rolled out by China with dozens of countries on the three contiguous continents is truly massive, and it has pursued the mechanisms to finance them as well. The Asian Infrastructure Investment Bank that will finance infrastructure construction throughout Asia already has 57 member-countries, with China providing a major chunk of its $100-billion initial capital. China has also initiated a $40-billion Silk Road Fund to support private investments in Obor. Another financing source is the New Development Bank set up by Brazil, Russia, India, China and South Africa (the BRICS countries) with a target capitalization of $100 billion. Last year, the Export-Import Bank of China dispensed more than $80 billion in loans. Singapore, in partnership with China Construction Bank, has pledged about $22 billion to finance Obor projects. International pension funds, insurance companies, sovereign wealth funds and private equity funds in search of higher financial returns are also investing in Obor.

All together, the Obor initiative can potentially propel dynamic economic growth in the three continents in the decades to come, while poised to provide a new growth driver to the slowing Chinese economy. Saddled with overcapacity in many domestic industries like coal, cement, and even solar panels, China’s strategy is to redirect its capital abroad, thereby diffusing excessive domestic industrial capacity while reaping improved financial returns—a true win-win.

But Obor is not without its skeptics, whether on China’s underlying motivations or on the initiative’s prospects for success. In any case, for us in the Asean Economic Community, Obor merits more than close watching given the vast opportunities from greater linkage to the European and African markets that it promises. Forward-looking economic planners and enterprises would best factor this into their own growth plans for the future.

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