Originating as an idea within China’s commerce ministry intended to decrease overcapacity in China’s steel and manufacturing sectors, China’s “One Belt, One Road” (OBOR) program has evolved into a cornerstone of Xi Jiping’s economic strategy and foreign policy. By establishing a modern incarnation of the dynamic trade network that once directed a thriving trade between East and West, China promises that its plans to build a modern Silk Road through a combination of commercial investment and aid will promote economic prosperity across Eurasia and support regional stability among its neighbors.

For China and its government, the stakes are enormous. While economic reforms initiated by Deng Xiaoping catalyzed China’s growth over the past few decades, new measures are needed as China rebalances and makes the difficult transition from its past model of investment-driven growth to sustainable consumption-driven development. In addition to the domestic political and economic reforms underway, China hopes that its efforts to address the region’s infrastructure deficit and to forge economic partnerships with its neighbors through OBOR will allow the country to ensure future success under the “New Normal” of slower but steadier economic growth.

If successful, the program’s benefits will not be contained to China; OBOR has the potential to be a boon to the region and help drive global economic growth. However, with challenges complicating China’s domestic policies and periphery diplomacy efforts, doubts mounting concerning the overall health of the Chinese economy, and risks for investing in emerging markets growing, the success of OBOR is far from guaranteed.

From Silk Road to OBOR

While the term “Silk Road” more readily recalls the ancient overland route traversed by traders and their caravans, this series of land routes spanning from East Asia to Europe was also supplemented by a network of long-range sea routes that later grew in importance as wars disrupted traditional overland paths. True to its origins and as suggested by its name, China’s “One Belt, One Road” program consists of two main components: the Silk Road Economic Belt, which is a network of land-based infrastructure projects spanning from central China through Central Asia to Europe, and the Maritime Silk Road, which is composed of a series of port and coastal infrastructure projects extending from South and Southeast Asia to East Africa and the Mediterranean.

Given China’s established reputation of engaging in “financial diplomacy” and “checkbook” foreign policy, Chinese investment in infrastructure projects abroad is not a novel development. However, OBOR is particularly remarkable for its massive scale, which potentially encompasses 65 countries and 4.4 billion people, or approximately 60% of the world’s population. By spanning a broad geographic scope and building relationships and infrastructure to connect countries included in the program, OBOR is intended to facilitate trade, expand China’s economic influence, and promote regional stability.

Economic Impact

When it was initially formulated by China’s commerce ministry, the idea to revitalize trade across Eurasia was driven by pragmatic problem-solving. While the government’s ¥4 trillion ($586 billion) stimulus package launched at the height of the 2008 financial crisis allowed the country to sustain the high growth rates that served as a main contributor to the global economic recovery, it was becoming apparent that much of the growth produced by the Chinese government’s 2008 stimulus was highly artificial. Dispersed primarily among local governments and state-owned enterprises (SOEs) and employed to fund massive infrastructure and manufacturing projects to shore up China’s GDP growth figures, the government’s stimulus spending led to a rapid accumulation of debt and excess capacity across economic sectors.

While the government could and did temporarily contain the problem by organizing bailouts and debt swaps, the consequences, which, in addition to the pressing problem of the growth of the equity and property bubbles that have been of recent concern, include the survival of the inefficient and unproductive “zombie” firms that have hindered the Japanese economy for decades, were too grave to ignore. In search of a more sustainable solution, China’s commerce ministry naturally looked abroad. While China currently faces overcapacity in its manufacturing and construction industries domestically, it is estimated that the infrastructure deficit across Asia runs around $800 billion to $1.3 trillion annually, totaling an estimated $15 trillion over the next 15 years. In addition to the need for construction companies, infrastructure development in neighboring countries such as Myanmar and Pakistan also require many of the materials, such as steel and cement, which are in oversupply in China. Picking up on the potential value of addressing this infrastructure deficit and eager to establish China’s international presence, President Xi Jiping announced China’s intentions to build a new “Silk Road Economic Belt” during a visit to Kazakhstan in 2013 and followed by proposing the creation of a “Maritime Silk Road” during a speech to the Indonesian parliament a month later. While some details still remain uncertain, it is clear that OBOR is intended, in part, to create demand for China’s excess industrial exports through a combination of commercial investment and aid.

Additionally, in line with China’s efforts towards internationalizing the renminbi, OBOR creates the potential for promoting renminbi usage along the trade routes and through the infrastructure investments abroad. While the renminbi’s inclusion in the IMF’s SDR basket was a major landmark for the currency, usage of the renminbi remains relatively limited. Despite its title as the world’s largest economy by purchasing power parity, China has a currency that is only ranked seventh in usage for payments, and despite being the world’s largest exporter and the world’s second largest importer, in 2014, only 17% of China’s trade was settled in its own currency. While both the recent swap agreements with the Bank of England and the European Central Bank and the establishment of the equity market link up between Shanghai and Hong Kong will help promote the usage of the currency when combined with effective government policy, their impacts have been slight. Given the substantial benefits to be gained by increasing the percentage of its trades settled in renminbi and improving the visibility of the currency, OBOR could be a significant force in promoting the adoption of the renminbi and impart substantial benefits to Chinese businesses.

OBOR and the “New Normal”

Contrasting with the heavy-handed economic policies employed by China in the past summer, OBOR provides an avenue for the production of real growth and the development of long-term stability through improved infrastructure and greater interconnectedness. OBOR is backed not only by the political leadership in Beijing but also by China’s significant financial clout. Funding for the project flows from China’s substantial foreign exchange reserves, which currently totals over $3 trillion, and from multinational institutions such as Asian Infrastructure Investment Bank and Silk Road Fund. Following the turmoil of the past summer’s Chinese stock market crash, government policy appears to have refocused on the development of OBOR after a prolonged latent period following the initial burst of enthusiasm for the program at the start of President Xi Jiping’s term. Considering the present need for infrastructure investments for China’s neighbors and the increasing role of developing markets in driving world economic growth, OBOR could be a defining feature of the “New Normal” and a key determinant of future economic development and growth.

Please reach out to Grace Chang at gc4@princeton.edu for any questions, comments, or concerns.

Written by thefinancier

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