At a Glance
- New plan designed to be a catalyst for trade
- If successful, could stimulate demand in aviation, telecommunications, rail, among other industries
Since Chinese leader Xi Jinping first discussed the “One Belt One Road” (OBOR) concept to revive ancient trade routes from east to west in 2013, it is quickly beginning to take shape.
As its name suggests, China’s One Belt, One Road plan has two components. One Belt is an overland route stretching from China’s inland provinces across central Asia, through the Middle East before ending in the heart of Europe. One Road is a “21st Century Maritime Silk Road” stretching from Fujian on China’s coast, through the Malacca Straits, around the horn of Africa and up through the Red Sea into the Mediterranean, ending in Venice.
The ambitious project is designed to be a catalyst for trade by upgrading infrastructure in many of the less developed regions and countries it passes through. Earlier this year China’s National Development and Reform Commission (NDRC) released its action plan to build a network of roads, railways and gas pipelines. New institutions such as the Asian Infrastructure Investment Bank (AIIB) and the US $40 billion Silk Road Fund have also been established.
The scale of OBOR and its implications for international trade, investment and infrastructure development means it commands attention. This also holds for CME Group given the potential to lift demand in commodity and energy markets and even reshape regional and international trade flows.
Image source: CCTV America
To put this in perspective, the overall area covers about 50 percent of global GDP, some 4 billion people and over 60 countries. One way of viewing China’s extraordinary trade partnership push is that it is a development typical of emerging economic powerhouses post-industrialization, similar to what happened in the United Kingdom or the United States before.
The project fulfills a number of economic and strategic objectives for China. Domestically, it should provide a new growth driver by opening up trade roads west for the country’s less developed inland provinces. This should help smooth China’s ongoing economic adjustment as it transitions from investment-led growth to consumption by absorbing some of the excess capacity across various heavy industries and construction materials.
Economic Growth and Currency Internationalization
Outwardly the project seeks to extend Chinese diplomatic and economic ties through commerce and development. Beyond building infrastructure, OBOR has the potential to stimulate demand in a range of related industries including aviation, rail, telecommunications and electricity generation where China has manufacturing expertise and capacity. If this also leads to further urbanization in many of the less developed countries involved, this could lead to yet further growth linkages.
Currency internationalization is another strategic imperative. It is expected some of the financing will be denominated in RMB, which is expected to broaden and deepen the ongoing process of liberalizing China’s capital account. This should also help the RMB along the road to reserve currency status, which remains a strategic priority for Beijing.
Funding for the AIIB is reported to be $100 million and in addition Chinese policy banks are also expected to support the project as Chinese state-owned enterprises (SOEs) will be heavily involved.
While funding remains somewhat vague at this stage, Beijing has already promised to help countries and companies issue yuan bonds to raise capital. Hong Kong has indicated it will seek to play a role mobilizing funding. UnionPay, China’s bank card organization has pledged its support and is rapidly expanding its services in included countries. To get some idea of the potential numbers we could be talking about, the Asian Development Bank estimates developing nations in Asia will need to spend about $820 billion a year to fund infrastructure projects through 2020.
A Boost to Commodities Demand
These initiatives also promise to ensure China maintains its dominant position in various industrial commodity markets. OBOR will mean pouring a lot of cement for roads and a lot of steel for railways. Steel needs iron ore, energy and coal so there are many infrastructure linkages, while electricity infrastructure will help support demand for copper. Building pipelines to open up natural gas supply from central Asia is expected to remove supply restrictions and eventually allow Chinese demand to play a bigger role in pricing. At the moment gas is only 6 percent of China’s energy mix.
Our intelligence says OBOR has already moved off the drawing board with national and provincial-level planners keen to redress substantial overcapacity in steel, cement and construction materials. Some analysts are already predicting that OBOR could lead to greater global steel demand and a rise in Chinese steel exports. Further out, there is also an expectation that China may build more steel capacity overseas, integrated with iron-ore mines.
There is also the possibility that trade will grow with new linkages. OBOR could also boost shipping and cargo demand as planned infrastructure investments improve ports that dot the silk route and open new markets to commerce. Investments in port, rail and road infrastructure typically boost cargo volumes as shippers have more options for carrying freight.
China already imports over 50 percent of its oil from the Middle East. By expanding strategic influence in this region, it is likely to enhance oil security. This could also lead to increased oil exports from the Middle East and further enhance the status of the Dubai Mercantile Exchange (DME) Oman Futures Contract.
Increased Foreign Investment
At this early stage there are understandably more questions to be answered over how projects will be funded. Risk is also unavoidable because OBOR plans to go through not just remote countries but ones with politically unstable governments and weak external balances of payments. China will need to carefully tread and manage the sometimes-delicate domestic politics of foreign investment.
What we can say with more certainty is that as the next stage of China’s growth moves outwards, this will also be accompanied by it providing increased overseas investment and finance. As this is happening in tandem with efforts to liberalize its capital account and enhance the status of the RMB, OBOR is a development that could have a far-reaching impact on financial markets and how commodities are traded.
CME Group continues to position itself to assist in the facilitation of China’s capital market liberalisation both through expanding yuan trading capabilities and its network of alliances with partners in China.
In October we signed a MOU with China Construction Bank to offer Offshore Chinese Renminbi Futures (CNH) Contracts with physical delivery in London for the first time. In September, we signed an agreement with China Foreign Exchange Trade System (CFETS) on cooperation to explore opportunities and promote each other’s market infrastructure and products. Both parties have also committed to greater connectivity in product distribution, with CME Group facilitating its customers to trade China interbank products, and CFETS facilitating China interbank market participants to trade CME Group’s products. We also signed an index development and product licensing agreement with China Securities Index Co. Ltd (CSI) in September. China is a very important market for us, and we are confident that our enhanced cooperation with various Chinese partners will further strengthen the relationship and better serve the needs of our respective markets.
CME Group has launched various products that are key to the Chinese market. One of the most significant was the physically-delivered gold kilo futures which debuted in January 2015. We have also launched Chinese Iron Ore futures contracts in response to the growing customer demand to manage risk in China. We also partnered with FTSE Russell, a leading global index provider, and have entered into a licensing agreement establishing CME Group as a global partner for futures, options on futures and OTC cleared products on FTSE Russell. Most recently, on 12 October 2015, we launched the E-mini FTSE China 50 Index Futures.
China’s strategic push outward presents numerous opportunities and CME Group looks forward to actively participating in this growth.