The One Belt, One Road initiative

12 January 2017

The Silk Road Economic Belt and 21st Century Maritime Silk Road, known collectively as the One Belt, One Road (OBOR) initiative, form China’s USD 4 trillion strategy to boost economic cooperation and investment among 65 countries across 3 continents. OBOR will see China finance, construct and operate infrastructure and energy projects, with spending also directed toward improving domestic infrastructure and growth conditions, particularly in western China.

The vision was first mentioned in September 2013 when Chinese President Xi Jinping introduced the Silk Road Economic Belt, a land-based route which leads to Europe via Central Asia. Secondary routes include the China Pakistan Economic Corridor, the China-Indochina Peninsula Corridor and the China-Mongolia-Russia Corridor. President Xi Jinping highlighted five points for the establishment of the Silk Road Economic Belt as follows: 

  1. To strengthen communication among countries on economic development strategies and regional cooperation
  2. To improve road connectivity along the route
  3. To promote trade facilitation
  4. To enhance monetary circulation
  5. To strengthen people-to-people exchanges

In October 2013, President Xi Jinping then proposed the 21st Century Maritime Silk Road to strengthen maritime cooperation during an address to the Indonesian parliament. This is a sea-based route passing through Southeast Asia, Africa and the Middle East towards Europe. 

OBOR is not conceived as an aid programme, and the Chinese government hopes to reap political, economic and financial rewards from its investments. Aside from developing regional economic and energy links and gaining access to commodity resources the motivation behind OBOR is twofold. Firstly, by financing capital-intensive infrastructure projects abroad, the Chinese government is able to temporarily relieve domestic overcapacity in steel, cement, coal, solar panel and other sectors. Most lending under OBOR is conditional on the involvement of Chinese companies, whether in construction, operation of projects or supply of materials. As a result, the initiative acts as an indirect subsidy for companies, particularly state-owned enterprises (SOEs), suffering financially from industrial oversupply. At the same time, OBOR will be used as an opportunity to reform China’s SOEs. Some SOEs will be restructured under a mixed-ownership system, with the aim of making them more efficient and profitable enterprises.

Secondly, financing overseas projects is an attempt to loosen links to the US dollar, diversify foreign-exchange reserves and build the renminbi as a global currency. Currently, around 90% of Chinese foreign exchange is US and euro-denominated government securities, as the government has historically used reserves to purchase US Treasuries. However, China will continue to prioritise its trade and geopolitical relations with the US. Under OBOR, reserves are instead increasingly being used to finance international infrastructure projects. Moreover, greater lending of the renminbi through OBOR will expand usage of the currency and support the development of China’s offshore renminbi bond market.

China has taken several steps to back the OBOR initiative, including the establishment of the USD 40 billion Silk Road Fund in December 2014, which is backed by China Investment Corporation, China Development Bank and the Export-Import Bank of China. The commencement of the China-led Asian Infrastructure Investment Bank (AIIB) in January 2016 will also support projects by combining financial reserves with Chinese infrastructure expertise. Some of China’s wealthiest provinces will also finance OBOR projects. In April 2015, provincial authorities in Guandong announced their intention to contribute to 67 OBOR projects, totalling USD 55.4 billion. 

However, the opportunities that the OBOR initiative brings also result in an array of challenges. OBOR will pass through countries as diverse as Poland and Iraq, exposing participating companies to myriad political, credit and security risks. Numerous countries receiving Chinese financing already bear elevated debt levels and OBOR will weaken their sovereign credit position further, elevating non-payment risks. Moreover, China’s growing regional influence will elevate geopolitical risks, as it encroaches into India’s traditional sphere of influence. Companies moving into territories for the first time may be unfamiliar with these developments in the risk environment. Risks can be addressed by political risk insurance which covers the following perils: expropriation including confiscation and nationalisation, selective discrimination, forced divestiture, forced abandonment, license cancellation, political violence and currency inconvertibility/exchange transfer embargo, as well as political violence, terrorism and sabotage insurance and kidnap-for-ransom insurance.

The political environment in key countries along OBOR, namely Indonesia, Myanmar, India, Sri Lanka, Egypt, Saudi Arabia, Turkey and Azerbaijan is assessed in this report. Whilst just 8 of the 65 countries that fall under the OBOR banner, these countries reflect the diverse risks and opportunities present in the initiative.

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For further information, please contact Ruth Lux, Senior Consultant on +44 (0)20 7886 5409 or email ruth_lux@jltgroup.com