By John Richardson
THE ONE Belt, One Road initiative is a crucial element in China’s efforts to economically re-invent itself – and this reinvention has to work if China is to avoid economic stagnation.
We therefore know that One Belt, One Road will remain a major government priority.
And McKinsey has provided important details on the scale of this project:
The belt is the physical road, which takes one from here all the way through Europe to somewhere up north in Scandinavia. That is the physical road. What they call the road is actually the maritime Silk Road, in other words, shipping lanes, essentially from here to Venice. Therefore it’s very ambitious—potentially ambitious—covering about 65 percent of the world’s population, about one-third of the world’s GDP, and about a quarter of all the goods and services the world moves.
The above map, from a September 2015 China-Britain Business Council report, is also very useful as it shows that the plan involves six economic corridors and 60 different countries.
The Five Major Objectives
What are the big objectives of One Belt, One Road? They are, as I first started discussing in early 2015:
- Finding outlets for China’s vast oversupply in many industrial sectors.
- Migrating low value manufacturing to other less-developed countries along the One Belt, One Road routes. Oversupplied petrochemicals will thus be moved overseas to these less-developed countries. Low value finished goods will be then be returned to China and sold in export markets.
- Some low cost manufacturing will also be relocated to China’s less-developed western provinces, away from eastern China where rising labour costs are a challenge. This will help create basic manufacturing jobs in western China.
- One Belt, One Road will provide much more efficient routes to both domestic and international markets for China’s higher value goods and services. China has to be successful in these area it is going to escape its middle-income trap.
- Securing more low cost imports of oil and gas as China seeks “virtual energy independence” through closer geopolitical and trading ties with Central Asia and the Middle East etc. China will support the economic development of these countries and regions through say investing in overseas refineries and petrochemicals plants. China has plenty of surplus refining and petrochemicals engineering capacity to dispose of. In return, China would require greater oil and gas imports at preferential prices.
Progress on these Objectives
To achieve these five objectives, One Belt, One Road involves a carefully planned outreach campaign by China’s senior politicians. Geopolitical and trading relationships are being strengthened with the countries that are supporting this initiative.
The plan also, of course, involves vast spending on improving both domestic and overseas road, rail, port and other infrastructure links.
There is plenty of evidence that are all of these five objectives are being realised.
Take the garments industry and Cambodia and China as just one example. Between 1994 and 2013, Chinese investment in Cambodia was about US$5bn, focused mainly on agriculture, mining, infrastructure projects, hydro-power dams and garment production, according to the East Asia Forum (EAF). Since 1992, China has also provided around US$3bn in concessional loans and grants to Cambodia, added the EAF.
And as labour costs rise in China, its clothing exports to the EU are falling, said Textiles Intelligence – the fibre, textiles and business information service. China’s exports to the EU were down by 9.9% in the first three months of this year as Cambodia’s exports to the EU jumped by 17.7%.
Garment exports to the EU from Bangladesh and Pakistan, which are also part of the One Belt, One Road plan, have also risen.
Scenarios for Fibre Intermediates
We need to apply this upstream – so we can build scenarios for global trade flows in global paraxylene (PX), purified terephthalic acid (PTA) and polyester fibre.
You have to start with base cases, which we provide in our recently updated Supply and Demand database. You then need to build scenarios around these base case, which we can also help you with.
We expect China will import around 18m tonnes of PX in 2016, which will fall to 17m tonnes in 2026.
Where would these imports come from? Predominantly from those oil and gas-producing countries and regions with which China has built better trading links, perhaps. And how much of these imports could come from overseas Chinese joint ventures?
A separate and also related point on PX is this: To what extent might China be able to raise its own domestic capacities of PX through the coal-methanol-aromatics process? This would help with the economic development of western China, which is also a One Belt, One Road objective.
China has this year moved into a net export position on PTA, but by 2026 we expect a small net deficit.
What if China decides to run its PTA capacities harder than we anticipate to support overall economic growth.
China may also export greater quantities of PTA to its One Belt, One Road trading partners. A natural development is back integration to local polyester fibre production, as any local apparel and non-apparel industries develop. Bangladesh and Pakistan etc. would thus be following in China’s historical footsteps – see the diagram below:
Or what is perhaps more likely is that China retains its dominant position in polyester fibre exports.
In 2016, we expect China’s polyester fibre exports to total 2m tonnes, rising to 3m tonnes in 2026. It would thus remain the world’s biggest exporter.
But is there an upside to this 3m tonnes total? And what will be the distribution of this export trade?
We are living in an ever-more complex world where standard old models of analysis can no longer guarantee the success of your business – and One Belt, One Road is just one example of this complexity.