Trans-Pacific View

China’s ‘One Belt, One Road’ Initiative: Outlook For OBOR and the US Rebalance

Insight from Erica Downs

China’s ‘One Belt, One Road’ Initiative: Outlook For OBOR and the US Rebalance
Credit: APEC 2013

The Rebalance authors Mercy Kuo and Angie Tang regularly engage subject-matter experts, policy practitioners and strategic thinkers across the globe for their diverse insights into the U.S. rebalance to Asia.  This conversation with Dr. Erica Downs – Senior Analyst at Eurasia Group and former fellow in the John. L Thornton China Center at the Brookings Institution is the 22nd in “The Rebalance Insight Series.”

OBOR and TPP seem to be two parallel initiatives to advance Chinese and American economic and foreign policy initiatives in the Asia-Pacific. What are the implications for the U.S. rebalance to Asia?

OBOR and TPP are two very different approaches to deepening economic integration in Asia and are not necessarily at odds with each other. OBOR aims to forge greater economic connectivity through the construction of physical infrastructure. In contrast, TPP seeks to do so through the creation of new rules for global trade, covering tariff liberalization as well as non-tariff barriers such as labor and environmental standards. Meanwhile, the geographical focus of OBOR is the Eurasian landmass while that of TPP is countries on both sides of the Pacific Ocean. States at the intersection of OBOR and TPP need not choose one over the other – and can benefit from doing both. This is true for China and the U.S., too. China can negotiate to join TPP when it meets the membership criteria, and the Obama Administration has stated that TPP is open to China. Xi Jinping has said that the U.S. is welcome to participate in OBOR.

What foreign policy objectives might Chinese President Xi Jinping achieve through OBOR?

OBOR is a means to multiple ends. Economically, Beijing views it as a way to find new sources of growth abroad as China’s economy slows, especially for construction companies and excess capacity industries who need new customers. OBOR is also a vehicle to promote the international expansion of China’s nuclear power and high-speed rail technologies, part of a broader effort to upgrade China’s exports from low- to high-value capital goods. Additionally, Beijing expects OBOR will assist the internationalization of the RMB as Chinese exports promote trade settlement in RMB and Chinese entities increasingly invest and lend in RMB. Strategically, Beijing intends for OBOR to expand China’s political influence in a more economically integrated Eurasia and to help stabilize unstable neighbors like Pakistan.

Which financial players are OBOR’s key stakeholders?

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Chinese financial institutions will play a larger role in financing OBOR than the Asian Infrastructure Investment Bank (AIIB). China Development Bank (CDB) and the Export-Import Bank of China (China Eximbank), which have missions to advance China’s national interests, will be major supporters. Both have established track records in financing overseas projects and tying loans to buying and hiring from China. The Silk Road Fund (SRF), created last year to bankroll OBOR, will continue to invest in central state-owned enterprises and function as a magnet to attract other financiers to specific projects. CIC Capital, a subsidiary of China’s sovereign wealth fund, was established this year to support Chinese firms investing in infrastructure and agricultural projects abroad. CIC Capital will also finance OBOR projects, as will the Bank of China (BOC) and other commercial banks.

Beijing will consider AIIB projects to be part of OBOR. However, even though the AIIB will complement OBOR by virtue of the fact that its mandate is to finance infrastructure in Asia, the bank’s lending will not be dictated by Beijing’s foreign policy priorities. China has other financial institutions it can use to advance parochial interests. Moreover, the AIIB is a multilateral bank; the 57 countries that joined as founding members would constrain any attempts by Beijing to use AIIB to advance Chinese diplomatic objectives.

How much money are these financial institutions likely to spend on OBOR projects?

China will put a substantial amount of money into OBOR over the next few decades, but the actual amount will likely fall short of their aspirations because of the difficulties involved in translating Xi’s signature initiative into reality. Chinese financiers have earmarked large amounts of money for OBOR. BOC and CITIC have committed $100 billion and $113 billion, respectively, while the SRF intends to increase its authorized capital from $10 to $40 billion. CIC Capital will spend a portion of the $100 billion it plans to raise for global investments in OBOR countries. CDB will finance some of the 900 OBOR projects with an estimated value of $890 billion in its project database, although CDB had not published a funding target. Other financial institutions that will be major bankrollers of OBOR, like China Eximbank, also have not publicized targets.

The numbers released by Chinese financiers are intended to show support for OBOR and do not include explanations of how and when these aspirations will be converted into firm commitments. They will probably struggle to deliver on their pledges due to a shortage of bankable projects and the some countries’ lack of capacity to assume additional debt.

What is your outlook for OBOR’s long-term trajectory, and what are the implications for the next U.S. administration? 

OBOR should help develop some of the economically least integrated parts of the world, Central and South Asia. Spurring the growth of these regions through greater connectivity, including the construction of infrastructure, is the objective of the New Silk Road initiative proposed by Secretary of State Hilary Clinton in 2011. China is well-positioned to play a leading role in deepening Eurasian economic integration. It has already established itself as a force for integration through the development of oil and natural gas pipelines from Central Asia, Myanmar and Russia to China. Moreover, new financial institutions from the AIIB to the SRF will benefit OBOR countries by providing them with more opportunities to shop for the best value for money. That said, the political incentive to show support for OBOR may prompt some Chinese firms to do inadequate due diligence, resulting in projects that are not completed on time and on budget (or at all), loans that exacerbate the debt of borrowers and less enthusiasm in some countries for Chinese investors and lenders.

Mercy A. Kuo is an advisory board member of CHINADebate and was previously director of the Southeast Asia Studies and Strategic Asia Programs at the National Bureau of Asian Research. Angie O. Tang is Senior Advisor of Asia Value Advisors, a leading venture philanthropy advisory firm based in Hong Kong.