July 2, 2015 | www.bloombergbriefs.

com

One Belt, One Road

Assessing the
Economic Impact
of Chinas
New Silk Road
INSIDE
Chinas Modern Marco Polos Bring No Novelties Westward
Mapping Chinas One Belt, One Road Ambitions
Chinas Road to Africa Closes Infrastructure Gap, Adds Debt Risk
One Belt, One Road Wont Move Dial on 2015 Growth: Simpfendorfer
Chinese Steel Capacity May Go West
Asean and Central Asian Cement Markets Show Promise of Growth
Improved Infrastructure to Streamline Shipping for Exporters

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One Belt, One Road

Chinas Modern
Marco Polos Bring No
Novelties Westward
BY TOM ORLIK AND FIELDING CHEN, BLOOMBERG INTELLIGENCE ECONOMISTS Originally published on June 4.

It took Italian merchant Marco

Polo 24 years to get from 13th
century Italy to China and back.
The payback: he returned a
wealthy man. In Chinas 21st
century vision, the modern
version of this trade route is
about to get a little smoother. But
will returns on the new Silk Road
be so high?

S THE NAME suggests, Chinas One

Belt, One Road plan has two components. One Road is a maritime Silk
Road stretching from Fujian on Chinas coast,
through the Malacca Straits, around the horn
of Africa, and ending in Venice. One Belt is
an overland route stretching across central
Asia, through the Middle East before ending
in the heart of Europe.
Thats a lot of territory, not all of it particularly enticing. The hope for Chinas leaders
is that such an ambitious project will help
achieve multiple objectives. Pouring cement
for ports and roads and laying steel rails for
trains could use up excess industrial capacity. Regional infrastructure with China at the
center would facilitate trade and increase Beijings strategic heft.
Its the impact of infrastructure spending
on absorbing industrial overcapacity that
has sparked the most immediate interest.
Since November 2014, when the government
pledged $40 billion in support of the project,
shares in firms such as Sany Heavy Industry
and China Machinery Engineering outpaced
even the wild rally on the Shanghai bourse.
In the short term, that looks too optimistic. Excess capacity in Chinas steel, cement
and other major industries is vast. Even if the
amounts pledged so far were spent immedi-

Construction Shares Rise on Infrastructure Spending Hopes

250
225

200
175

China Machinery Engineering

Sany Heavy Industry
Shanghai Composite Index
China Railway Construction

150

125
100
75
50
Jun-14
Aug-14
Source: Bloomberg

Series rebased to 100 as of Nov. 3, 2014

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

ately and exclusively on made-in-China products, they wouldnt bring all the blast furnaces
and cement kilns back to life.
Looking longer term, the potential demand
is enormous. The Asian Development Bank
estimates infrastructure needs for the region
at $750 billion a year through 2020. Chinas
policy banks could put substantially more
funds to work than the $40 billion available
from the Silk Road Fund. Even so, difficult
negotiations with host countries on which
projects are priorities and whose national
firms win construction contracts mean Asias
infrastructure needs are unlikely to solve Chinas overcapacity problems.
Enhancing trade links has the potential to
make a lasting impact. The area covered by
the One Belt, One Road initiative includes
about 50 percent of the worlds GDP and
roughly the same share of global trade. Reduced transport costs should increase trade
flows, bringing the benefits of greater competition and efficiency that come with it.
The trouble is that while Marco Polo returned from China with his bag stuffed with
oriental novelties, Chinese goods are already
old news for customers on the new Silk Road.
China is the top trade partner for close to half
of the countries on the route. That doesnt
mean there isnt scope to do more. It does
mean the benefits from increased trade will
likely come as a slow burn, not a quick blast.
Finally, with all the roads in the region leading to the Middle Kingdom, and many of them
paid for with their checkbook, Chinas leaders
hope that they will gain enhanced strategic
influence. In that sense, One Belt, One Road
falls under the same heading as the Asian
Infrastructure Investment Bank and island
building in the South China Sea.
All represent Chinas attempt to expand its
influence over everything from shipping routes
for crucial oil imports to decision making in
the global financial system. How that plays out
remains to be seen. Strategic influence comes
with economic weight if One Belt, One Road
and the governments other efforts dont reverse the deceleration in Chinas growth, its
strategic ambitions could be tough to realize.

2015 Bloomberg LP. All rights reserved. These commentaries were originally published in the Bloomberg Brief: Economics Asia and on the Bloomberg Economics wire.
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Mapping
MappingChina's
Chinas
One
One
Road
Ambitions
OneBelt,
Belt,
One
Road
Ambitions
The One Belt, One Road initiative ends where Marco
Polo's original Silk Road journey began in Europe.
Sclerotic growth has made Europe receptive to
Chinese investment.

One Belt starts in Xian in central China. Opening

trade routes for China's inland provinces is intended
to accelerate catch-up to the more developed coast.

President Xi Jinping announced the One Belt initiative

in Kazakhstan. Beijing and Moscow vie for influence in
central Asia, a region rich in natural resources.
25.1

Asia's infrastructure needs estimated at

$750 billion a year through 2020 by the
Asian Development Bank could help
absorb China's industrial overcapacity.

2.4 2.2

14.5

East Europe

(excluding EU members)

European Union
1.3 0.4
7.4 5.4

Central Asia

One Belt, One Road is

China's answer to the U.S.
and Japan's efforts to
develop the Trans-Pacific
Partnership, a regional
free trade area.

West Asia &

North Africa
As China's overseas population and
assets increase, including in trouble spots
in Africa and the Middle East, Beijing's
principle of non-interference in other
countries will be tested.

12.8

South &
Southeast Asia

Africa requires $93 billion in infrastructure investment a

year according to the World Bank. China's tendency to
bring its own materials and workers to overseas projects
sometimes sparks tensions with host countries.
Beijing has promised to support companies
and governments along the route if they
wish to issue yuan bonds and use the
proceeds to contribute to the plans.
The Silk Road Fund ($40 billion), Asian
Infrastructure Investment Bank ($50 billion)
and China Development Bank have funds
to kick start spending on roads, rails and
ports along the route.

Strategic rivalry between Asia's emerging giants could

make it tough for China to realize gains from increased
trade and investment with India's 1.3 billion population.
The Strait of Malacca is a choke point for China's
energy imports. By opening new routes through
Pakistan, Myanmar, and Thailand, China hopes to
reduce vulnerabilities.

% Share in China Total Trade (2014)

Silk Road Economic Belt (Land Route)

% Share in World Total Trade (2014)

Maritime Silk Road (Maritime Route)

Source: Bloomberg

July 2, 2015 bloombergbriefs.com

7.6

Competing territorial claims in the South China

Sea have become a flash point for tensions in
the region. China's island building has raised
concerns about expansionist ambitions.

BloombergBriefs.com

Bloomberg Brief: Economics Asia

Chinas Road to Africa Closes

Infrastructure Gap, Adds Debt Risk
BY MARK BOHLUND AND TOM ORLIK, BLOOMBERG INTELLIGENCE ECONOMISTS Originally published on June 17.

Chinas One Belt, One Road initiative promises to expand an already active engagement with Africa.
Chinas deep pockets and dearth of natural resources and Africas mineral reserves and infrastructure
needs make a compelling combination. Yet the misuse of increased fiscal space by some African states
means Chinas investment adds to debt risks.
Its the ability of Chinese firms to bring
financing to the table thats often been the
deal-clincher. The bulk of investments are
spearheaded by state-owned enterprises,
with preferential financing supplied by the
China Development Bank and Export Import
Bank of China. The stock of Chinese investment in Africa has more than tripled to $26
billion in 2013 from $7 billion in 2008. Chinas
credit line to Africa is expected to expand
substantially from the current $20 billion.
For African nations, the headline benefits
are clear. The World Bank says Africa needs
$93 billion in infrastructure spending a year.
Chinese investment, coming at a time when
many western donors and businesses are
retreating, helps build the roads, rails and
ports needed to kick-start development. It also frees up domestic resources for spending
on other priorities like health and education.
Improved infrastructure has facilitated
a boom in trade, underpinned by Africas

Chinas Trade Balance With Africa

140

Trade Balance

120

China Exports to Africa

100

China Imports from Africa

$ Billion

80

60
40
20
0
-20

-40

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Source: Bloomberg

BloombergBriefs.com

To see Bloomberg Intelligence

economists real-time economic analysis
4

July 2, 2015 bloombergbriefs.com

comparative advantage in commodities and

Chinas in low-cost manufactured goods.
Africas sales to China more than doubled
to $116 billion in 2014 from $55 billion in
2008. Reflecting the importance of the relationship, newly elected Africa leaders often
make Beijing their first port of call, snubbing
old colonial ties with the U.K. and France.
There are also costs. Investment is often carried out by Chinese firms using Chinese workers, limiting the benefits to the
host country. Growing commodity exports
have done little to develop the labor-intensive manufacturing base necessary to draw
Africas rural workers into a high-productivity factory sector. Indeed, an influx of cheap
Chinese goods may stymie the development
of Africas low-end manufacturing. Theres also a chance that loans turn sour especially
as falling commodity prices dent income for
African borrowers.
For some African states, easy investment from China has facilitated an increase
in recurrent expenditure. Taken together
with stimulus packages launched in response to the financial crisis, that has eroded the fiscal buffers created through debt
relief and put them at risks of a renewed
crisis. Ghana, for example, has seen public
debt double to 67 percent of GDP in 2014,
from 33 percent in 2008, according to IMF
estimates.
For China, there are costs in bad publicity when projects trigger social tensions.
Theres also a chance loans turn sour, with
recent reports of problems for Angola. Still,
set against the gains from access to critical
resources and greater strategic heft in the
region, those costs look manageable. Compared with the paltry returns China gets on
its investment in U.S. Treasuries, increased
investment in Africa through the One Belt,
One Road initiative looks a good bet.

VISIT:

BI ECON

<GO>

Chinas engagement in Africa has a long

history. In the pre-reform era, it was a checkbook diplomacy rivalry with Taiwan that motivated Beijing. In the reform era, Chinas
hunger for resources provided the drive for
investment in everything from Angolan oil
to Congolese copper. More recently, Chinas technology firms have also arrived on
the scene, with Huawei and ZTE building
telecom systems for Ethiopia and others.
One Belt, One Road levers existing plans
for Chinese investment up the East African
coast. Most notable is the $10 billion-plus
Bagamoyo port in Tanzania. If realized, it
would dwarf Mombasa, 300 kilometers to
the north in Kenya, which currently serves
as the naval gateway of East Africa. Chinese firms have also been awarded major contracts to build railways connecting
the ports of Mombasa and Dar-es-Salaam
Tanzanias commercial capital with inland countries.

Bloomberg Brief: Economics Asia

One Belt, One Road Wont Move Dial

on 2015 Growth: Simpfendorfer
Originally published on June 17.

Chinas One Belt, One Road initiative has been painted

as everything from a response to home-grown economic
problems to a masterful reshaping of the regional economy.
Ben Simpfendorfer, head of Silk Road Associates, has
spent 20 years working in China and the Middle East.
Bloombergs Chief Asia Economist Tom Orlik asked him to
help sort the genuine oasis from the speculative mirage.
Q: Whats the significance of the One
Belt, One Road initiative for China?
A: China has captured one of the worlds
most powerful brands. Everyone from Beijing bankers to Cairo taxi drivers knows and
understands the significance of a new Silk
Road. It places China at the center of the
history and the destiny of the region.
Q: What does it mean for Chinas growth
this year?
A: One Belt, One Road wont stop GDP
growth from slowing. China is simply too
big. Its five largest provinces would account
for five of the Silk Roads 10 largest economies. The other majors are India, Turkey,
Korea, Indonesia and Saudi Arabia. Some
of those, like Korea, already have developed
infrastructure, so the demand for more isnt
great. Some of them, like India, have tensions with China so if there is building to
be done, Chinas firms wont be first in line.
Q: What does it mean for the rest of the
region?
A: The impact isnt going to be substantial,
but it will be material. The region suffers from
a shortage of capital. The One Belt, One
Road scheme and the Asian Infrastructure
Investment Bank have funds. But its important to remember that lack of funds is only

one of the barriers to building better roads,

rails and ports. There are also issues with
bureaucracy, local politics. That means China wont be able to mirror its domestic success so easily.
Q: Where in the region do you expect to
see the biggest results?
A: The greater Mekong region is the litmus test. Trade is already taking place,
but theres a significant population and
scope to do much more. For countries like
Cambodia and Laos, this could be a game
changer. To start moving the dial for China,
One Belt, One Road would have to start
unlocking the potential in countries with
larger populations like Pakistan, Indonesia and India.
Q: Is there a specific project or milestone
we should look to for signs the initiative
is gaining traction?
A: Look for projects in the regions bigger
economies. Success here would be meaningful, especially for their near neighbors.
Look also for signs that the initiative has
kick-started infrastructure projects that
have already spent years on the drawing
board. To me, that would signal policy announcements are translating into change
on the ground.

Q: Whats the strategic significance of

this initiative?
A: Its a smart move by China. They are
branding a change that is already taking
place in the worlds center of economic gravity. The Silk Road is Chinas backyard. The
countrys commercial influence is growing
steadily, whether that applies to its oil imports or construction service exports. It will
be hard for the U.S. to resist the change.
Q: The route passes through some trouble
spots in the Middle East and Africa.
Whats the benefit of China to building a
road into a conflict zone?
A: Little benefit unless there are strategic interests, such as building a land route through
Pakistan that provides China with access to
the Arabian Sea. But its an important question as the regions security will be key to the
initiatives success. History shows that the
old Silk Road only flourished during periods
of stability along the route.
Q: Chinas overseas investments havent
always gone well. What are the risks?
A: China must collaborate with foreign companies whether thats big multinationals or
local conglomerates. Foreign partners can
provide local knowledge or global expertise.
In the rush to go abroad, many Chinese
companies preferred to go it alone and have
since struggled, especially the provincial
state-owned enterprises.
Ben Simpfendorfer is founder and managing
director of Silk Road Associates, a Hong Kongbased advisory. He is the author of The Rise of
the New East (Palgrave: 2014) and The New
Silk Road (Palgrave: 2009), and is also the
former chief China economist at RBS.

SPECIAL ISSUE

GLOBAL GROWTH
How Strong Is the Engine?

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July 2, 2015 bloombergbriefs.com

Bloomberg Brief: Economics Asia

Chinese Steel Capacity May Go

West With One Belt, One Road
BY YI ZHU, BLOOMBERG INTELLIGENCE ANALYST Originally published on June 25.

The large-scale investments needed to build the One Belt, One Road plan
will boost demand for steel and encourage a shift in Chinas production
capacity to western countries as it becomes easier to bring in raw materials.
Meeting all of Asias demand for railways,
pipelines, power stations and other projects
may generate demand for 272 million tons of
steel through 2020, according to Bloomberg
Intelligence estimates. If the program is fully funded and rapidly put in place over five

years it could add as much as 5 percent a

year to Chinese steel demand.
The boost to demand for Chinas firms will
depend on the availability of funds and the
political will to back projects, as well as negotiations with foreign partners as to which

Steel Output Along the New Silk Road

Million Tons / year

1,000
900
800
700
600
500
400
300
200
100
0

Source: World Steel Association

BloombergBriefs.com

nations firms will benefit. The short-term

demand push has not yet started due to
lack of clarity in investment amounts and
implementation schedules.
Construction due to the plan may prompt
Chinese steelmakers to build more capacity
in Southeast Asia, West Asia and African
countries along the new trade link, by setting up integrated steel mills with nearby
iron-ore mines.
This could help China close capacity
where it is surplus to requirements at home
and ramp up operations where demand is
greater overseas. That could also reduce
anti-dumping cases against Chinese firms.
Hebei, the largest steel-producing province,
plans to send 5 million tons of capacity overseas by 2017 and 20 million tons by 2023,
according to its Go Global strategy.
The westbound connection would also
push China to upgrade domestic infrastructure linking its coast to the interior, generating demand for high-value-added steel
products to build pipelines and high-speed
railways, among other things. While China is
seeing a surplus of low-end steel products,
it has a shortage of high-end steel offerings.

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Bloomberg Brief: Economics Asia

Asean and Central Asian Cement

Markets Show Promise of Growth
BY MICHELLE LEUNG, BLOOMBERG INTELLIGENCE ANALYST Originally published on June 25.

Chinas cement companies that plan to expand to Asean and Central Asia should see
long-term benefits from the enormous cement demand that is set to be generated by
the One Belt, One Road initiative. The current capacity of these regions totals about 290
million tons, equivalent to about 10 percent of Chinas total and 70 percent of that for its
largest cement producer, China National Building Materials.

80
70

60

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

Urbanization Level (2014)

Urbanization Level Annual Change (2010-15)
Cement production per capita

50
40

30
20
10
0

Source: World Factbook, IMF, Bloomberg Intelligence

Kilograms

Cement Output per Capita and Urbanization Rates

Developing nations in Asia will need to spend

about $750 billion a year to fund infrastructure projects through 2020, according to the
Asian Development Bank. If fully realized,
those investments may spur 580 million tons
annually in cement demand based on historical correlations with fixed-asset investment.
That is about 25 percent of Chinas output.
Average cement output per capita in southeast and central Asian nations are 380 kilograms and 300 kilograms, respectively. This
is less than the global average of 600 kilograms and Chinas 1,800 kilograms, implying
large potential demand.
Chinese cement companies may extend
their overseas expansion, lured by a promising outlook for demand and higher profitability than in China. For example, Myanmar,
Laos and Cambodia are net cement importers that buy from Thailand and Vietnam. Local cement prices range from $70 to $100 a
ton, compared with Chinas $45 a ton. Anhui
Conch is the most ambitious of these firms,
aiming to build 50 million tons a year of overseas capacity in the next decade.
Turning the promise of expanded overseas demand into reality will require funds
for construction, political will to push
through bureaucratic obstacles and the
ability of Chinese firms to negotiate entry
into new national markets.

BloombergBriefs.com

Note: Countries with lower urbanization rates,

higher changes in urbanization and lower
cement output per capita tend to have more
room for cement demand growth.

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BRIEF

Bloomberg Brief: Economics Asia

Improved Infrastructure to
Streamline Shipping for Exporters
BY JOHN MATHAI, BLOOMBERG INTELLIGENCE ANALYST Originally published on June 29.

The One Belt, One Road program could boost shipping and cargo demand as planned
infrastructure investments improve ports that dot the silk route. Some of these ports are
currently constrained by depth restrictions and lack equipment capacity to handle the
trend of increasingly large ships. Investments in port, rail and road infrastructure might
boost cargo volumes and provide shippers more options for carrying freight.
As land access opens up, exporters will
have the choice to optimize the various
modes of shipping via air, sea, road and
rail or use a modal mix. Freight movement
by road may grow, especially as exporters may increasingly use combinations of
air-and-road or rail-and-road to optimize
supply chains.
Rail between China and Europe currently takes 20-to-25 days, while sea freight
takes double that time. Implementation of
infrastructure projects related to OBOR
may shorten lead times as high-speed
rail begins to replace multiple rail gauges
and as customs clearance procedures are
streamlined.
In January of this year, China started
the Transports Internationaux Routiers, also known as the International Road Transport, accession process. If implemented,
it will enable goods to transit from origin
to destination by road in sealed load compartments. The shipments would be able to

Transport of Notebooks From Central China to Netherlands

40

Time (Days)

35

20
18
16
14
12
10
8
6
4
2
0

Cost (USD/Unit)

30
25
20

15
10
5

0
Ocean

Rail*

Sea-Air

* Block Train Service

Source: DB Schenker, Rail Logistics & Forwarding

pass smoothly through customs of different
countries since duties and taxes liable are
covered by international guarantee. Using
major EU countries under the TIR system

Air
BloombergBriefs.com

as a basis for comparison, TIR is likely to

boost trade as customs clearance may go
paperless and procedures may be whittled
down to a single day.

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