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Quantifying One Belt One Road may be a fool's game

05 April 2017 IHS Markit Maritime & Trade Expert

This story originally published on

China's One Belt One Road (OBOR) programme continues to generate high levels of interest in the global shipping community. Its unprecedented scale and heavy focus on trade and transportation infrastructure make it a front-runner among policies that will affect the industry the most over the decades to come.

The potential impact of OBOR is closely related to its scale and getting an accurate picture of the real size of the programme in terms of projected investment levels and the eventual reach of its development projects is a focal point of watchers of the key global trends that are shaping the future of shipping.

For many, beyond the headline numbers of multibillion dollar investments, OBOR is an opaque concept, and industry actors from port operators to tanker owners are in the dark over how and to what extent the programme will affect their businesses, and how to develop and implement strategies to benefit from it.

For those watching closely how the programme evolves, the fact that direct investment by Chinese enterprises in OBOR countries actually shrank in 2016 came as something of a surprise. Despite its high profile as a cornerstone of Beijing's economic policy, official figures from the central government show direct investment by Chinese enterprises in OBOR countries reached just USD14.5 billion in 2016, down from around USD14.8 billion in 2015.

This is well below 10% of China's total overseas direct investment (ODI) last year and a good place to begin busting a few myths in terms of how OBOR investment and project implementation really works and why it is such a challenge for anybody to forecast its potential scale with a useful degree of accuracy.

"There is this sense with regard to One Belt One Road that Beijing is implementing some sort of grand plan but it really doesn't work like that," says Tom Miller, a senior China watcher with global economic research company Gavekal and author of the newly published 'China's Asian Dream'.

Miller spent the past three years studying and picking apart the overseas expansion of Chinese companies and the policies behind it, including visits to many OBOR countries and project sites.

"There are often question marks when it comes to official figures out of China but the figure for ODI in the Belt and Road countries for 2016 is relatively low and it does not look exaggerated to me."

The figure is low because it is deals outside of ODI that make up what is by far the biggest segment of projects categorised under the OBOR programme.

In addition to the USD14.5 billion in ODI, Chinese companies last year signed contracts with entities in OBOR countries valued at USD126 billion, an amount more than 50% higher than its equivalent in 2015.

A large portion of this amount involves Chinese construction companies signing contracts to build infrastructure such as the large port projects, industrial zones, and linking trade and transport systems that are behind those multibillion dollar headlines.

These contracts are typically financed by loans from Chinese banks and directly achieve one of the main policy goals of OBOR: to provide markets abroad for capital goods and new business for Chinese construction companies.

"The largest part of OBOR activity by a long way involves individual commercial companies going overseas and sourcing deals," says Miller. "There is certainly good diplomatic backing and support for those deals, but they are essentially commercial projects arranged by individual Chinese companies rather than state projects."

As commercial projects, they are subject to all of the normal challenges you would expect from commercial deals in what are often very poor countries. This means, for instance, they may or may not come to fruition, and many of them will change substantially in terms of both scope and value before they are completed.

According to Miller, this makes it very challenging if not impossible to come up with accurate projections for investment values for even single OBOR projects let alone the entire programme.

"Making projections about the potential size of OBOR investments is not too far from meaningless," he says.

An important example is Gwadar port in Pakistan and the related China-Pakistan Economic Corridor (CPEC), probably the highest profile ongoing OBOR project. In addition to extensive port infrastructure, the CPEC includes a 3,000 km network of highways and railways from western China running the full length of Pakistan as far as the sea and a series of energy projects including solar, wind, and coal-fired power stations.

Gwadar is located in Baluchistan, which is home to an ethnic nationalist insurgency as well as operations by sectarian militants with links to Islamic State. The day before a ceremony in November to mark the opening of the newly refurbished Gwadar port, a bomb in another part of the province killed over 50 people in an attack claimed by Islamic State.

Pakistan has deployed a dedicated security force thought to be over 10,000-strong to protect the CPEC projects and the port, including troops to guard workers and Chinese employees, and to escort trucks carrying import and export goods through the volatile province.

"These issues can end up resulting in project price tags rising exponentially, or ultimately result in big changes in the nature of projects," says Miller.

The significant downsizing of planned port and transportation projects in Myanmar is another high profile example of the fluidity of developments under the OBOR programme.

A planned deep-water port at Maday Island and oil and gas pipelines linking the port at the town of Kyaukphyu in western Myanmar with China's Yunnan province was eventually successfully completed. However, a more ambitious plan for a USD20 billion railway and highway system to support the import and export of commodities besides oil and gas and other goods is on hold and is quite likely to be scrapped completely.

"This was a deal that was actually done at elite level when the military junta was in power in Myanmar," says Miller. "As soon as the junta began to allow the country to open up, there was a popular backlash against the Chinese developments that disrupted plans massively."

Miller points out that while certain projects run into big challenges such as these, making it difficult to quantify outcomes with any real accuracy, many projects proceed relatively smoothly and bring the expected benefits to local economies and industry as well as commercial success to the individual Chinese companies involved and support the government's goals for the overall policy.

The China Merchants-invested Colombo International Container Terminal, where annual container volumes handled passed the two million teu mark in 2016, is a modern and efficient facility that successfully filled an infrastructure gap to support the trade growth of both Sri Lanka and India.

"Unless we have a black swan-type event, Chinese companies will continues to invest in infrastructure overseas such as ports, and will do so with the blessing of the government. Not only do you have investment from Chinese companies, the programme is also incentivising investment in infrastructure from other countries such as Japan," says Miller.

"Ultimately this is good for infrastructure in Asia as well as the other emerging markets where investments are taking place."



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