12 August 2015

China to widen its economic influence by “One Belt, One Road”

Peter Wong, Deputy Chairman and Chief Executive, The Hongkong and Shanghai Banking Corporation Limited
(This article was first published on 12 August 2015 by The Business Times)

In response to expected flat world trade growth abroad and moderate economic activity at home, China is packaging a series of initiatives to help bolster both. The plans will significantly expand Singapore’s importance to Southeast Asia’s financial, trade and logistics services.

China’s recently announced “One Belt, One Road” plan embraces twin goals to tackle these challenges.

‘One Belt’ refers to the economic belt along China’s traditional Silk Road connecting China with Europe. The ‘One Road’ is the new ‘Maritime Silk Road’ between China, Southeast Asia and Africa. The aim is for China to invest in the infrastructure and linkages associated with these ‘Roads’ to help bolster its overseas trade. This in turn will stimulate production and consumption demand at home.

In one policy, China hopes to address challenging internal and external economic headwinds and rebalance its economy.

By ‘rebalancing’, Beijing intends to promote the development of a consumption-led economy, to supplement its traditional success in exports. The policy will also have the planned benefit of spurring economic growth in its laggard western provinces to complement its economic dynamos in the east of the country.

If all goes to plan, China’s President, Xi Jinping, predicts that “One Belt, One Road” will lift China’s GDP this year by 0.25 per cent. In the next decade, he estimates it will comprise annual trade volume, between China and belt and road countries, surpassing USD 2.5 trillion. The policy is expected to benefit a massive 4.4 billion people in 65 countries.

Strengthening the infrastructure along the belt and the road is a key priority and Southeast Asian countries are a vital part of the initiative. China has been Asean’s biggest trading partner since 2009 whilst Asean has been China’s third largest trading partner since 2011. The improved transport infrastructure will encourage trade even further.

One example of the projects in store is that China has pledged to build a high-speed railway network that spans Southeast Asia. Travel time between Kunming and Singapore will take a mere ten hours. The construction of the section of the railway linking Kunming in Southwest China’s Yunnan province through neighbouring Laos’ capital Vientiane then into Thailand is slated for completion in 2019.

Singapore should make the most of its strength as a global centre of trade, finance and talent as well as its geographical proximity and strong ties to China and Southeast Asia. It has great potential to further develop itself as a hub for financial services development throughout Asia, particularly in Southeast Asia. 70 per cent of infrastructure and financial projects in the region are already being conducted by Singapore-based financial entities according to Professor Joseph Cherian from the National University of Singapore.

We expect the total investment in planned and ongoing projects could reach 1.5 trillion yuan in the coming years.

An example of how this policy is intended to work is in infrastructure development. China has far more steel than it needs. A shrinking construction market at home has meant a surplus is piling up. Meanwhile, Southeast Asia is rich in resources but lacking construction funding which is an impediment to its economic growth, causing an infrastructure deficit and low levels of industrial development.

China has the capital, expertise and excess capacity to bridge these gaps. By investing in Asia’s infrastructure needs, China is helping Asian economic development abroad and priming demand for its domestic heavy industry at home.

The policy will reinforce China’s centre stage position in Asian trade and transport. China’s vast transport and shipping sectors would be the biggest beneficiaries of this initiative. Agriculture, textiles, telecommunications, financial and high-tech sectors are also expected to see knock-on benefits.

Beijing has vowed to allocate an initial investment of USD 40 billion to set up a Silk Road fund for the construction of major infrastructure such as high-speed railways, bridges and ports in Southeast and Central Asia. This figure is above and beyond the USD 64 billion of new investments already announced for infrastructure projects.

To cope with the huge funding need, Beijing is launching a new supra-national financial body – the Asian Infrastructure Investment Bank (AIIB) to make “One Belt, One Road” happen. AIIB has garnered support from 57 countries as founding members. This will create a large fund that can be sought by countries to develop infrastructure throughout Asia. China is proposing to furnish USD 100 billion worth of authorised capital, to give the AIIB the financial firepower needed to turn the plan into reality.

Singapore, as one of the earliest supporters of AIIB, is pledging USD 250 million or 0.25 per cent of the AIIB’s total authorised capital of USD 100 billion – USD 50 million of which will be paid in over five years.

From Beijing’s perspective, developments under ‘One Belt, One Road’ and via the AIIB are part of a bigger picture to encourage further economic integration of participating countries and the formation of a new regional economic trading and investment bloc. Importantly, it will expand the global use of the Chinese currency, increasing the speed of renminbi’s internationalisation.

China will support foreign countries and companies with good credit ratings to issue renminbi denominated bonds in China. Chinese outward investors will also want to issue both foreign currency and renminbi denominated bonds abroad so they can match their different types of funding needs in countries along the belt and road.

Singapore has a role to play here. As one of the world’s leading financial centres, Singapore has strong, well regulated and transparent capital markets. It will be an important hub for raising and distributing equity and debt capital to facilitate investment in the Southeast Asia, India and elsewhere in the Asia Pacific region. And the renminbi is an integral part of it.

What’s more, Singapore is already a leading offshore renminbi centre. A total of 6.9 trillion yuan was cleared in Singapore as of the first quarter of 2014. More than 73 banks in Singapore have opened renminbi clearing accounts to service clients covering 33 countries and regions. Renminbi denominated deposits in Singapore totalled 257 billion yuan at the end of March, according to the Monetary Authority of Singapore.

The Bank of China has turned to the Singapore bond market to raise USD 3.55 billion funds via a multi-currency bond to support the “One Belt, One Road” initiative. The lender has issued the international bond in four currencies: US dollars, euros, renminbi and Singapore dollars.

Beijing’s “One Belt, One Road” is a small phrase with big ambitions. Seizing the opportunity will be a huge boost for Singapore. The path to success might be long and tough, but China has certainly made an impressive start.

China to widen its economic influence by “One Belt, One Road” (3-page PDF 32KB)