China’s Belt and Road Initiative will add US$117 billion to global trade this year, a new study shows
Euler Hermes says nations targeted by the initiative will see higher trade volumes, even if they are yet to receive any direct investment from ChinaThe trade insurer estimates that the Belt and Road Initiative resulted in US$460 billion worth of investments in the five years since its inception in 2013
Finbarr BerminghamUPDATED : Wednesday, 23 Jan 2019, 12:08PM
Merchandise trade between China and the countries targeted by its “Belt and Road Initiative” is predicted to grow by US$117 billion this year, according to new analysis.
For China, this will mean US$56 billion in additional exports, while it will import an extra US$61 billion worth of goods from the 80 countries named in the Chinese government’s official manifesto, research from trade credit insurer Euler Hermes shows.
The report estimates that this will add 0.3 per cent to global trade and 0.1 per cent to global growth, at a time when fears are mounting about a slowdown across the world economy, but most notably in China.
The belt and road strategy is Chinese President Xi Jinping’s flagship investment programme that was launched in 2013, and aimed at building infrastructure in countries accounting for 68 per cent of the world’s population and 36 per cent of its gross domestic product (GDP).
Not all of the countries targeted have welcomed Beijing’s overtures; some have rejected investment, notably India and latterly Malaysia.
Others have yet to agree to any China-funded projects, such as South Korea, but have expressed interest in receiving investment through the belt and road plan.
However, Euler Hermes said that these nations will see higher trade volumes as a result of the initiative, even if they have yet to receive any direct investment from China.
Mahamoud Islam, senior economist at Euler Hermes in Hong Kong, said that this is because of the effect of better connectivity and infrastructure along the belt and road network, as well as better trade relations between China and target markets.
Given that a huge part of the belt and road plan is domestic, international companies could expect to benefit from infrastructural improvements in China too, Islam said.
“Other countries benefit from demand from China. You can argue about politics and the supply chain being controlled by China. But at the end of the day, this is bringing demand to markets that benefit from that demand.
“It improves competitiveness. That’s not surprising, you’re building railroads, ports and airports, connecting countries,” Islam said, adding that for China, the belt and road strategy was a way to push out excess capacity in industries such as coal and steel, to internationalise its companies and to help liberalise the yuan by lending in Chinese currency.
In 2018, the trade gains were estimated to be higher still, at US$158 billion, with South Korea, countries in Southeast Asia, India and Russia the greatest beneficiaries.
The belt and road plan has been billed as a means of improving trade and was roundly welcomed when it was started in 2013. Initially marketed as a revamp of the old Silk Road trade route connecting Eurasia, Euler Hermes estimates that it saw US$460 billion invested between 2013 and 2018.
The investment has continued this year. From January 2 to January 15, the value of new belt and road projects was US$4.5 billion, according to RWR Advisory Group, a Washington-based research house, with the highest proportion of this going to Sub-Saharan Africa.
The largest funding package, however, was in Pakistan, which received US$2.21 billion for the Mohmand dam project, to be built by a joint venture that includes China Gezhouba Group.
Pakistan’s strategic location has made it one of the primary targets of China’s belt and road spend and has been earmarked to receive more than US$60 billion in debt and equity investment.
At the centre of this is Gwadar, a port on the Arabian Sea, which is being turned into a transshipment hub by China, allowing its remote westerly regions to access the energy markets of the Middle East.
However, Pakistan is also one of the most controversial hubs on the network. Many analysts claim that its debt exposure to China is unsustainable.
Indeed, there has been a notable backlash against the initiative in recent months, with the Malaysian Prime Minister Mahathir Mohamad warning last year of a “new version of colonialism” stemming from China’s outbound lending.
A report last year from the Center for Global Development, an American think tank, implied that countries are concerned about being stuck in a debt trap, unable to repay loans and forced to cede assets such as commodities or infrastructure instead.
“The primary concern is that an US$8 trillion initiative will leave countries with ‘debt overhangs’ that will impede sound public investment and economic growth more generally,” the report read.
These fears were fanned by reports in December that Kenya may have to hand over control of its largest port of Mombasa, paid for by China, if it was unable to repay the debt. The claims were denied by the Kenyan President, Uhuru Kenyatta.
In Sri Lanka in 2017, the government converted the debt owed to Chinese funders to equity, allowing China Merchants Port to take control of the Hambantota Port on a 99-year lease.
“China is sitting on the largest foreign exchange reserves of any country on Earth. When that money just sits in the central bank, they tend to get about a 3 per cent return. So they have an incentive to make that excess liquidity work for them. Through debt and equity investments they are trying to reap better economic returns,” said Bradley Parks, executive director of AidData, a research centre at the College of William & Mary in Virginia.
These cases, along with the implication that China is using belt and road plan lending to put its foreign reserves to work, have helped sour the mood towards Xi’s flagship initiative in recent months.
Tony Nash, the CEO of Complete Intelligence, a research firm, thought the belt and road strategy held initial promise, but now describes it as a “missed opportunity”, even in trade terms.
Nash said that in many cases, China is “underestimating the risk” of projects it is funding, pointing to the troubles faced by Indonesia’s best-known project, the US$6 billion railway linking Jakarta and Bandung. The project has faced manifold problems, including issues around land procurement.