One Belt One Road (OBOR): An Economic overview

Fahid Fayaz Darangay

One Belt One Road (OBOR), the brainchild of Chinese President Xi Jinping, is an ambitious economic development and commercial project that focuses on improving connectivity and cooperation among multiple countries spread across the continents of Asia, Africa, and Europe. Dubbed as the “Project of the Century” by the Chinese authorities, OBOR spans about 78 countries.

Initially announced in the year 2013 with the purpose of restoring the ancient Silk Route that connected Asia and Europe, the project’s scope has been expanded over the years to include new territories and development initiatives. Also called the Belt and Road Initiative (BRI), the project involves building a big network of roadways, railways, maritime ports, power grids, oil and gas pipelines, and associated infrastructure projects.

The project covers two parts. The first is called the “Silk Road Economic Belt,” which is primarily land-based and is expected to connect China with Central Asia, Eastern Europe, and Western Europe. The second is called the “21st Century Maritime Silk Road,” which is sea-based and is expected to will China’s southern coast to the Mediterranean, Africa, South-East Asia, and Central Asia. The names are confusing as the ‘Belt’ is actually a network of roads, and the ‘Road’ is a sea route.

The original Silk Road arose during the westward expansion of China’s Han Dynasty (206 BCE–220 CE), which forged trade networks throughout what are today the Central Asian countries of Afghanistan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, as well as modern-day India and Pakistan to the south. Those routes extended more than four thousand miles to Europe.

Central Asia was thus the epicenter of one of the first waves of globalization, connecting eastern and western markets, spurring immense wealth, and intermixing cultural and religious traditions. Valuable Chinese silk, spices, jade, and other goods moved west while China received gold and other precious metals, ivory, and glass products. Use of the route peaked during the first millennium, under the leadership of first the Roman and then Byzantine Empires, and the Tang Dynasty (618–907 CE) in China.

But the Crusades, as well as advances by the Mongols in Central Asia, dampened trade, and today Central Asian countries are economically isolated from each other, with intra-regional trade making up just 6.2 percent of all cross-border commerce. They are also heavily dependent on Russia, particularly for remittances—they make up one-third of the gross domestic product (GDP) of Kyrgyzstan and Tajikistan. By 2018, remittances had dipped from their 2013 highs due to Russia’s economic woes.

President Xi announced the initiative during official visits to Kazakhstan and Indonesia in 2013. The plan was two-pronged: the overland Silk Road Economic Belt and the Maritime Silk Road. The two were collectively referred to first as the One Belt, One Road initiative but eventually became the Belt and Road Initiative.

Xi’s vision included creating a vast network of railways, energy pipelines, highways, and streamlined border crossings, both westward—through the mountainous former Soviet republics—and southward, to Pakistan, India, and the rest of Southeast Asia. Such a network would expand the international use of Chinese currency, the renminbi, and “break the bottleneck in Asian connectivity,” according to Xi. (The Asian Development Bank estimated that the region faces a yearly infrastructure financing shortfall of nearly $800 billion.) In addition to physical infrastructure, China plans to build fifty special economic zones, modeled after the Shenzhen Special Economic Zone, which China launched in 1980 during its economic reforms under leader Deng Xiaoping.

Xi subsequently announced plans for the 21st Century Maritime Silk Road at the 2013 summit of the Association of Southeast Asian Nations (ASEAN) in Indonesia. To accommodate expanding maritime trade traffic, China would invest in port development along the Indian Ocean, from Southeast Asia all the way to East Africa and parts of Europe.

They contain the following six economic corridors:

1. The New Eurasian Land Bridge, which connects Western China to Western Russia
2. The China-Mongolia-Russia Corridor, which connects North China to Eastern Russia via Mongolia
3. The China-Central Asia-West Asia Corridor, which connects Western China to Turkey via Central and West Asia
4. The China-Indochina Peninsula Corridor, which connects Southern China to Singapore via Indo-China
5. The China-Pakistan Corridor, which connects South Western China through Pakistan to Arabia sea routes
6. The Bangladesh-China-India-Myanmar Corridor, which connects Southern China to India via Bangladesh and Myanmar

Additionally, the maritime Silk Road connects coastal China to the Mediterranean via Singapore-Malaysia, the Indian Ocean, the Arabian Sea, and the Strait of Hormuz.

OBOR is of prime significance to China as it aims to boost its domestic growth and is also a part of the country’s strategy for economic diplomacy. By connecting the less-developed border regions like Xinjiang with neighboring nations, China expects to bump up economic activity. OBOR is expected to open up and create new markets for Chinese goods. It would also enable the manufacturing powerhouse to gain control of cost-effective routes to export materials easily.

Any excess capacity in terms of production can be channelized effectively to regions along OBOR routes. China has announced investments over $1 trillion in the various infrastructure projects and is funding them by offering low-cost loans to the participating countries.

Many participating countries, like Kyrgyzstan and Tajikistan, are positive about OBOR due to massive investments by China in local transmission projects in these nations. Landlocked Nepal has recently joined OBOR by signing a deal that will help it improve cross-border connectivity with China, and Pakistan is set to benefit from the $46 billion China Pakistan Economic Corridor (CPEC) that will connect southwestern China to and through Pakistan, allowing access to Arabian Sea routes.

While China continues to pitch OBOR as an all-inclusive project for regional development, other nations perceive it as a strategic move by the Asian powerhouse to attain significance and control at a regional level and to play a larger role at the global level by building and controlling a China-focused trading network.

With US President Donald Trump posing challenges for Asian nations through measures like trade tariffs, China sees this venture as an opportunity to emerge as a regional leader. In the future, we may see a boost in the Chinese yuan, with increased usage in the OBOR region.

One Belt One Road covers numerous African and Asian countries, such as Kenya, Indonesia, Israel and many others amongst its total reach of 44 countries. Interestingly, most of these countries are developing ones. China’s One Belt One Road helps these countries improve their transportation, energy production and trade.

Transportation

One Belt One Road has assisted many countries in developing infrastructure from transportation to electrical energy. For example, China has invested $14 billion in Eastern Africa Kenya’s Standard Gauge Railway (SGR). SGR is 485km single-track railroad, and acts as one of the most significant projects since Kenya became independent in 1963.

SGR stretches from Mombasa to the Kenyan capital, Nairobi, and in December 2015, Kenya loaned $1.5 billion from China to extend the SGR further to Naivasha in the north-west. The SGR also facilitates local industries and trade between Africa and China.

Energy

One example of an One Belt One Road investment in energy is its project in Pakistan — the Nehru Tim Jielu Mu Hydropower Station. Electricity is a big problem in Pakistan; during the summer, there is more than 500 million megawatt deficit on the national grid. Power cuts are frequent in hospitals, commercial buildings and residential buildings.

In 2014, the construction of Nehru Tim Jielu Mu Hydropower Station was approved and operated by a joint engineering team of China Gezhouba Group Co., LTD (CGGC) and China Machinery Engineering Corporation (CMEC). This project invested around $4.3 billion, and its goal is to build a dam on Nehru River and provide electricity via hydroelectric generation.

This hydropower station is Pakistan’s largest hydropower project, which can generate the capacity of 5.15 billion kilowatt-hours. This project brings light to Pakistan and also assists in the nation’s economic development.

Economics

One Belt One Road promotes trade between each country and generates mutual economic benefits. For example, Kazakhstan is a landlocked country in Central Asia, and as its winters are very cold, there is barely any vegetable production.

One Belt One Road connects Kazakhstan and the northwestern Chinese Xinjiang Uygur Autonomous Region. The cross-border trade of vegetables provides Kazakhstan’s people with their basic needs. The total trade between Xinjiang and Kazakhstan is more than $11 billion annually, a figure that composes 40 percent of China-Kazakhstan trade in total.

Another example of OBOR comes in the form of the trade routes of Brunei. Brunei has abundant oil and gas resources, but the nation lacks the material for producing oil and gas pipelines.

Liaoning, a province in northeastern China, provides $2.123 million in financing loans, and Huludao City Steel Pipe Industrial Co., Ltd. produces 100,000 tons of oil and gas pipelines. This investment not only generates $100 million, but it also offers more than 300 job opportunities.

One Belt One Road shortens the distance between each country and promotes the global economy, and will hopefully see ongoing progress and generate benefits for every country.

Supporting a diverse array of initiatives that enhance connectivity throughout Eurasia and beyond could serve to strengthen China’s economic and security interests while bolstering overseas development. At the first Belt and Road Forum in Beijing in May 2017, President Xi Jinping noted that, “In pursuing the Belt and Road Initiative, we should focus on the fundamental issue of development, release the growth potential of various countries and achieve economic integration and interconnected development and deliver benefits to all.”

The BRI is an umbrella initiative spanning a multitude of projects designed to promote the flow of goods, investment, and people. The new connections fostered by the BRI could reconfigure relationships, reroute economic activity, and shift power within and between states. In March 2015, the Ministry of Foreign Affairs disseminated an action plan (issued by the National Development and Reform Commission) that fleshed out specific policy goals of the BRI. These included:

• Improving intergovernmental communication to better align high-level government policies like economic development strategies and plans for regional cooperation.
• Strengthening the coordination of infrastructure plans to better connect hard infrastructure networks like transportation systems and power grids.
• Encouraging the development of soft infrastructure such as the signing of trade deals, aligning of regulatory standards, and improving financial integration.
• Bolstering people-to-people connections by cultivating student, expert, and cultural exchanges and tourism.

Beneficiary countries are likely to find the most attractive elements of the BRI to be its provision of hard infrastructure. Likewise, the BRI provides China with an opportunity to use its considerable economic means to finance these infrastructure projects around the world. The Asian Development Bank (ADB) estimates that the developing countries of Asia collectively will require $26 trillion in infrastructure investment to sustain growth.

Leveraging these needs against its economic strength may ultimately garner China significant political gains. Notably, many of the areas targeted by China suffer from underinvestment due to domestic economic struggles, and they often register low on the United Nations Human Development Index (HDI). Myanmar and Pakistan – two countries heavily targeted by the BRI – rank 148^th and 150^th globally in terms of HDI.

To support the BRI, Beijing has injected massive amounts of capital into Chinese public financial institutions, such as the Chinese Development Bank (CDB) and the Export-Import Bank of China (EXIM). These banks enjoy low borrowing costs, as their bonds are treated like Chinese government debt with very low interest rates and they have access to lending from the People’s Bank of China, allowing them to lend cheaply to Chinese companies working on BRI projects.

This easy financing enables China’s state-owned enterprises (SOEs) to offer highly competitive bids for projects against foreign companies that might be more financially constrained. For instance, in 2015 Japanese construction companies lost out to their Chinese counterparts in a bid to build a high-speed rail project in Indonesia.

Discussing the reasons behind their choice, the Indonesian government cited Chinese financing from the CDB, which came with fewer strings attached. It should be noted, however, that the project has been fraught with problems. Critics have decried the terms of the contract, which has been revised several times since it was awarded, as unrealistic. Furthermore, contractors have yet to break ground on the railway due to licensing and land acquisition issues.

Some BRI projects are already underway, such as those associated with the China-Pakistan Economic Corridor (CPEC) – a 3000-kilometer corridor that runs from China’s Kashgar to Pakistan’s Gwadar. CPEC includes a wide array of infrastructure projects including highways, railways, pipelines, and optical cables, but more than half of the total planned investment for CPEC will go to energy projects like power plants. He Lifeng, Chairman of China’s National Development and Reform Commission, notes that CPEC is “an important loop in the larger chain of the Belt and Road Initiative, and would enable the possibility of a 21^st Century Maritime Road.”

Pakistani leaders also view CPEC as important. In the face of a recent slowdown of CPEC projects due to geopolitical tensions, Pakistan Prime Minister Imran Khan took controversial steps in October 2019 to push forward the development of CPEC and provide tax exemptions for the state-owned Chinese Overseas Ports Holding Company, which operates Pakistan’s Gwadar Port.

CPEC is intended to connect the land-based Silk Road Economic Belt with the Maritime Silk Road, and Gwadar Port is an important part of this effort. It was leased to the Chinese Overseas Ports Holding Company from the Pakistani government until 2059, and is already being expanded. A highway from Kashgar to Gwadar has also been considerably upgraded. Further development projects of CPEC include the Gwadar Special Economic Zone, which is currently under construction next to the port and due for completion by the end of 2020.

The BRI has the potential to yield considerable economic and political gains for China. Many of these have been explicitly acknowledged in China’s official policy communiques, such as the expansion of China’s export markets, the promotion of the Renminbi (RMB) as an international currency, and the reduction of trade frictions like tariffs and transport costs.

Additionally, developing and connecting hard infrastructure with neighboring countries will help reduce transport times and costs. Establishing soft infrastructure with partner countries will allow for a broader range of goods to be traded with fewer regulatory hurdles. Raising capital for these infrastructure projects by issuing bonds in RMB will also encourage its use in international financial centers. In particular, China’s lower-income western provinces stand to gain, as the creation of overland economic connectivity with Central Asia will boost growth there.

Many of the potential benefits of BRI are less publicly articulated. For instance, some of China’s SOEs – such as cement, steel, and construction companies – have built up significant capacity (expanding factories and hiring workers) to serve the once booming domestic economy. As China’s economy has slowed, these companies are struggling to find productive uses for their resources. Similarly, China has a large reserve of savings that is not being invested productively. Investing in large-scale overseas infrastructure projects enables China to export its excess savings and put its SOEs to work.

If successfully implemented, the BRI could help re-orient a large part of the world economy toward China. Increasing the amount of trade, investment, and connectivity between China and countries throughout Eurasia will also render these countries more dependent on the Chinese economy, increasing China’s economic leverage over them. This may empower China to more readily shape the rules and norms that govern the economic affairs of the region.

The BRI may also win China political gains. Beijing may be able to exploit its financial largesse to influence partner country policies to align with its own interests, particularly in certain countries in Central and South Asia that lack good governance and robust rule of law. Some countries that are part of BRI rank unfavorably on Transparency International’s Corruption Perceptions Index, an index running from 0, indicating very high corruption, to 100, indicating very low corruption. BRI recipient countries with particularly poor Corruption Perceptions Index scores include Turkmenistan (20), Pakistan (33), and Sri Lanka.

Accepting Chinese capital may come with expectations that Chinese companies will then be contracted to manage infrastructure, giving them at the least some influence over critical infrastructure. From China’s perspective, investment into strategic locations like Gwadar will help diversify China’s transport network for critical natural resources like oil and gas, which could help reduce dependency on trade routes, such as the Strait of Malacca, through which China currently receives much of its oil and gas.

Partner countries should likewise reap concrete benefits. Fulfilling the infrastructure needs of these countries will speed development by helping them export their products to overseas markets, which could help create new jobs and foster stable growth.  Other potential sources of infrastructure finance, such as the World Bank, tie lending to conditions that recipient governments may feel encroach on their sovereignty, such as stipulations that governments limit spending to a certain level or enact anti-corruption measures. Chinese investment on the other hand has been historically less likely to require recipient countries to adhere to such conditions.

Long-term feasibility of the Belt and Road Initiative

China will need to overcome several hurdles for the BRI to succeed. There is a real possibility that offers of investment will be met with lukewarm responses from partner countries that may distrust Chinese motives. This has been evident in past cases of overseas investment by Chinese SOEs not tied to the BRI. Australia, for example, has proven reluctant to allow certain investments by Chinese state companies, and has thus far rejected calls to formally align its state infrastructure fund with the BRI. In 2016, Canberra blocked two investment bids by Chinese SOEs in the energy and agriculture sectors citing national interest and security concerns.

Myanmar has also demonstrated some hesitation in accepting Chinese investment, reversing course from its prior enthusiasm. In 2011 the government of Myanmar halted construction of the Myitsone dam – one of China’s largest investment projects in the country – due to concerns over growing Chinese influence and potential environmental damage. While the project remains in limbo, China was still the largest investor in Myanmar, with more than $15 billion invested in business projects in the country in 2018.

India has expressed significant hesitation toward the BRI. Leaders in New Delhi opted out of both the 2017 and 2019 Belt and Road Forums. In addition to being generally skeptical of the BRI, one specific major concern is the building of CPEC infrastructure through disputed Kashmir.

Economic considerations further complicate these concerns. BRI infrastructure projects in Central Asia, Pakistan, and Myanmar are projected to lose money due to underutilization and could potentially cause more harm than good. For instance, the Kara-Balta oil refinery  – Kyrgyzstan’s largest Chinese investment – has faced significant problems with overcapacity in recent years. Elsewhere, in Thailand, officials are still grappling with the difficulties of financing and negotiating the $9.9 billion Thai-Chinese high-speed railway project in Thailand, which is already long delayed.

Many BRI projects are expected to reap benefits only over the long term, but will tie up large amounts of capital in the meantime that could otherwise be more productively employed elsewhere. This has proven the case with Qinzhou port in southern China, which was slated to function as a crucial hub for trade with Southeast Asia but is still severely underused even five years after completion.

Notwithstanding these hurdles, it is important to recognize that BRI is a long-term plan. Many of its projects are still in their planning phases and will not be completed for years to come. While offers of Chinese investment have been met with mixed responses, should China successfully complete a few keystone projects the reception could become much warmer. This makes the success of the first wave of projects all the more crucial. While it may be many years before the success of the BRI can be properly judged, it certainly has the potential to forge stronger economic and political bonds throughout the region. This deeper integration may grant China more influence over other countries and a stronger hand in guiding development of the international economic system

Impact on India:

Negative impact :-

• China’s projects of ports, naval bases and surveillance posts in Indian Ocean will encircle India. This is commonly called as “String of Pearls“.
• “China-Pakistan Economic Corridor” (CPEC)- Flagship project under the mega OBOR initiative, passes through Pak occupied part of Kashmir. This step of China undermines India’s sovereignty as China didn’t take permission from India.
• China may take control of the developing countries through its investments, this may impact the trade relations between India and these countries.
• If India joins in OBOR, Chinese companies may supervise the projects in India under OBOR. This will be a minus because Chinese companies may not create employment opportunities for local people and may not care about local developmental needs.

Positive impact :-

• India’s major drawback is lack of infrastructure. If India partners with OBOR, it can utilize China’s investments and technology to overcome this drawback.
• If India becomes a part of OBOR, trade relations of India with Eurasian countries will improve.

Despite of being encircled by Chinese projects, India is powerful enough to sustain its influence in the world politics. Hence, there is no need to worry about OBOR. But India should be strict in the case of China ignoring India’s sovereignty. By taking advantage of OBOR, India can overcome its major drawback of lack of infrastructure.

(The author is currently pursuing Masters in Financial Economics from Madras School of Economics, Chennai)

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