The Impact of the Belt and Road Initiative on Asian

Economies

By: Arshia Grace Manavalan

Roll no.: 213

ABSTRACT:

Chinese outward foreign investment (OFDI) has drawn significant attention in recent years

mostly due to the unveiling of the Belt and Road Initiative (BRI) by the Chinese government

in 2013. The BRI presents opportunities for trade, investment and jobs between China and

Asian economies. This will support increasing consumption, infrastructure development,

political associations and sustainable development in large parts of the world. The BRI

countries play a major role in receiving Chinese OFDI. This paper analyzes the trends and

nature of Chinese investment in nations situated along the BRI in Asia from both industrial

and geographical perspectives and the impact such investment has on the economies of

receiving nations.

KEYWORDS:

Belt and Road Initiative, maritime silk route, economic corridor, trade

JEL CLASSIFICATION:

F15, F21, F34, O19

INTRODUCTION:

Known by many names; One Belt One Road, Maritime Silk Route and New Silk Road among

others, the Belt and Road Initiative (BRI) is based on the then Silk Road Economic Belt

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which was proposed in September of 2013 when President Xi Jinping made a speech at

Nazarbayev University, Kazakhstan, The BRI aims to build a land channel from the Pacific

Ocean to the Baltic Sea by improving cross-border infrastructure and flows of international

trade and capital. Another branch of the BRI is the 21st Century Maritime Silk Road which

was later proposed in October 2013 during President Jinping’s visit to Indonesia. This road

not only connects the Association of Southeast Asian Nations (ASEAN) but also tries to link

the countries from the South China Sea to the Mediterranean and South Pacific Ocean. An

illustration of both the land channel and maritime route are shown below (Fig 1).

From China’s Fig 1: Geographical representation of BRI routes

perspective, the BRI is

a comprehensive trans-regional development policy combining investment and trade. It is

considered a win-win strategy as it will bring prosperity for both China and relevant

countries. The BRI is financed by the Chinese government and the Asian Infrastructure

Investment Bank (AIIB). The BRI involves around 65 nations which

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account for 60% of the world’s population and about 30% of global GDP (Huang, 2016). A

key feature of countries along the BRI are that they are endowed with abundant energy and

natural resources, but their manufacturing industries are relatively weak.

The member states of BRI in Asia are represented in the following table (Table 1):

Region Country GDP (USD Billion)

East Asia China 14343

Mongolia 13.85

Southeast Asia Brunei 13.47

Cambodia 27.09
Indonesia 119
Laos 18.17
Malaysia 365
Myanmar 76.09
Philippines 377
Singapore 372
Timor-Leste 1.67
Thailand 544
Vietnam 262

South Asia Afghanistan 19.1

Bangladesh 303
Bhutan 2.45
India 2875
Maldives 5.73
Nepal 30.64
Pakistan 278
Sri Lanka 84.01

Central Asia Kazakhstan 180

Kyrgyzstan 8.45
Tajikistan 8.12
Turkmenistan 40.76
Uzbekistan 57.92

Table 1: Countries along the BRI in Asia (26 countries)

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Further sections in this study elaborate on the benefits and improvements Asian economies

along the BRI have received as well as a short analysis on what China stands to gain from the

BRI.

LITERATURE REVIEW:

Chung (2018) analysed the intentions and execution of China’s Maritime Silk Route (MSR)

projects in South Asia and how the BRI strategy impacts China’s interactions with the

economies along the MSR route, that is, India, Sri Lanka, Maldives, Bangladesh and

Pakistan. This involved the evaluation of both economic and political calculations for

participation of the regional countries and identifying possible actions for success. The

political reactions determined through this are that China will counter India in the region,

making India a major concern. The economic reactions on the other hand are positive as the

region will witness infrastructure investments and trade. Peyrouse and Raballand (2015)

studied the New Silk Road Initiative with regard to economic ideology and rationality with

respect to trade and transport in Central Asia. The BRI provides better transport facilities and

infrastructure in Central Asia, but it does not target substantial trade barriers. Poor

management practices, widespread corruption and production patterns at borders form

obstacles for the implementation of BRI. The study suggests that China should include

smaller projects within the BRI infrastructure that do not directly favour Chinese trade and

strategic interests but are beneficial for the local economy. In essence the BRI should be an

initiative not only for economic development but also for human development.

Xue (2016) focused on problems in China’s foreign policy mechanism that showed

significant changes from “keeping a low profile” to “proactively and enterprisingly motivated

for achievements” as it implements the BRI strategy. Such problems exist at three points of

the decision-making process and include collection and analysis of information, summary of

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policy suggestions and final decision-making. This study suggested that China needed

reforms in their conceptual framework, bureaucratic systems and talent selection of the

bureaucracy pertaining to foreign policy. The relationship with neighbouring countries and

those China is interested in trading with should be based on long-term perspective and

political vision. The author believes that the Chinese objective of the BRI is to alter the

balance of power globally that will affect generations to come. Kralovicova and Zatko (2016)

critically assess the consequences of current BRI projects on the Russian economy and

presented perspectives for their further development. According to the authors, BRI has the

potential to become a success story, not only for involved countries but for all countries of

the global economy. The values of Trade Complementarity Index (TC) calculated by authors,

growth of economic indicators and geopolitical situation demonstrate that trade between

China and Russia will continue to increase. There is an obvious dominance of China in

mutual trade between Central Asian countries but the role of Russia in maintaining the power

balance of the whole region is also noteworthy. Gabuev (2016) analysed Russia’s reaction to

BRI and the interaction between the two nations. The Kremlin considers BRI part of its

historic sphere of influence and this Central Asian region will be affected largely by BRI as it

is more dependent on China’s trade and investment. The findings of the study show mixed

results. On one hand, Russia and China have displayed the ability to develop and maintain

intellectual and bureaucratic frameworks that accommodate their mutual interests including

the idea of “linking up” BRI and the Eurasian Economic Union (EEU). On the other hand, the

challenges in the path of BRI arise from the top-down decision-making approach, minimal

inclusion of the business community and China’s prerogative to deal with countries on a

bilateral basis (as opposed to the EEU).

Iqbal et al (2018) studied economic cooperation between China and Pakistan considering

Chinese investment. With the creation of the China Pakistan Economic Corridor (CPEC)

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many challenges have arisen including a political tussle with India, and other economic and

security challenges. Pakistan and China enjoy a rich and multi-dimensional relationship that

is often categorized not just as infrastructural but also strategic. In the modern perspective,

there is a need to reinterpret strategic issues in the light of new realities as and when required.

Most existing studies on BRI are theoretical in nature. The empirical approach adopted by

Iqbal et al (2019) illustrates through rigorous econometric testing that there is a significant

impact of Chinese imports and exports on the economic growth of Asian countries along

BRI.

BRI AND AN ASIAN PERSPECTIVE

Asian economies have abundant natural resources but lack the infrastructure and organisation

to tap into them efficiently. Thus, they require improved infrastructure to dive economic

growth through trade, investment, competitiveness, and connectivity within the region and

with the rest of the world. For instance, the ASEAN Development Bank (ADB) estimates that

the total infrastructure investment needs in ASEAN from 2016 to 2030 will be between US$

2.8 trillion and US$3.1 trillion.

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Most projects under BRI in the 26 nations listed previously are infrastructure projects with a

focus on developing roads and extensive railway systems as well as power projects. These

Table 2: List of projects under BRI (2013-2016)

projects have been initiated since 2013 as shown in Table 2. A few BRI related projects are

under review, and are either to be cancelled or re-negotiated.

IMPACTS ON INTERNATIONAL TRADE

Trade between Asia and Europe accounts for 28% of world trade (not including trade

between EU countries) so enabling easier trade flows has a large potential impact. The size of

this impact would depend on the sensitivity of trade to changes in relative costs which can be

estimated in gravity models of international trade. Such models describe trade flows in terms

of country size and relative costs of trade between them.

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The impact of the BRI will also depend on where trade costs fall as a result of BRI projects.

These costs may fall between a very small group of countries or be spread much more widely

among all BRI nations.

Most of the BRI projects are developed through Joint Ventures (JV) between an Asian host

country entity and a Chinese entity, with financing from China’s connected financial

organizations. These JV’s carry out their projects under concessions, that is, the permission of

the local government or by direct government procurement.

BRI projects not only involve investments or flow of capital as will be shown in a later

section, but also importation of goods from China into the BRI participant economies. These

goods may directly or indirectly be used in BRI projects. Fig 2 represents an instance of

Chinese imports into the ASEAN nations between 2010 and 2017.

Fig 2: Imports of goods from China into ASEAN 2010-2017

Source: ASEAN stat (accessed on 11.10.2020)
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On the other hand, it is possible that importation of some of the products will reduce once

BRI projects are fully completed. Rather, there could be an increase in the imports and

exports of intermediate goods both from the Asian economies into China and the world and

from China into these nations. This could help address the trade in goods imbalance between

Asian countries and China.

THE CHINESE PERSPECTIVE

China’s OFDI has been growing over the years and leads us to ask the question: why propose

the BRI? There are predominantly two views on the purpose of China’s BRI. One is that from

a purely economic cooperation perspective, the Initiative is mainly aimed at promoting the

internationalization of the RMB (Renminbi) and Chinese enterprises enabling them to acquire

global resources to cope with the U.S. economic policies of the Asia Rebalancing strategy.

The BRI also stands to resolve the increasingly excess capacity in China. On the other hand,

the BRI tries to disguise the Chinese attempt to break the hegemony position of the United

States, thereby enhancing its international influence and then to seek global leadership as a

political purpose. The proposal of BRI is only intended to help China out of the “middle

income trap” and at the same time promote economic growth via reciprocity and cooperation

in Asia. Infrastructure is the focus of cooperation but the BRI also includes policy dialogue,

free trade, financial support and personnel exchanges among other benefits.

IMPACT ON INVESTMENT

China’s Foreign Direct Investment (FDI) inflows to the Asian economies have been

increasing since the 2010’s and even more so since the announcement of the BRI. We

observe this trend in Fig 3 and Fig 4 which represent Chinese inflow of FDI into the

Southeast Asian nations and South and Central Asian nations respectively.

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 China FDI inflows to Southeast Asia
Cambodia Indonesia Singapore Vietnam
8000

7000

6000
FDI (USD million)

5000

4000

3000

2000

1000

0
0 2010 2011 2012 2013 2014 2015 2016 2017 2018
Year

Fig 3: Chinese FDI inflows to Southeast Asia

Source: UNCTAD database (accessed on 11.10.2020)

The completion of BRI projects means that the host countries are able to increase their

investments in the logistics sector and improve their infrastructure. This could contribute to

spill-over effects in the economy through other investments such as manufacturing, oil and

gas, mining and agriculture. Hence, the completion of BRI has the propensity to plug the

investment gaps in infrastructure which if left unaddressed, would definitely have a negative

impact on the overall economic growth in the participating Asian economies.

CONCLUSION:

It is clear that the BRI is an opportunity for more trade, investment and job creation in Asian

countries that lie along the belt and road route. Even if the entire benefit of the initiative is

not as large as projected, it will prove to be a game changer in the next few years. From 2013

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when BRI came into force, China has signed agreements with more than 40 countries in the

region and has ensured industrial cooperation with more than 30 countries. This is a fresh

opportunity for Asian countries to develop through cooperation.

China’s significant investments in BRI projects provide an avenue for Asian economies to

overcome the problem of inadequate infrastructure, a major obstacle in the path of short-term

and long-term economic growth. Many projects in Southeast Asia, South Asia and Central

Asia have been completed and presently provide better facilities for trading and investment.

Chinese exports and imports have increased through such routes and this has revealed a

significant impact on the development of Asian economies. Thus, it would be fit to conclude

that BRI is a development strategy in terms of growth by increasing the trade and investment

for various countries.

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