Brief Background of the Belt and Road Initiative
Source: HKTDC Research https://research.hktdc.com/en/article/MzYzMDAyOTg5
In 2013, the People’s Republic of China adopted the Belt and Road Initiative (BRI), a global infrastructure investment project involving 71 countries that are projected to boost global annual GDP by US$ 7 Trillion by 2040. Through the BRI, China aims to connect Asia, Europe, and Africa via railway lines and ports, forming six economic corridors as seen in the map above. During this article, we will explore the financial and strategic rationale behind the implementation of the BRI.
Economic and Strategic Rationale behind BRI
Trade by sea during the COVID pandemic and the potential of rail
Maritime transport is used for 59% of China’s international trade, followed by air at 22%, road at 18%, and rail and other modes taking up roughly 1%. China thus shows a heavy dependence on maritime transport for its exports as well as imports and virtually no use of rail. Due to such dependence on maritime transport, volatility in sea freight rates can drastically affect China’s price of exports and imports and by extension, impact global import prices and to a lesser extent, global consumer price levels. Sea freight rates are determined by various factors such as the price of oil, available ship capacity, shipping container availability, port congestion, equipment shortages, etc. For example, changes in these factors saw the China Containerized Freight Index (CCFI) increase by 243% from August 2020 to August 2021. As such, the COVID pandemic proved to be a stark reminder to China that its heavy reliance on sea freight for transport is unsafe and that increasing reliance on railways through the economic corridors shown above can be advantageous.
Transporting goods via railroad is about three times more expensive than sea freight. Despite this, railroads allow for goods to ship from China to Europe within 16-21 days as opposed to the 37-45 days taken for sea freight port-to-port shipping. As such, one of the determinants between choosing rail or sea freight is the importance given to either speed of shipment or cost. When choosing in advance between the two modes of transportation, predictability in transport costs is another determinant of choice. Sea freights as depicted above, are highly volatile and are more so compared to rail tariffs. As such, rail can be considered a more favorable option when planning to transport goods in the future with price stability in mind due to its lower price volatility as compared to sea freight.
China’s increasing dependence on imported oil and natural gas
Since 1980, China’s demand for energy increased by more than 500%, making it now the world’s largest energy consumer and the second largest oil consumer. 82% of China’s crude oil imports and 30% of its natural gas imports are transported by passing through the Straits of Malacca. Meanwhile, 25% of China’s natural gas imports are shipped through the South China Sea. This demonstrates that China’s energy supply is heavily reliant on the smooth passage of ships within Southeast Asia and is particularly susceptible to maritime blockades at chokepoints along the “First Island Chain” as shown above. Currently, the nation most capable of imposing such a maritime blockade would be the United States and it would seem like an act reserved strictly for times of conflict. Hence, it would be in China’s interest to reduce its reliance on these shipping routes for its energy sources to overcome the United States’ influence and threat over Chinese energy supplies. This matter can be resolved through the construction of natural gas and crude oil pipelines from Central Asia or Russia to China as proposed by the BRI, thus securing China’s energy supplies.
BRI as a vehicle to increase the internationalization of the Chinese Yuan
Another strategic rationale behind the BRI could be China’s aim to reduce its US dollar reliance. The United States has shown that it is capable of imposing harmful financial sanctions on US Dollar dependent countries like Iran. The sanctions on Iran left the country suffering from stagflation and falling growth and the country was forced to devalue its currency to return to its economic growth. By implementing the BRI, China increases the trade and investment of partner countries. In doing so, China would be able to increase the demand for the Chinese Yuan in partner countries thus increasing its international circulation, creating a big integrated market for transactions using its currency, and fulfilling its objective to reduce US dollar reliance.
This article provides but a small glimpse into the economic and geopolitical implications of China’s Belt and Road Initiative. Through the BRI, China aims to secure its economic and geopolitical stability through the means of trade transport and energy import diversification and the internationalization of its currency to reduce US Dollar dependence.
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