Depec-Bradesco Economic Highlights

Transcription

1 Depec-Bradesco Economic Highlights Year XIV Number June, One Belt One Road: a geopolitical and economic initiative by China Fabiana D Atri Macroeconomic Research Department The sweeping and ambitious plan known as One Belt One Road (OBOR) 1 should be understood as both a geopolitical and economic strategy. China s rise on the global stage has received a great deal of attention. Particularly under Xi Jinping s administration, China has played an increasing role in shaping the world s political and economic agenda, going well beyond the long-established limits of trade. By contrasting with the recent protectionist tendency of the United States, taking part in various multilateral organizations and acquiring several global companies, the country has been consolidating its role. With a far more active and assertive foreign policy agenda, China has been promoting alternatives to existing mechanisms, including the creation of new development banks. It is in this context that we must understand the One Belt One Road program, an idea that was officially launched by the Chinese president in 2015, and which has recently become clearer. This initiative must be put into context in view of the structural deceleration that the Chinese economy is currently going through, as the country faces daunting challenges to reduce the imbalances that emerged in the aftermath of the 2008 crisis, especially the increasingly high leverage and excess capacity in many industries, many of which are connected to the infrastructure. In this sense, the idea of building trade routes and investing in infrastructure projects around the world is as much an economic project as part of a geopolitical strategy. The idea of One Belt One Road which boils down to reviving trade routes and promoting infrastructure development along these routes was launched in September and officially announced by President Xi Jinping in Belt refers to the ancient overland Silk Route, which connects China to Central Asia and to Europe. The project features six main corridors: The new Eurasia bridge (connecting Western China and Western Russia), China-Mongolia-Russia (from Northeastern China to Southeastern Russia), China-Central Asia-Western Asia(between Western China and Turkey), China-Indochina Peninsula (between Southwestern China and Singapore), Bangladesh-China-India-Myanmar (connecting Southeastern China and India), China-Pakistan (between Western/Southern China and Pakistan). And Road stands for the sea routes, also known as the new Silk Road, running from China through Southeast Asia to the Indian Ocean, and ultimately to the Mediterranean. More details on 3 other routes were recently made available 4 : China-Indian Ocean-Africa-Mediterranean, China-Oceania- South Pacific and China-Europe-Arctic Ocean. Based on multiple objectives, such as strengthening economic diplomacy, opening up and promoting trade and the internal development strategy, there are 68 countries (not limited to the geographic limits of these routes) involved in 270 concrete projects so far, for total investments of approximately USD 900 billion. 1 In Chinese, yi dai yi lu. 2 In a speech by Xi Jinping at a university in Kazakhstan, mentioning the creation of a Silk Road Economic Belt. See: gov.cn/mfa_eng/topics_665678/xjpfwzysiesgjtfhshzzfh_665686/t shtml, retrieved on June 19, Official data provided by the Chinese government can be found at the following addresses: and retrieved on June 19, For more details, please go to: retrieved on June 21,

2 Country Project Description Value Thailand Railroad (to be built by CRCC) USD 23 billion Pakistan Nuclear power plant (to be built by CNNC) USD 9.6 billion Guinea Aluminum extraction (by China Power Investments) USD 6 billion Uzbekistan and Kyrgyzstan Railroad (to be built by CRBC) USD 200 billion Iran Railroad (to be built by NORINCO) USD 7.8 billion Russia Gas pipeline (to be built by CNPC) USD 55 billion Pakistan Corridor (with highways, power plants, factories and railroads) USD 62 billion Laos Railroad (to be built by China Railway) USD 7.2 billion Russia Port in Zarubino (to be built by China Railway) USD 3 billion Sri Lanka Port in Hambantota (to be built by CCCC) USD 800 million Examples of ongoing projects within the scope of One Belt One Road Source: PWC, Dragonomics, press, Bradesco China has been developing a new financing structure for the project, with three separate sources of funding: the Silk Road Fund, the New Development Bank and the Asian Bank for Infrastructure Investment, with over USD 250 billion in available capital. According to statistics from China s Ministry of Foreign Trade, more than 13,000 investment contracts related to OBOR have been signed since 2015, totaling USD 241 billion. In addition, XI Jinping recently said that, between 2014 and 2016, more than USD 50 billion have already been invested in the countries involved in the initiative. This past May, the Chinese government held a two-day forum aimed at promoting and addressing questions about the plan, when several project agreements were signed. Despite the difficulties in compiling all ongoing and upcoming projects up to that point, as well as calculating the total amount of investments already made and which may yet be announced, the forum served to solidify Xi Jinping s new diplomatic initiatives, and attracted the interest of several countries. From a geopolitical perspective, the progress made in the past few years is clearly evident, especially when considering diplomatic initiatives with neighboring countries and ongoing projects. First, China has sought to meet its strategic supply needs and to gain access to the sea on its Western side. In fact, the relative void left by Russia in Central Asia (Kazakhstan, Turkmenistan, Tajikistan and Kyrgyzstan) has made room for a number of investments in the region, especially in the oil and gas sector. Chinese companies have been acquiring other businesses from these countries, and a broad network of gas and oil pipelines sending these products to China is already up and running. Meanwhile, Chinese banks have been ensuring the credit supply for these markets, while the local infrastructure has seen some improvement, especially in the transportation and electricity sectors. In addition, the country s relations with Pakistan have been reinforced by projects such as the corridor connecting Kashgar, in China, to the Pakistani port of Gwadar (operated by China s Overseas Port Holding Company). With this ongoing, USD 20 billion project, China will gain access the Arabian Sea, expanding its economic and political opportunities across the region. In East Asia, several high-speed train projects have been designed to connect China to Laos and Thailand. In addition to the more notable progress of infrastructure projects, it is important not to overlook the creation of new financing mechanisms, which offer alternatives to existing sources of funding such as the World Bank and the International Monetary Fund. Although they are both in their embryonic stage, we believe that the Asian Infrastructure Investment Bank and the New Development Bank (originally conceived as the BRICS Development Bank) will play a key role and offer additional support to infrastructure projects, not only in Asia but in other regions as well. Finally, the growing number of business acquisitions around the world and the greenfield investments that Chinese companies have made over the last three years reinforce a new and sweeping geopolitical stance, which is no longer restricted to land and sea routes. In fact, the chart below tracks investments made by China under the initiative, and which are not accelerating. In other words, the OBOR initiative is just another sign of the shift in China s globalization efforts. 2

3 Chinese investments abroad - total Chinese investments - OBOR Chart 1 Chinese foreign investments (non-financial) USD billion Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Source: CEIC, Bradesco From an economic perspective, the OBOR program has very clear implications. By establishing new trade routes and by solidifying existing ones, opportunities emerge for new bilateral trade agreements, allowing China to capitalize on the void left by the United States when it opted out of the TPP, and to take advantage of an integrated value chain already in place in Asia. Chinese investments have been complementing this trade strategy and moved in the same direction, as seen by the fact that Chinese investments abroad have exceeded foreign investments in the country for two years running. It should be noted, however, that less than 10% of recent Chinese investments were directed towards OBOR countries, since the United States, Europe and Hong Kong 5 were the top destinations for Chinese capital. In addition, investments in the infrastructure of several countries ended up easing the excess installed capacity, by exporting capital goods and infrastructure technology developed by China in recent years, especially in railways. Opening up these routes to the Western region allows for significant development in the country s interior, as resources and projects are allocated to economically disadvantaged provinces, thus reducing regional imbalances. So far, more than 10 provinces have announced projects associated with OBOR, led by Xinjiang and Fujian, seeking greater alignment with Beijing s strategy. Finally, as noted by several analysts, these developments will eventually favor the international expansion of the Chinese currency in the medium term. 60% 50% 40% 30% 20% 10% 0% -10% -20% Apr-08 Jul-08 53,0% Oct-08 Jan-09 Apr-09 Jul-09-11,1% Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 31,1% -4,1% According to estimates by the Asian Development Bank, investments related to OBOR can reach USD 8.8 trillion by 2030, which breaks down to USD 584 billion in annual investments over the next Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 9,7% Apr-14 Jul-14 Chart 2 China: machine and equipment exports 12-month change Source: CEIC, Bradesco 15 years. This ambitious project, which has already produced some visible progress, will lead to benefits over the medium term. The externalities are positive: (1) for China, starting with the strengthening of trade and 5 Nearly 70% of Chinese investments abroad are directed first to Hong Kong. However, it is widely known that, from there, this capital makes its way to other parts of the world. Oct-14 Jan-15 Apr-15 Jul-15 Oct-15-5,2% Jan-16 Apr-16 Jul-16-2,2% Oct-16 Jan-17 Apr-17 0,6% 3

4 non-trade relations, the development of new sources of demand for the country s capital goods industry and the export of infrastructure-related services, as well as an increased supply of strategic raw materials and (2) for participating countries, as several of them will have access to infrastructure investments combined with available funding and technology. In other words, Chinese interests could benefit the recipients of these investments. However, even though the project will lift China to a new global status, we believe that it should not be seen as a solution to the current economic slowdown, when it comes to boosting the exports market and reducing idle capacity. Considering the level of expectations when the projects were launched, the balance so far is not very positive. Several projects have yet to be launched, due to political risks on both sides. There is also internal resistance in several OBOR countries, especially due to political currents and to operational issues, such as the migration of Chinese workers to build the projects. Recently, even Australia announced the official rejection of Chinese contributions linked to OBOR. A definitive and comprehensive assessment of this initiative seems premature at this point. Nonetheless, there is still a lot of discussion about the returns provided by the projects, since the economic logic might be secondary to political motivations. We must keep in mind the possibility that these projects do not become a reality, given the significant political and economic challenges, which, combined with the conflicts and tensions in different regions, could make the Chinese strategy unfeasible. Likewise, we should monitor some of the governance issues related to the projects and to the development banks. On the other hand, we may think that the most likely outcome will be similar to what we have seen so far: with bilateral initiatives, or projects with a clearer focus on a specific agenda (e.g., trade or investment), depending on the interests of China and other stakeholders, based on the perspective of the State and of the companies that could benefit. Nonetheless, we must recognize that China has been playing an important role in the new balance of global power and, slowly and steadily, trying to leverage its own political status. We may also be looking at a new realignment of world trade, with new sources of nonprivate financing, but under the management of several countries. For Brazil, even though it is not part of the OBOR due to its geographic position, the prospects for expanding the relationship with China remain very favorable, and we cannot miss this opportunity among others of working towards greater economic openness. We can also draw parallels to China s strategy, since the most recent Chinese investments in Brazil have been largely focused on infrastructure especially the electricity segment and on food supply. 4

5 Team Fernando Honorato Barbosa Economists: Internships: Ana Maria Bonomi Barufi / Andréa Bastos Damico / Constantin Jancso / Daniela Cunha de Lima / Ellen Regina Steter / Estevão Augusto Oller Scripilliti / Fabiana D Atri / Igor Velecico / Leandro Câmara Negrão / Marcio Aldred Gregory / Myriã Tatiany Neves Bast / Priscila Pacheco Trigo / Regina Helena Couto Silva / Thomas Henrique Schreurs Pires Alexandre Stiubiener Himmestein / Christian Frederico M. Moraes / Felipe Alves Fêo Emery de Carvalho / Felipe Yamamoto Ricardo da Silva / Gabriela Soares de Faria / Mariana Silva de Freitas / Rafael Martins Murrer - BRADESCO does not accept responsibility for any actions/decisions that may be taken based on the information provided in its publications and projections. All the data and opinions contained in these information bulletins is carefully checked and drawn up by fully qualified professionals, but it should not be used, under any hypothesis, as the basis, support, guidance or norm for any document, valuations, judgments or decision taking, whether of a formal or informal nature. Therefore, we emphasize that all the consequences and responsibility for using any data or analysis contained in this publication is assumed exclusively by the user, exempting BRADESCO from all responsibility for any actions resulting from the usage of this material. We all point out that access to this information implies acceptance in full of this term of responsibility and usage. The reproduction of the content in this report (partially or in full) is strictly forbidden except if authorized by BRADESCO or if the sources (the name of the authors, publication and BRADESCO) are strictly mentioned. 5