Four years in, OBOR feels like an anti-climax
As world leaders descend on Beijing for this weekend’s New Silk Road summit, there’s a general feeling that the reality of the One Belt One Road (OBOR) initiative has yet to match the fanfare with which it was announced.
Vladimir Putin and Recep Tayyip Erdogan, the leaders of Russia and Turkey respectively, will be in attendance. The UK will be represented by Chancellor Philip Hammond, while the US has agreed to send a delegation, led by special assistant to the president and senior director for East Asia of the National Security Council, Matt Pottinger.
The Chinese capital is on lockdown, with factories shuttered in order to lower pollution. Subway stations around the government buildings have been closed, restrictions apply on traffic – of both the two and four-wheeled variety.
President Xi Jinping is going all out to promote the initiative, but – four years after it was unveiled to great pomp – many involved in international trade are still unconvinced.
“Maybe they thought OBOR would be easy, but it hasn’t been. When Xi launched it, there were so many conferences around it, people were getting so annoyed. It was not OBOR, it was conferences and think tanks about OBOR. So he said: ‘Stop this travelling and making an excuse to travel all over the world under the pretext of OBOR,’” Joerg Wuttke, the outgoing president of the EU Chamber of Commerce in Beijing, tells GTR.
“The next I heard was that he was not impressed that people were using the OBOR label just to get the money out of China. In areas that are taking advantage of his liking of soccer, the frenzy of buying soccer clubs was unbelievable. Xi is annoyed about how this scheme, which originally is a good scheme about connecting, has been hijacked to be getting money out of China and travelling.”
OBOR was created as a giant infrastructure drive that would renew the ancient Silk Road trading route, stretching from East Asia to Western Europe, touching on the shores of Africa and stimulating trade growth everywhere in between. It was an exercise designed to push out Chinese companies, which had erstwhile proven to be notorious home birds, and for the policy banks to flex their financial muscle on the international stage.
Infrastructure has and is being built, particularly in the Central Asian region, as well as South Asian nations such as Myanmar and Sri Lanka. But, as Wuttke suggests, the brand has been hijacked as a means to invest in non-trade related assets: football teams and real estate in Europe. M&A activity has soared, with Chinese companies taking up shares in companies around the world, often using concessional capital provided under the auspices of OBOR.
What was envisioned as a utopian, multi-tentacled treasure trove for trade has become something altogether more nebulous, resulting in Chinese firms taking huge stakes in western pharmaceutical companies and the former Arsenal flop Gervinho raking in an estimated €10mn a year playing for Hebei China Fortune FC.
“SOEs [state-owned enterprises] have been given a nudge by central government to invest in western markets and left it up to them to decide where the money should go. If you are an energy company you look for gas, solar or wind. If you’re a development company, maybe schools and hospitals.
“The projects that the Chinese are known for, building dams or airports, highways in Africa, hydropower in Iran, they’re still doing those, but with OBOR the spread of investment is wider. That’s driven by the need of each particular Chinese entity and their expertise,” Richard Bell, a Shanghai-based partner at law firm Clyde & Co, tells GTR in a telephone interview.
Bell has met with a number of Chinese companies looking to invest overseas, often taking equity stakes in projects and businesses. Perhaps this is one significant change inspired by OBOR. Previously, Chinese companies built infrastructure in Africa or Latin America and then left it in local hands.
Now, however, they want some of the future cash flow. Case in point is the Hinckley nuclear power project in the UK, in which China General Nuclear holds a 33% stake. The company will take a cut of the future sale of electricity to the UK consumer.
“The Chinese are no longer content to build a plant and then leave, they want to be a stakeholder in the project and get yield from it,” Bell says.
Last year, Chinese companies announced a record US$246bn in outbound takeovers, but with capital controls now in place, the activity has dried up, plunging by 67% in Q1 of this year. Maybe Xi will use this weekend’s summit to announce an end to the bonkers buying bonanza and a return to what was at the root of OBOR at its launch four years ago: trade.
Where is the trade?
In 2013, OBOR was predicted to boost the flow of trade in participant countries from US$1tn a year to around US$2.5tn. The first train carrying goods from Yiwu in China to the UK arrived in London in January, with the return train arriving in Yiwu in April. However, the return train carried not nearly as many goods for export as the one from China.
As GTR reported earlier this year, “in the five years up to the end of June 2016, 1,881 trains ran the China-Europe routes. Of these, only 502 were doing the leg back to China with European goods”.
This, says Wuttke, is not the way things were supposed to be. The initiative promised trade reciprocation: Europe, he hoped, would benefit as much as China. He hopes that this weekend’s summit will be used as an opportunity to highlight the importance of this multilateralism.
“I hope there’s no protocol, no pomp, no big words, but making it clear what this is: long-term strategy, engagement, making it available to other countries. But also I hope this will be emphasised, it’s not just a one-way street, it’s an opening up of China at the same time to let other countries trade with China,” he says.
That’s not to say international companies have not had a slice of the pie. In the construction industry, opportunities have been plentiful.
Ajay Sharma, Asia Pacific head of global trade and receivables finance at HSBC, tells GTR: “European engineering, construction, maintenance, logistics, architecture and business services firms – still battling economic headwinds at home – could and should be firmly in the mix to pick up the opportunities of the anticipated Asian infrastructure boom. German companies, well-known for their tunnel drilling machinery, components and maintenance already supply projects in Singapore. Elsewhere, Dutch companies are dredging for land reclamation activity linked to port projects.”
Perhaps the most important question in all this is: where is the money coming from? China has set aside an official kitty of US$40bn for OBOR activity, but has already pledged that much again in bilateral state lending to Pakistan alone.
The Asian Infrastructure Investment Bank (AIIB), which is also financing some projects, has been armed with US$100bn, the majority of it Chinese, although it is a multilateral bank with shareholders from dozens of countries. People are frustrated, but if China is fronting up the cash, surely, China should be left to decide how it rolls out its premier foreign policy initiative?
As it is, there’s weariness in the trade business when talking about OBOR. At a meeting in Hong Kong yesterday, one very senior US trade finance banker scoffed: “Belt and Road? What’s that? We’ve seen nothing on that front – maybe you can explain what it is, and explain blockchain while you’re at it!”
But for others, there’s a long game to be played. New infrastructure will provide a system of connectivity that has never existed in this era. The projects should be viewed not as one-off, but as part of a large network that will, eventually, galvanise trade for all connected to it.
“The connected nature and the underlying intent of OBOR means that they must be part of a broader, self-sustaining commercial ecosystem. Getting those economic ecosystems to function at their full potential will need companies able to reach across national borders and with the vision to see the value of building connections between regions to stimulate business activity that does not yet exist,” Sharma says.
Some say OBOR is a soft power tool designed to return China to the glories of the Tang dynasty, when for 300 years from 600AD, China was the world’s most advanced and dominant civilisation.
At a time when its major rival in the west is retrenching under a president stumbling from one crisis to the next, it’s a logical time to make such a play. But clarity is needed over what the OBOR initiative really stands for and what we can expect to see from it in the coming years.take me back