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China’s ‘New Silk Road’ to Spur Infrastructure Investments

China is on the move again. The country’s economy may have slowed, but that doesn’t mean Beijing is sitting still about it. Instead, China is pushing ahead with a project that President Xi Jinping first revealed while visiting Kazakhstan last year.

The “New Silk Road” is the target of a $40 billion fund aimed at financing the construction of infrastructure that will link China with three continents over land and sea, with railroads, pipelines and roadways reviving trade both overland and along shipping routes in an echo of the original Silk Road.

Xi made the announcement about the fund at a meeting with the heads of Bangladesh, Cambodia, Laos, Mongolia, Myanmar, Pakistan and Tajikistan, along with representatives of the United Nations Economic and Social Commission for Asia and the Pacific and the Shanghai Cooperation Organization.

The fund is to be overseen by Chinese policy banks, but is not the only part of the plan. In two separate initiatives, the “Silk Road Economic Belt” and the “21st Century Maritime Silk Road,” the money will provide investment and financing support to carry out infrastructure, resources, industrial cooperation, financial cooperation and other projects related to connectivity, according to the Chinese news agency Xinhua.

Building plans won’t be confined to the Chinese provinces close to other countries, either, but will also be encouraged in those countries by new policies designed to spur Chinese lenders to step outside both comfort zones and geographic boundaries to finance development. The government also plans to convince Chinese companies that investment in those other countries is good business.

Only a few days after the announcement about funding, the China Securities Journal, a media outlet for the Chinese government, built on the news with the revelation that China is establishing a new bank to fund New Silk Road developments.

The Marine Silk Road Bank is to have a minimum in paid-in capital of 5 billion yuan ($816.23 million), and will be funded by the Marine Silk Road Investment Management Fund and ASEAN member countries. China’s $40 million fund is just the first contribution, and according to a report from the Asian Development Bank, Asia as a whole is in need of infrastructure investments of up to $730 billion annually before 2020.

As an example of what kinds of development could be in store for the countries along the New Silk Road, Kazakhstan is already in the midst of construction on a dry port and rail yard at Khorgos, a city on the country’s eastern border with China. It aims to shave days off its already-shorter rail route to Europe from China at a cost of $44 billion over the next five years.

While China is also looking to ramp up its sea trade, in some cases overland routes are just more efficient; Kazakhstan is an example. Maritime shipments of manufactured goods from China to Europe can take up to two months to reach their markets by sea, but the train can cut that time to two weeks. The Kazakhstan project is designed to trim another four days from the factory-to-retail journey.

The Maritime Silk Road, meanwhile, will begin near Guangdong on the South China Sea and, moving through the Malacca Strait and Indian Ocean, find its way around Cape Horn, thence to the Red Sea and the Mediterranean. It will finish up in the centuries-old trade city of Venice, which in Marco Polo’s day served as the jumping-off point for trade with Asia.

Not only is the New Silk Road a major project, according to Edmund Harriss, a portfolio manager at Guinness Atkinson, it’s also a major diversification project. “China has for a while been seeking to diversify some of the foreign assets it has amassed ... A substantial part [of those assets], $4.3 billion in foreign reserves, are held in U.S. Treasuries. A little while ago they set up the China Investment Corp. to invest in overseas assets,” said Harriss, who manages several Asia-focused strategies.

China’s original focus was to secure access to natural resources such as ore, iron, copper, and zinc with big investments in South America and Africa, according to Harriss. “Its efforts to pursue that path in the U.S. wasn’t so successful. In fact, Chinese oil company Cnooc’s unsuccessful attempt to acquire Unocal Corp. in 2005 “was a major slap in the face to China.”

 “Looking at the various investments that they made, particularly through the China Investment Corp., they weren’t particularly successful and attracted quite a lot of criticism internally, so [they] had to have a bit of a rethink,” he said, adding the result of that rethink appears to be the Silk Road project.

What do they hope to achieve? Harriss said they have several basic objectives. First is diversification of their foreign assets. The Chinese “like to invest in currency projects that are long-term contracts in nature and provide long-term stable return. Couched in terms of the Silk Road, [that diversification] will relate to China trade. They have a purpose that is likely to translate into stable returns over time. They’re not going to be particularly high-return projects, but they will be stable—presumably in more stable parts of the world and where they have stable relationships with governments.”

China’s second objective is greater influence on international affairs through resources. Harriss said, “By investing in infrastructure projects that local governments cannot by themselves easily afford, they’re building up geopolitical influence with these countries.” While it’s been “standard practice in emerging market countries” for China to exert its influence through investment, Beijing hasn’t been so successful at that in Europe—so now, while European growth is faltering and it wants to stimulate growth, China is looking to leverage what investments it does have there.

Since European options are “really quite limited” for growth without taking on additional debt, “which is the last thing the EU government needs,” it’s looking to countries with a deep well of funding. Harriss said that China, Norway, which is looking to diversify out of oil-based assets, and the Middle East and its petro dollars are its options.

Another objective for Beijing is a more basic level of international engagement. While China’s presence in world trade is well known, Harriss said that it amounts to only about 15% or maybe a little more of world trade. “Its contribution to world GDP is substantial, as is its growth, but integration with the rest of the world financially is much, much below that.” Just a couple of China’s goals along these lines is the desire to make its currency convertible at some point and to expand the level of overseas investments.

The New Silk Road project is a high-profile, expensive undertaking, and although $40 billion sounds impressive, Harriss said that China has $4 trillion—and they’re planning to spend at least $50 billion on domestic road and rail projects on their own turf. But if, say, “a country like the U.K.—one of the G7—is willing to seek Chinese funding for infrastructure, that’s a big deal. China is willing to support, to invest; it’s looking for returns.”

“In the U.K. or Germany or France, and Italy too, if you make an investment on infrastructure terms on a 20-year project and return based on that project, you will expect those terms to be fulfilled, and they will be. China is going in in a hardheaded fashion, looking for projects that will generate return, and [that are] not as speculative as earlier forays overseas proved to be,” Harriss said.

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