by Andrew Staples, Director, The Economist Corporate Network
ASEAN economies have been at the forefront of the emerging markets success story of the past two decades and, taken as a whole, ASEAN is one of the fastest growing large economy today.
But as the Chinese economy slows and restructures, ASEAN economies will need to make the next leap forward. Mega-regional initiatives, such as
China’s “one belt, one road” (OBOR), will provide the push. The heart of Silk Road Economic Belt China’s president, Xi Jinping, began floating the ideas of a “Silk Road Economic Belt” and a “21st Century Maritime Silk Road” in late 2013. The belt will run westward overland through Central Asia and onward to Europe, while the road will flow through the South China Sea and then westward towards Europe, with proposed stops in Southeast Asia, South Asia and Africa. These two ideas were eventually combined as OBOR.
The belt and road will be realised through the development of physical infrastructure in over 60 countries. The numbers are as big as the ambition: OBOR will directly affect economies with a collective gross domestic product (GDP) of US$2tr (approximately 40 per cent of global GDP) and over four billion people. The OBOR initiative is part of a broader strategic push by China to promote connectivity and development through economic engagement and investment along the two trading routes.
What are the potential benefits?
The World Bank has pointed out that OBOR could stimulate Asian and global economic growth and make it more sustainable. In particular, countries along the corridor— especially those with undeveloped infrastructure, low investment rates, and low per-capita incomes—could experience a boost in trade flows and benefit from infrastructure development.
Yet, self-interest also informs OBOR as a strategy that has the added attraction of supporting China’s domestic economy by boosting trade and creating new business opportunities for Chinese companies. For example, local Chinese firms are extremely well-positioned to win many of the overseas engineering projects—roads railways, ports and pipelines—that the new connectivity will demand.
Meanwhile, improved transport links will benefit many Chinese exporters. Furthermore, aiding its neighbours’ development will create new overseas markets. For these reasons, some foreign observers have suggested that OBOR is a convenient outlet to export China’s growing industrial overcapacity. Indeed, some consider the OBOR project to be a domestic investment drive that principally benefits China’s provinces and companies.
Is it all good news?
The OBOR plan has been greeted with open arms by Chinese provinces struggling in straitened financial circumstances. Sensing an opportunity to access central government funds, the majority of China’s 31 provinces have already issued OBOR development plans for which they hope to obtain support. These span roads, railways, airports and seaports, as well as trade and logistics centres.
This rush for OBOR funds has raised some concerns, including the need to clarify what role the private sector will play in these projects. As Mr Han Willem Kotterman, COO, Telstra, notes, central government funding to subsidise infrastructure development is one thing, but subsidies for Chinese firms, for example equipment manufacturers to provide telecommunications connectivity along the routes, is a matter of concern for other market players. The scope and nature of the OBOR initiative is still fluid and likely to evolve over time. However, from the onset, given OBOR’s evident aim to expand Chinese influence throughout the region and export Chinese industrial expertise, the emerging strategy has led to comparisons with the US Marshall Plan—America’s own aid programme to help Europe rebuild after the second world war and strengthen US strategic influence through trade and development assistance.
Unsurprisingly, the Chinese leadership has been quick to rebuff such comparisons. In fact, China’s president, Xi Jinping, has emphasised that the policy of “Three Nos” apply to China’s OBOR initiative, which are:
• Does not interfere in the internal affairs of other nations
• Does not seek to increase the so-called “sphere of influence”
• Does not strive for hegemony or dominance
Banking on it
OBOR, moreover, is presented as a departure from traditional aid donation programmes, such as the Marshall Plan. Instead, projects are expected to generate returns. Funding for the OBOR initiative will be supported by two recently established institutions, the Silk Road Fund (SRF) and the Asian Infrastructure Investment Bank (AIIB).
The chair of the SRF, Jin Qi, has said that the fund will work in line with “market-oriented principles” and should generate adequate returns for its shareholders. The AIIB’s stated aims are to combine China’s core competencies in building infrastructure with its deep financial resources to help development in other parts of Asia. China will provide much of the US$100bn in proposed initial capital, which will be used to promote the construction in transport and communications infrastructure in poorer Asian countries.
According to The Economist Corporate Network analysis, Indonesia stands to be the biggest beneficiary among the ASEAN economies, with approximately US$87.4bn identified in OBOR related pipeline infrastructure projects, roughly double the US$42bn each that the Philippines and Vietnam will host.
The AIIB is facing resistance from the US which has raised concerns regarding the lack of transparency and governance, and fears that the AIIB will compete with existing (and US-aligned) institutions, such as the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB).
The AIIB also faces the considerable challenge of getting up to speed. Mr Andrew Steel, Head of Asia Pacific, Corporations Ratings Group, Fitch Ratings, points out that the new bank has not yet appointed key personnel, does not yet have its policies and procedures in place and may find it difficult to communicate its competitive advantages in an already crowded and well established field. Asia’s infrastructure needs, however, are vast— the ADB estimates that developing Asia requires over US$8tr in infrastructure spend this decade alone—and the AIIB has quickly gained momentum.
By the end of 2015, 57 governments (20 regional and 37 non-regional) had signed up as members. But the US and Japan remain aloof at present. OBOR is a hugely ambitious play by China in terms of scale and scope, and if successful, would have vast and deep implications for the region. Yet the challenges in implementation are great, not just operationally but politically too. Other countries may be happy to receive investment, but not at the cost of becoming overly reliant on China or upsetting traditional allies.
About the Author
As Director for The Economist Corporate Network in Southeast Asia, Andrew provides members with insight and analysis on a range of topics related to ASEAN and the broader East Asian economy. He regularly chairs and moderates major Economist events, delivers custom briefings to senior executives (including Fortune 500 C-suite) and public figures (including heads of states) in his areas of expertise, which include international political economy, foreign direct investment, corporate strategy and comparative management, and regularly appears in the international media (BBC, CNN, Channel NewsAsia, Al Jazeera).