China: the objectives of the plan One Belt, One Road

China: the objectives of the plan One Belt, One Road

CINA.IC&Partners

From our office IC&Partners Asia

 

In autumn 2013, during his visits to Kazakhstan and Indonesia, Chinese President Xi Jinping announced the big infrastructure plan called One Belt, One Road: with this plan, China intends to improve the connectivity and cooperation between countries of  Eurasian area in order to promote the trade exchanges in this vast region and to make more stable the political and diplomatic relations between these countries.

 

This infrastructure plan includes to two main components that connect China to the Old Continent: the first component (One Belt) is the land-based “Silk Road Economic Belt” that from China reaches Europe after passing through Central Asia, Middle East and Russia; the second component (One Road) is the oceangoing “Maritime Silk Road” that arrives in the heart of the Mediterranean after skirting Southeast Asia, East Africa and the Middle East.

 

The area covered by One Belt, One Road can count on 55% of global GDP, it is inhabited by 70% of the global population and holds 75% of the world’s energy resources; this great plan, which involves 65 nations, has for China several targets, but most important aim is to strengthen its role in the Eurasian area through the construction of modern logistics and energetic infrastructures.

 

The schedule of foreign investments involved in the plan One Belt, One Road not only has the objective of promoting a better economic integration between the numerous countries involved, but it is also part of a wider strategy by which the Chinese government wants to promotes the internationalization of its companies (so-called “Go global strategy”) to bring them to levels of greater competitiveness in the global economy.

 

For several years, the Chinese government encourages this process especially by offering to Chinese companies various forms of support to help them to settle abroad, to export and to mitigate their commercial risks. In addition, the Beijing government has funded many infrastructure projects in the developing countries asking in return preferential clauses for the Chinese companies (mostly public companies) for the entry to their markets and for buying local resources (China adopted this policy mainly in Africa, South America and in the neighboring Asian countries).

 

With the significant investments under the plan One Belt, One Road, China also intends to compensate for the over-capacity that characterizes many sectors of its industry (steel, aluminum, cement, machinery, turbines, heavy goods vehicles, basic chemicals) by transferring part of the production over-capacity to countries that are along the new Silk Road.

 

Most of these investments for infrastructures are managed by large state-owned enterprises and are financed by Chinese public banks at very favorable rates (a further financial support is represented by the development aid in the form of loans from the Ministry of Commerce, the China Development Bank and the Export-Import Bank of China): an emblematic case is represented by the six plants that Anhui Conch, the biggest manufacturer of Chinese cement, is building in Indonesia, Vietnam and Laos through a credit line of 50 billion USD provided by Bank of China.

 

However, some opinion leaders consider this dominant presence of the Chinese public companies in the implementation of infrastructure projects abroad a weakness because in the past the poor efficiency that characterizes the Chinese State-Owned Enterprises has led these investments to have a low return. For this reason, the Chinese government has launched in autumn 2015 an action plan in order to improve the management of State-Owned Enterprises and to increase their efficiency, also by a joint participation of public and private capital in their ownership.