China’s New Silk Road: One Belt, One Road — More Than Just A Geopolitical Game

By Danyi Yang & Mark McNamee

Ever since Chinese President Xi Jinping proposed to build a cross-regional economic plan in 2013 to strengthen trade and investment partnerships across Asian, European and African markets, China’s “One Belt, One Road” initiative has been attracting worldwide attention with its massive scale and immense potential economic impact.

China’s Master Plan for Global Integration

The Belt and Road blueprint consists of two main routes. The Silk Road Economic Belt focuses on enhancing economic engagement with Central Asia via land transportation and expanding the influence onward to Europe; while the 21st-Century Maritime Silk Road is aimed at bringing together China’s coastal hubs and Europe, which starts from the South China Sea and will help develop China’s economic ties along the sea route with multiple key players in the Southeast Asian, South Asian and African regions.

Covering regions with around 60 percent of the global population and 30 percent of the world’s GDP, the China-initiated project is poised to become the world’s largest economic development plan. It has recently been placed under global spotlight again, as China’s top officials made visits to global partners and settled long-term bilateral deals with substantial economic weight, including major infrastructure and financial contracts finalized with Russia, Pakistan and India.

Proposed Routes for China’s One Belt, One Road Initiative

Map courtesy of Wall Street Journal

Impact on Multinationals Operating in China

1. Solving Industrial Production Overcapacity: Besides facilitating regional commodity trade flows, one of its most critical and straightforward impacts domestically is to create an outlet for the country’s industrial production overcapacity. With a weakening manufacturing sector and dwindling demand at home, the world’s largest emerging market is aggressively seeking to develop new export markets for its construction materials and manpower.

2. Urbanization on Western and Central Clusters: The New Silk Road strategy, especially the land route, will be offering abundant opportunities for China’s western and inland areas to glean benefits. All provincial governments along the routes are proactively working on obtaining incremental financial support for local infrastructure projects, and setting up logistics centers and cultural expos in preparation for strengthened global economic interactions.

3. Internationalizing the Renminbi: As fifty founding members joined the Beijing-led Asian Infrastructure Investment Bank, the synergy between the financial institution – which aims to close Asia’s infrastructure gap – and China’s One Belt One Road plan is likely to further bolster the utilization of renminbi in cross-border trade transactions and loan settlements.

Impact on Multinationals Operating in Europe and Central Asia

Outside of China, the New Silk Road land route will have multiple economic repercussions in Central Asia and Eastern Europe. Most notably and immediately, China’s infrastructure development strategies in these areas will offer much-needed investment assistance and economic stimulus to economies struggling from depressed energy prices, the regional fallout from the Ukraine crisis, and weak global demand.

Central Asian nations, reeling from low oil prices and the collapse of the Russian ruble, and Eastern European countries, managing slowed growth on account of weak Eurozone demand, will benefit considerably from the inflow of billions towards the construction of previously-unaffordable railways, roads, and ports.

Likewise, western multi-national firms should be aware of the opportunities made possible by the New Silk Road program. In the short- to medium-term, one of the main beneficiaries will be construction and logistics firms seeking to invest in these new infrastructure projects. Over the longer-term, companies should recognize the potential for both an increase in the size of these countries’ addressable markets as well as the possible liberalization and diversification of these economies, which is a fundamental aspect of the New Silk Road development model. Should these factors in fact materialize in the coming years, the opportunity for exports, investments, and selling into these markets could rise substantially.

Courtesy of Frontier Strategy Group, © 2015