Impact of Silk Road (One Belt, One Road) on China’s economy
China wants to expand their business to open new markets and become strong enough to challenge American dominance over China. They decided to revive their most successful trade project ever, the Silk Road, as ‘The Silk Road Economic Belt and the 21st-century Maritime Silk Road’ or for short, the One Belt, One Road project (OBOR). The GDP growth rate of China has reduced over the past few years and it expects the OBOR initiative to boost its GDP growth by boosting its foreign trade.
The project is based upon the no-cost creation of $5 trillion of credit creation at the Bank of China. That credit creation funds about $2.5 trillion of soft low-interest loans and $2.5 trillion of credit to whoever wins the construction contracts. In the OBOR project agreement there is a clause which requires that Chinese construction companies (which have already built several high-quality roads, railways, ports and airports and HST rail tracks in china) should be considered as the contractor of B;RI projects. On current evidence it seems that 80% of contracts are being awarded to Chinese construction companies on the grounds of cost and their capacity to deliver.
OBOR is expected to produce a $4bn surge in Chinese GDP over say six years – the contracts being done by Chinese companies increase Chinese GDP by about $0.67 tr. a year or say about 3.0% of GDP a year declining to 2.5% a year as China continues to grow. That surge in foreign earned income is likely to have a tax take of about 30%, so an increase in Chinese Government revenues of about $1.3 tr in total distributed over six years.
China will find new markets for its product. It’s model for growth and prosperity has always been investment led and it has led to excess capacity. OBOR will help China to channelize this excess effectively if it ventures into newer untapped markets for its export.
China is also looking to strengthen the Yuan’s role as an international reserve currency and hopes the Belt and Road initiative, which for the most part have state-owned Chinese banks to grant huge loans for infrastructure projects contracted by Chinese firms in all the participating nations, to be adjuvant for this. Belt and Road countries are not only in need of China’s money but also its various products and services, which could help to boost their acceptance of Yuan, because paying for these purchases by using Yuan will the cost of currency exchange. It is expected to expedite China’s plan for mergers and acquisitions activities in infrastructure and logistics development.
While it may be a bit too early to analyze the impact of this ambitious and enterprising project, the OBOR has the capability to facilitate deeper regional integration through increase in trade and investment as well as expediting China’s mergers and acquisitions activities in infrastructure, logistics and tourism. However, China’s OBOR related support may even lead to significant risks and uncertainty to the Chinese economy, such as the increased burden of servicing more debt when the projects in various countries become financially unsustainable due to geographical and external geopolitical risks and also inadequate risk evaluation by Chinese investors.
ZHIQIN, S. (2018) China’s Belt and Road initiative : A catalyst for Economic Reforms? Available from: https://carnegietsinghua.org/2018/04/24/china-s-belt-and-road-initiative-catalyst-for-economic-financial-and-good-governance-reforms-event-6869 Accessed 08/07/2018
WANG, F. (2017) ‘Big Room’ to Boost Yuan’s Usage Among Belt and Road Nations, Central Bank Official Says. Available from: https://www.caixinglobal.com/2017-06-08/101099268.html Accessed 07/07/2018