What the Belt and Road initiative means for geopolitics, protectionist trade policies and regional currencies

At the Belt and Road (B&R) Forum for International Cooperation in May 2017, China’s President Xi Jinping shared his vision for connectivity and growth across the Asian region. Amid rising trade protectionist sentiments in some parts of the world, the B&R initiative seems to be going against the grain. Ms Julia Goh, Economist at United Overseas Bank (Malaysia) Bhd (UOB Malaysia), explains how the B&R initiative will foster mutual cooperation in trade-dependent economies such as Malaysia.

Q: What are China’s ambitions for the B&R initiative and how effectively did President Xi Jinping rally support for the project at the B&R Forum in May?

The B&R initiative that will connect Asia, Africa, Middle East and Europe was first announced in 2013. It consists of six economic corridors and spans 68 countries, which represent more than 60 per cent of the global population and around 40 per cent of global gross domestic product (GDP). Spearheaded by China, the B&R initiative aims to boost trade and to stimulate economic growth across and beyond Asia.

Given the scale and reach of the B&R initiative, some observers say the project is motivated by China’s regional ambitions at a time when some global economies look to be stepping back from Asia. China’s President Xi Jinping addressed this concern at the two-day B&R Forum in May, stressing that the B&R initiative is about building partnerships and not about forming alliances, suggesting that the initiative is leaning towards mutual cooperation in trade and commerce.

China is also taking a more open, inclusive and globalised approach that favours not only commercial but also cultural exchanges. This is different from the wider protectionist rhetoric progressing across some parts of the world.

We see the B&R initiative as a means for countries to come together to integrate resources to achieve economic growth on a global scale. The B&R initiative has the potential to strengthen cross-border dialogue and to foster multinational cooperation, which will in turn create stability and encourage mutual investment beyond the home country.

Q: It has been mooted by China’s central bank that infrastructure projects under the B&R initiative will be financed in local currencies.  What effect will this have on domestic currencies across Asia, especially the renminbi (RMB)?

Financing is at the centre of the B&R initiative. China has committed at least RMB780 billion[1] (US$113 billion) via its state funds and banks to finance projects under the B&R initiative.

While the bulk of the funding is denominated in RMB, China has encouraged the use of local currencies instead of major currencies such as the US dollar for B&R projects. In doing so, the risks of exchange rate fluctuations and the cost of foreign exchange conversion could be reduced.

Of note, the Chinese government has also committed RMB300 billion to help fund overseas businesses related to the B&R initiative[2]. This will also help promote the use of the RMB and increase other local currency-denominated funding across the region through issuing more local currency than US-denominated bonds.

RMB-denominated flows should also increase in tandem with China’s expanding goods and services trade (current account flows)[3], and greater infrastructure investment in countries along the B&R corridor. Higher trade and investments conducted among these countries and between them and the rest of the world will lead to increased supply and demand for local goods and services. This should result in higher demand for local currencies, including the Malaysian ringgit.

Q: How will trade-dependent economies in the Association of Southeast Asian Nations (ASEAN) bloc benefit from the Belt and Road initiative?

Due to its geographic proximity and historical relations with China, access to resources and emerging market status, ASEAN is expected to benefit from the pick-up in activities along the B&R corridor. ASEAN countries also have a clear trading advantage with China given that more than half of China’s top 10 trading partners are from the region.

In addition, under the B&R initiative, China has a range of arrangements and agreements to help foster greater economic cooperation with ASEAN. This includes the China-Indochina Peninsula Economic Corridor (one of the six economic corridors envisioned in the B&R initiative), the China-ASEAN Free Trade Area and the ASEAN and China Production Capacity Cooperation for the development of the maritime, port development, connectivity, tourism, health and environmental sectors.

 Q: Which sectors and industries will benefit the most from the B&R initiative?  

Infrastructure-related development in sea/land/air transport, energy, water, information communications and pipelines would be the first areas to benefit from the B&R initiative. With better infrastructure and greater global connectivity, we expect to see a boost in demand for tourism-related services in industries such as food and beverage, hospitality, leisure and entertainment, shopping, education and healthcare.

Q: How can the B&R initiative help counter the rise of protectionist trade sentiment occurring in other parts of the world? 

In an increasingly fragmented global economy, the B&R initiative promotes cooperation and common development. It seeks to boost efficiency in the flow of production and integration of markets to achieve diversified, independent, balanced and sustainable development. As such, the initiative should bring about a greater level of economic activity among participating countries.

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About United Overseas Bank (Malaysia) Bhd

United Overseas Bank (Malaysia) Bhd (UOB Malaysia) is a subsidiary of Singapore-based United Overseas Bank Limited and has had a presence in Malaysia since 1951.  UOB Malaysia offers an extensive range of commercial and personal financial services through its branches, subsidiaries and associate companies: commercial lending, investment banking, treasury services, trade services, cash management, home loans, credit cards, wealth management, and bancassurance products.

In line with the UOB Group’s regional corporate social responsibility initiatives focusing on children, education and the arts, UOB Malaysia has organised the annual UOB Heartbeat Run since 2008 to raise funds for charity. In 2011, UOB Malaysia established the inaugural Painting of the Year Competition and Exhibition.

For further information, please visit www.uob.com.my.

[1] Source: yidaiyilu.gov.cn and UOB Global Economics & Markets Research estimates

[2] Source: UOB Global Economics & Markets Research estimates

[3] The share of total goods traded by B&R countries accounted for about 34 per cent of the world’s total trade. B&R countries’ total trade with China accounted for 25.7 per cent of China’s total trade in 2016. China’s total services trade with B&R countries reached US$122.2 billion in 2016, accounting for 15.2 per cent of China’s total services trade, and 3.4 per cent point higher than in 2015