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Rich dividends expected of Chinese Belt & Road initiative

M S Siddiqui | Published: November 08, 2017 20:48:54 | Updated: November 11, 2017 12:40:43


Photo credit: The Indian Express

The Chinese government's vision is to double 2010 national income by 2020 with the nation pushing towards transforming its economy from a largely export-driven one to services and domestic consumption, from labour and energy-intensive manufacturing towards innovative, hi-tech and higher value-added production, and from quantity to quality and ecological sustainability.

China has joined the World Trade Organisation (WTO) more than a decade ago. Its government used the ascension negotiations to reform its domestic economy. The improved efficiency plus better market access from joining the organisation propelled a decade of rapid development and made China what it is today. But the Chinese economy is overburdened with the state-owned enterprises (SOEs). The reform of SOEs means integrating weak and strong companies, breaking large, unmanageable companies into smaller entities, and closing those that are heavily indebted and unable to continue without outside support.

Party leaders and bureaucrats are beneficiaries of SOEs in China like Soviet Union. "Many senior Communist Party officials are running state enterprises, or local government officials with local state enterprises, and they like to continue with these sources of income and employment. So, it is not easy to carry out the reform. The biggest obstacle to SOE reform, however, is politics", said David Dollar, a senior fellow at the Brookings Institution.

China has surplus industrial output which can be beneficially utilised along the belt and road (B&R) projects. The Asian Development Bank (ADB) forecasts 580m tonnes of cement is needed yearly for infrastructure projects in Asia alone, which is a quarter of China's output. Construction of railways, pipelines and other projects along the B&R trade route may create demand for 272mn tonnes of steel. This initiative will make the state-owned industries viable.

In addition to funding, the Chinese government has sought foreign partnerships to access expertise, new technologies and equipment, as well as management and operational experience in managing large-scale, complex infrastructure projects. Chinese construction enterprises can benefit from partnerships with foreign companies on gaining experience in large scale infrastructure projects involving multiple countries and stakeholders, which might be new to them.

The traditional economic structure of China, which relied on investing massively in fixed assets and exporting low-skilled labour-intensive products, is running out of steam. It now requires a new model to support economic development, through building many high-tech, high value-added sectors, which is not easy to achieve in a short time. This is the typical "middle-income trap" challenge.

About three decades ago, the economies of South Korea, Taiwan, and Hong Kong faced the same "middle-income trap" challenges as domestic labour costs rose sharply. These countries relocated most of their labour-intensive manufacturing factories to the eastern coastal regions of China and went on to upgrade domestic industrial structure. This process not only helped South Korea, Taiwan, and Hong Kong to overcome the "middle-income trap" but also helped mainland China to achieve industrialisation and modernisation simultaneously and created many jobs. The B&R has similar plan to relocate labour-intensive low technology industries to other countries. This will not only help China to overcome the "middle-income trap" by transforming its economic structure but will also create unprecedented opportunities for all the developing countries along the B&R to achieve economic take-off.

The initiative focuses mostly on infrastructure and is expected to open opportunities across industries. Professional service firms are preparing to meet investor demands, and are anticipating potential risks related to infrastructure projects associated with such a large-scale, cross-border initiative. Risk management and due diligence practices will be at the forefront of any business dealings coming from the ambitious strategy.

While B&R has the potential to harness the synergy of economic globalisation and China's domestic reforms, it cannot be pushed through by political fiat in Beijing. The initiative is expected to have a major impact on China's domestic front and internationally. One of the key domestic objectives is to accelerate the development of China's west and central provinces. The plan divides the nation into five regions with infrastructure plans to connect with neighbouring countries and increase connectivity.

The 2015 State Council's action plan identifies 18 provinces under the B&R initiative. All provinces immediately were compelled to include B&R in their government reports, even though some regions were tangential to the original plan. Local governments have since raced to secure funding from the centre and rushed to invest in purportedly B&R projects, contributing to the economic bubble. China's reform needs global impetus, but a political campaign is hardly the solution.

China's Belt and Road Initiative (BRI) is not only the most ambitious and all-encompassing economic development project in the history of humanity but also the core of what is likely to be China's grand strategy for the 21st century. It aims to connect China and Europe in a web of roads, high-speed rail, power lines, ports, pipelines, fibre-optic lines and other infrastructure with the goal of stimulating growth in scores of developing countries in between. The goal of B&R is to connect China, Europe and Africa also under a vast network of oil and gas pipelines, data centres, power plants and transnational high voltage power lines, airports, water canals, deep water ports, energy terminals, logistical hubs and free trade zones.  New maritime trade corridors provide China with new shipping alternatives while offering its less developed western, northern and south-western provinces easier access to new markets.

Domestically, the BRI will serve a major goal, i.e. giving greater impetus to the longstanding 'go west' policies aimed at rebalancing economic development between the industrialised coastal provinces and the inner provinces. Most of the growth potential for domestic demand is in the relatively underdeveloped inland provinces, where the central government aims to foster industrialisation by shifting manufacturing away from the coast towards a new geography of trade.  The BRI would link inland cities to global markets through a modern network of overland routes and energy pipelines, serving as alternatives to existing sea-lanes that cross the South China Sea and the Straits of Malacca. Geographic rebalancing will help resolve related macroeconomic imbalances between consumption and saving, because most of the consumption growth potential lies in the inner provinces. Fulfilling these objectives will benefit China in many ways. On the surface, the B&R initiative will provide markets to digest China's industrial overcapacity and facilitate trade between the participating countries, while also potentially strengthening its diplomatic relations globally. But there are also many other associated benefits. Trade between China and B&R countries have exceeded US$916b in 2016, which is 25.9 per cent of China's total foreign trade volume. Chinese companies have since established over 70 overseas economic and trade cooperation zones.

Beyond its primary goals, the B&R initiative also complements China's national economic reform strategy, reinforcing its 'Go Out' policy launched in the 1990s, which encouraged its enterprises to invest overseas. The B&R initiative provides China with the opportunity to amass vital global credentials and establish its industrial prowess, by designing and building projects such as high-speed railways and nuclear power plants. In construction and infrastructure, for example, Chinese SOEs have begun to achieve this by reforming their internal procedures to enable them to assume the main contractor roles in such projects, targeting complex projects, in difficult environments, and against strong competitors.

These reforms have also been complemented by the procurement of know-how and capabilities through progressive acquisitions and partnerships with foreign MNCs. These new and enhanced capabilities and skills will lead to global recognition across various infrastructure sectors. Shining examples to date include the Hungarian-Serbian Railway, a hydropower extension project, construction of a national motorway in Pakistan, and the Carmel Tunnel project in Israel.

The B&R also complements with China's 13th Five-Year Plan released last year, which further facilitates the implementation of the "Made In China 2025" strategy, announced in 2015 to focus on upgrading China's industries. The overarching aim is to evolve China's traditional manufacturing sectors to higher value and higher quality manufacturing with innovation and the latest technologies, while transitioning to a consumption-driven economy.

In promoting China's economic expansion abroad, Beijing also must take care to address challenges concerning the political environment, market volatility, and strategic complexity in the one belt one region (OBOR). Ultimately, OBOR's ambitious agenda in establishing China as a truly globalised power requires a major role of the private sector and engagement of an active Chinese civil society. China's reform needs OBOR. But ironically OBOR's success calls for structural reforms.

Finally, the B&R initiative is also expected to drive greater capital flows overseas from China, resulting in a further internationalisation of the RMB, expanding its circulation globally and diversifying currency risks. This could open its financial institutions and accelerate financial reforms.

Apart from strengthening China's economy, industrial capabilities and geopolitical standing, the B&R initiative is also a catalyst for infrastructure development in some of the least developed countries, while simultaneously driving economic growth by stimulating trade and creating domestic jobs.

 

 

The writer is a Legal Economist.

shah@banglachemical.com

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