Soft Power drives China’s new Silk Road

IN its broadest definition/vision, China’s Silk Road project could include 65 countries, involving 4.4 billion people and about 60 per cent of world GDP, says economist Stephen Jen. China has already signed Belt-and-Road MoUs with about 30 countries . . .

With geopolitical and economic deleveraging likely in the United States and Europe, China has an opportunity to increase its “soft power” in the world.
China’s One Belt and One Road (OBOR) initiative — sometimes shortened to Belt-and-Road —will provide scope for China to expand its economic and political influence beyond its borders. In particular, it will be a channel through which China could develop and project soft political power, ultimately shifting the world balance of power.  
A number of commentators, including London-based Stephen Jen, have likened the hugely ambitious Belt-and-Road programme to the post-World War 2 Marshall Plan, initiated by the US for Europe from 1948-52.
Jen writes in his latest client note that Belt-and-Road is a plan that will take three or four decades to fully develop, and that this is remarkable because China is the only country with any long-term development plan.
China’s policy long-termism is in contrast to the dominance of policy short-termism in much of the West, he says.
Belt-and-Road is an important consideration for investors in thinking through the confluence of both short-term and long-term geopolitical pressures in coming quarters and years.
Jen says that, in post-globalisation geopolitics — reference Brexit and the emergence of Donald Trump in the November US election — potential geopolitical and economic deleveraging by the US and Europe in coming years may be countered by the opposite — geopolitical and economic leveraging by China.
One of the channels through which the latter can happen is the New Silk Road project, also known as OBOR.
“This is a quintessential example of a geopolitical event that will likely be consequential for the global economy and the balance of political power in the long run,” Jen writes.
In its broadest definition/vision, the project could include 65 countries, involving 4.4 billion people and about 40 per cent of world GDP.
The economic objectives of the project are broad-based.  In addition to up-grading physical infrastructure in countries along the Belt-and-Road routes, China aims to enlarge its trade with these countries by removing investment and trade barriers.  
Further, China will seek to enhance the presence of its financial sector and financial arrangements in these countries.
The latest projected value of the project is around USD1.4 trillion, much of which will be financed by the Chinese Government or other State entities, although the private sector is
encouraged to co-finance and bid for projects.
Jen said the US spent US$13 billion on economic reconstruction of Western Europe, representing at the time almost 5% of US GDP.
In comparison, the likely total cost of the OBOR project could be 12 times bigger in absolute dollar terms, and will focus on infrastructure and manufacturing capacity-building activities.  It will cost an equivalent of nine per cent of China’s GDP.
Jen says most of the countries along the route are under-developed, with many desperately in need of upgraded roads, railroads, ports, power systems, sewage and other infrastructure. “If we were to do a simple exercise, assuming that OBOR will drive investments up by around a quarter of what was observed in China over the past two decades, OBOR would boost the pace of capital accumulation in the region by around 50 per cent a year.  The huge productivity windfall for these economies is obvious,” Jen writes.
But the development of OBOR will not be without risk.
Among the challenges China will face is the issue of governance and the possibility that some of the investment could be lost through corruption — or wasted due to bad management.  Another challenge,  Jen writes, is to
ensure that projects are motivated by profits rather than politics. To date, some US$250 billion worth of projects have either been built already, have recently started construction, or have been agreed on and signed.
Chinese enterprises have already invested in close to 50 countries along the New Silk Road, and Chinese banks have begun to establish branches in many of the countries along the route. Pakistan has been the first testing ground for OBOR, with more than USD45 billion already committed to energy projects and transport infrastructure.