Business and Management: The Influence of The silk

Business and Management: The Influence of The silk road Economic Belt and the 21st Century maritime silk road of china; the development of Chinese international trade from 2015 to 2016

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The Influence of The silk road Economic Belt and the 21st Century maritime silk road of china; the development of Chinese international trade from 2015 to 2016

Objectives

1. To highlight the chronological events that led to the launch of the Silk Road Economic Belt and the 21st-Century Maritime Silk Road (The Belt and Road)
2. To discuss the economic influence of the Belt and Road.
3. To discuss the political influence of the Belt and Road.
4. To identify the challenges that the initiative implementation faces.
5. To recommend on how China can deal with the identified challenges.

Literature Review

Chronology of the Silk Road Economic Belt and the 21st-Century Maritime Silk Road

On March 28, 2015, China launched the framework, principles and cooperation mechanisms and main concerns in its Belt and Road Initiative to improve regional linkage for future cooperation (Brugier, 2014). It is an action plan that was released by the China’s National Development and Reform Commission in collaboration with Commerce and Foreign Affairs Departments. The program provided an insight of the China vision and undertakings (Chris, 2015). The Belt and Road courses run through Asia, Europe, and Africa, linking the vivacious East Asia economic region at one end with the developed European economic region at the other.

The Silk Road Economic Belt intention is to connect China, Central Asia, Russia and Europe. Its aim is to link China with the Mediterranean Sea and the Persian Gulf through the Indian Ocean and Central Asia (Shaohui, 2015). On the other hand, the 21st-Century Maritime Silk Road is meant to exploit two routes: one would start in China’s coast, then to Europe through the South China Sea and the Indian Ocean and the other would start from China’s coast to South Pacific through the South China Sea (Fung Business Intelligence Centre, 2015). Before the launch of these two initiatives, there were some events that took place.

The first mention of the Silk Road Economic Belt was made by Chinese President Xi Jinping in September 2013 while delivering a speech at Nazarbayev University in Kazakhstan. He proposed for China and Central Asia to work together and build a Silk Road Economic Belt (Shaohui, 2015). In October 2013, the Chinese President suggested the establishment of a China-ASEAN community and issued a plan of the 21st Century Maritime Silk Road to enhance maritime cooperation (Chris, 2015). He made the proposal to the Indonesian parliament and suggested the creation of Asian Infrastructure Investment Bank to financially support construction and improve the regional relationship and economic integration.

After the president making the two proposals, the Third Plenary Session of Eighteenth Central Committee of the Communist Party requested for an increase in speed in the construction of infrastructure that linked neighbouring countries. They also wanted to see the actual implementation of Belt and Road initiative (Shaohui, 2015). Their efforts started to bore fruits in December 2013 when President Xi asked for the development of a strategic plan for the initiative at the annual Central Economic Work Conference. In February 2014, Xi met Russian President Vladimir Putin and agreed to construct the Belt and Road together with its link with Russia’s Euro-Asia Railways.

In March 2014, the Chinese Prime Minister Li Keqiang recommended for the acceleration of the initiative in the government work report (Brugier, 2014). In October 2014, 21 Asian nations signed a Memorandum of Understanding to create AIIB that would have its headquarters in Beijing. President Xi indicated that China would commit $40 billion to the Silk Road Fund that would be used to finance infrastructure, industrial cooperation, resources, financial cooperation and other programs along the Belt and Road (Fung Business Intelligence Centre, 2015). There were many efforts by China and its partners to see the initiative succeed and on March 28, 2015 when an action plan was launched.

The Economic Influence of the Belt and Road Initiative

The two programs demonstrate the China’s willingness to strengthen the relationship with its neighbours through regional integration which is important to everyone involved (Chris, 2015). The initiative is also critical to China as it helps to increase the pace of economic engagement with Central Asia (Toktomushev, 2015). Even before the introduction of these projects, China was a major economic player in Central Asia. In 2014, the China-Central Asia Trade was approximate $50 billion, a substantial increase from $1 billion in the early 2000s. China overtook Russia as the Central Asia’s trading partner during the financial crisis (Brugier, 2014). For example, a Chinese petroleum company contributes significantly to the Turkmenistan budget. The two projects will increase Chinese dominance in transport and energy infrastructure in the region (Helga & Billington, 2014). For example, China has invested massively in major energy infrastructure in Central Asia like Turkmenistan-China gas pipeline and Atyrau-Alashankou crude oil pipeline.

In addition to increasing trade with Central Asia in 2015 to 2016, the programs will make China the biggest lender and source of development funds in the region (Helga & Billington, 2014). Kyrgyzstan received has received about $1.8 billion from China since independence in the form of loans and grants, representing more than 50 per cent of the country’s external debt (Toktomushev, 2015). The Export-Import Bank of China, a government-sponsored lending institution holds about 40 per cent of Tajikistan foreign debt. During the financial crisis, China issued two loans to Turkmenistan for energy projects to secure own gas deliveries (Fung Business Intelligence Centre,2015). The loans were also granted with the motive of preventing Turkmenistan from getting the loans from international financial agencies.

Even though the trade with Central Asia has been impressive in the recent past, the Silk Road Economic Belt would increase its pace (Toktomushev, 2015). The Chinese government believes that poor infrastructure is the greatest hindrance to the growth of trade with Central Asia economies, and that is why it took the bold step of initiating this mega project. The Central Asian countries accepted to have Chinese investments into their infrastructure to improve the ones already existing (Lain & Pantucci, 2015). The Chinese investment, together with that from Russia and other international organizations, has considerably improved the Central Asian energy and transport infrastructure in all five Central Asian states, according to World Bank logistic performance index.

China will greatly benefit from this mega infrastructural project. First, the initiative will absorb industrial overcapacity, and the stock market reacted to the announcement of $40 billion pledge by the Chinese government to support the project (Chris, 2015). For example, by July 2015, the shares of industrial companies like Sany Heavy Industry and China Machinery Engineering had increased in prices at a higher rate than even the wild on the Shanghai Stock Exchange. The project comes to ease the vast excess capacity in steel and cement industries. However, the project has not managed to revive the blast furnaces and cement kiln even if the money pledged was spent exclusively and immediately on Chinese products.

In 2015 and 2016, the project has not had any significant impact on China’s economy, majorly because it is still in the initial stages. However, the long-term implications of this initiative are huge on the country’s economy (Tao, 2015). The Asian Development Bank approximates that the region will need $750 billion for infrastructure development every year through 2020. Out of this amount, China’s finance institutions are more likely to inject more than the $40 billion at the Silk Road Fund (Lain & Pantucci, 2015). However, the problems encountered while negotiating with host countries on the projects that require more priorities than the others and whose construction firms are awarded the contracts could mean that overcapacity problems in China are yet to be resolved.

The area covered by the Belt and Road initiative includes about half of the total global GDP, and the enhanced trade links would have a lasting impact as the area covered account for about 50 per cent of global trade (Djajadikerta & Zhang, 2015). It will reduce transport cost and consequently increase trade flows (Orik & Chen, 2015). Thus, it will result in greater competition and increased efficiency which would bring benefits to the international trade. However, the benefits from this initiative may not come as fast as one would expect from a project of this magnitude (Tao, 2015). Today, Chinese goods are not a new story to the customers in the regions covered by the project.

China is the leading trade partner in almost half of countries touched by the Belt and Road. It does not imply that there is no opportunity to do more, but the benefits from the enhanced trade may come at a slow pace, not a quick explosion (Lain & Pantucci, 2015). The Belt and Road initiative is a representation of China’s attempt to extend its influence over every economic aspect starting with shipping routes for vital crude imports to making decisions in the world financial system. It is yet not clear how it will achieve this as strategic influence comes with economic power. However, it can realize this goal if the Belt and Road projects and other efforts can turn round the deceleration in China’s growth.

Another economic influence of this mega project is to expand an already active connection with Africa (Godement, 2015). China has a long history of engaging with Africa as it provided an alternative source of funding to governments when the West put strict conditions on governments that they perceived undemocratic during the pre-reform era (Tao, 2015). China has invested heavily in almost all sectors from the Angolan oil to Congolese copper. In recent time, even Chinese technology firms have established themselves in Africa like Huawei and ZTE in Ethiopia. The Belt and Road initiative complements other existing plans for the construction of $10 billion port in Bagamoyo, Tanzania that would dwarf Mombasa port in Kenya, 300 kilometres to the North which are the naval gateway to East Africa. Chinese companies are building railways that connect Mombasa and Dar-er-Salaam ports with inland countries like Uganda, Rwanda, DR Congo, and South Sudan among others (Godement, 2015).

One of the reasons why Chinese firms are offered the tenders to construct these types of megaprojects is their ability to money on the table. Most of the investments are led by state-owned enterprises that have are given preference by the China Development Bank as well as Export-Import Bank of China (Tao, 2015). Chinese investment in African has grown by more than four folds in the last seven year to about $50 billion in 2015 from just $7 billion in 2008. The credit line has also grown and it is likely to expand at a higher rate from the current $30 billion (Godement, 2015).

The benefits of the Belt and Road to African countries are clear as they are in need of infrastructure. The World Bank estimates that it needs more than $93 billion annually for infrastructure development (Lain & Pantucci, 2015). Additionally, China comes in the picture when most many Western governments and businesses are retreating. It helps to build the roads, ports, and rails that are critical as the continent kick-starts development (Godement, 2015). The funding of infrastructure by Chinese in those countries frees up resources for use in other sectors like education and health. Furthermore, the support by China in Africa has facilitated trade, and with the Africa’s comparative advantage in commodities and Chinese low-cost goods, the Belt and Road project could only enhance trade links between these two distant friends. In 2014, Africa’s sales to China increased by more than 100 per cent from $55 billion in 2008 to $ 116 billion in 2014. It is a sign of the value of the relationship. It is now common to see newly elected presidents making Beijing their first foreign destination, snubbing their colonies like the U.K and France.

The Political Influence of the Belt and Road Initiative

It is evident that Silk Road Economic Belt has economic incentives for the region but the Central Asian leaders remain sceptical about China, and they tend to relate with caution and fear (Toktomushev, 2015). Even though Chinese leadership has repeatedly indicated that their agenda is only for economic development, the Central Asian public and political discourses believe that the Chinese ultimate goal is to subdue them economically and finally absorb them to Chinese empire. The fears originate from the complicated and incomprehensible Chinese foreign policy goals by the ruling class of the Central Asia and the historical issues of violence between Central Asia nomadic tribes and China. Thus, sinophobia is one of the greatest challenges that may hinder the development of the belt and road initiative. For example, the land deals with Kyrgyzstan, Kazakhstan and Tajikistan led to public outcry and the opposition leaders in those countries opposed the ruling authorities.

Central Asian elites see the Chinese-led regional infrastructure development as one of the tools that China wants to use to affirm its territorial dominion. These views are also shared in the neighbouring Russia as the public does not recognize the new role of Beijing as the major economic and development player in Central Asia (Toktomushev, 2015). There are fears that China is using its economic power in the regional to oust Russia as the political powerhouse in the region. The Russian government has always reacted sensitively to developments that involved other players and refused to support Chinese efforts of evolving the Shanghai Cooperation Organization in a more development and economic direction (Li, Wang & Deyi, 2016). The SCO is still in its infancy with a budget of just $4 million, and it is only a discussion forum with no tangible evidence of progress.

Challenges of the Belt and Road

An important point of consideration for China’s initiative in establishing the Silk Road economic belt nowadays and its maritime silk-road can be traced from the nature of its economic and political dynamics. Cao and Birchenall (2013) reported that the Chinese economic structures is relatively centred to the Eastern premises, coastal regions of the mainland, and the establishment of the Silk-Road can be used as a means to develop closer economic ties with Western economic regions and ultimately resulting into an economic empire based in China.

Inferring to the economic theory of infrastructure development as discussed by Lo (2015), it is safe to expect that the development of this Silk Road would be beneficial to stabilise economic growth in the mainland through structural reforms to distribute wealth to other parts of the nation. Also, reflecting from the prominent roles of the state-owned enterprises (SOEs) in China due to the lingering political control, it is also safe to expect that this initiative would allow the Chinese SOEs to take lead on most of the crucial silk-road projects. This initiative however, is relatively beneficial to foster the national economic development model, by emphasising the role of the SOEs as the beacon to pave new ways for smaller, or privately-owned Chinese companies to participate in this initiative. This model has two potential advantages. First, assuming the trueness of the premise that the “wealth of state will be redistributed to the citizens” as discussed in Plotnick and Winters (1985), the income from SOEs involvements in these strategic projects would be useful to finance China’s social initiatives. Second, the involvement of the SOEs will nevertheless, presented a strategic map for the private firms’ reflections during their future participations in the initiative.

Furthermore, the switch of government expenditures where the previously-focused investments are altered into consumption can be inherently caused by the economic contraction. Indeed, we should realise that investments should not fall too quickly, since that could crush China’s economic growth before the country’s compensation reach the point to compensate the growth. And the participation and investment into nationwide, cross-border ambitious project such as the Silk Road can assist China to prevent its investment to fall too fast during the structural reform in the country.

Reflecting from Snyder (1984)’s arguments about the international trade competitions, as well as Keohane (2005)’s arguments that economic alliances are closely linked to political reason, it is also safe to assume that China’s decision to start implementing this ambitious project is an effort by the Chinese government to counter the US-based trade pacts, or as a means to increasing their competitiveness and political prominence in the global competition maps; considering China was excluded from both of the Transatlantic Trade and Investment Partnership (TTIP) as well as the Trans-Pacific Partnership (TPP), which are both sponsored by the US, and could have been considered as a means to contain China’s economic prominence. More so, considering US’ ‘pivot to Asia’ policy, where the US started to work closely with China’s closer neighbours, such as South Korea, Taiwan, Japan and India; which reduces China’s capacities to expand its influence to the East.

Medeiros and Fravel (2003) reported that the Chinese government had maintained their stances that the economic growth is a key to national security and as a means to minimise potential political risks; legitimising the rule of the communist party in the long run. It is also safe to argue that this attempt represents the act of establishing hegemony in both local and international marketplace

However, it is also important for China to contemplate on the potential risks bored by this initiative. Based on an ideal trade cooperation model as advised by Goldstein and Martin (2000), the trade alliances and trade partnerships’ capacities would also be strongly reliant to the quality of its members as the alliance will foster better performance if the participants are financially healthy and having sound financial infrastructure to undertake large-scale economic cooperation. It is important to note however, that countries that participate in the Silk Road scheme own relatively large fiscal and current account deficits. This actually presents a risky situation for China, as China could possibly taking on greater degree of default risks by investing to develop infrastructures in these countries, and assisting them with capital, although there are no solid warranties that these countries could possibly provide suitable returns to China’s investments.

Politically wise, it is also important to contemplate on the possible backfire of this initiative, especially reflecting on China’s notoriety in their foreign operations. Cases of work ethic clashes as well as various scandals related to the poor labour management could increase the risks in damaging China’s political image, especially because the projects in the participating countries would be supervised and monitored by Chinese personnel. If problems arise during the infrastructure constructions and that it causes instability in host countries, not only that China will face resistance and rejections in its expansions into Asia, it opens risks of developing hostile relationships with major, strategic key players in those regions.

Conclusions

In general, it is important for China to recognise that in the process of encouraging the free trade, it should abide by international norms and analyses the international market rule. The main challenge in China in this Silk Road initiative would be to ensure its management approach is well-suited to the host countries, as well as to ensure that the participants in this new trade networks could contribute to provide return on this investment opportunities and fostering better allocation of capital, by fostering better capital allocation to partners that exhibits better potentials for growth, especially considering the default risks that might be bored by improper selections of partners, as most of the current participants shows a rather high default risks that might burden the Chinese economies.