BRI Topic #4:
Economical Implications

Economic Effects and Trade​

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The Belt and Road Initiative, or BRI, will and has significantly benefited China by promoting the Chinese currency RMB, reducing tariffs and transport costs, and allowing expansions of Chinese State-Owned Enterprises (SOEs). This new “Silk Road” can increase the amount of trade and investment by connecting China to the rest of the world. This will allow China’s economy to be boosted since a large part of the world’s economy can be re-directed towards China. Through this, China can also invest in many major overseas projects and allow their SOEs to bloom. 
 

Increase Use of the CNY (Leo)

The internationalization of the Yuan can weaken global reliance on the U.S. dollar, the current world reserve currency. As the world reserve currency, the U.S. can borrow at a lower cost. The reserve status of the dollar translates to high demand for the currency. This reduces the burden of paying off the national debt and facilitates spending. In addition, the safety of the U.S. dollar as the world’s reserve currency also encourages investment in the United States. This can intuitively be observed in the trade volume in U.S. stock markets compared to other countries.  However, the U.S. has also utilized the reserve status as political leverage, threatening to cut off financial exchange through their banking systems and freeze dollar-denominated assets. These benefits can be carried over to China if the use of the CNY drastically increases.

Pakistan: 
Pakistan, a notable recipient of BRI investments, has a growing trend of conducting transactions in RMB, facilitated by the economic projects initiated under the initiative. Addressing a ceremony on promoting the use of RMB in cross-border settlement organized by ICBC Bank Ltd, Mr. Ahmad, the Governor of the State Bank of Pakistan (SBP), said the SBP has put in place the required regulatory framework that facilitates the use of the RMB in trade and investment transactions, such as the opening of letters of credit and availing financing facilities in the Chinese currency. As a result of the central bank’s efforts to promote the use of the RMB in trade with China, RMB-denominated imports of Pakistan from China increased from two percent in 2017-18 to 18 percent in 2021-22. Mr. Ahmad also discussed the benefits of a local RMB clearing system and denominating trade in the RMB, including a fast turnaround time and reduced cost for the local banking system, easy access to the RMB settlement for the local banking system, improved and more competitive pricing of bilateral trade transactions, and the opening up of new markets for Pakistani businesses.

 

Source:

• https://www.dawn.com/news/1784373#:~:text=As%20a%20result%20of%20the,to%2018pc%20in%202021%2D22.

• https://www.arabnews.com/node/2398811/pakistan

 

Kenya:
   Moreover, as Sino-Kenyan trade grows, using the Yuan as a low-cost transaction mechanism is appealing for bankers as the KBA’s Habil Olaka states. Many African central banks are requesting for currency swaps, where a loan in one currency and a loan in another currency are exchanged, and for a part of their foreign reserves to be kept in RMB. These developments follow the general trend of increasing Sino-African economic cooperation.

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Expansion of Exports and Reduction of Trade Barriers (Marvin)
Through various bilateral agreements and infrastructure projects, trade routes have become more streamlined and efficient, making it easier and more cost-effective for Chinese products to reach international markets. 

Kazakhstan: 
For example, the development of the Khorgos Gateway on the China-Kazakhstan border has facilitated smoother cross-border trade, reducing trade costs and boosting Chinese exports.
The Khorgos Gateway's development has played a crucial role in lowering these transaction costs by minimizing the time and resources required for goods to move across the border. As a result, Chinese exporters experience cost savings in terms of paperwork, customs clearance, and transportation, which makes trade more affordable.
Economic trade barriers can encompass various challenges, including high operational expenses, cumbersome bureaucratic processes, and inefficient trade infrastructure. The Khorgos Gateway's development actively addresses these economic trade barriers. It showcases the commitment of both China and Kazakhstan to break down these barriers and foster economic cooperation. By optimizing trade processes and reducing costs, they are actively working to overcome the financial hurdles that once impeded trade.

Vietnam: 
   The construction of the Lao Cai-Hanoi-Hai Phong railway, funded in part by Chinese investments, has improved transportation links between China and Vietnam. Additionally, the Vietnam-China Border Economic Cooperation Zone, located at the border between the two countries, has been established to facilitate trade and investment. 
These developments have made it easier and more cost-effective for Chinese products to reach international markets through Vietnam, boosting Chinese exports to this important Southeast Asian market.

The expansion of exports from Vietnam is closely linked to its remarkable economic growth and its growing role in regional trade. By fostering economic prosperity, Vietnam has been able to attract increased foreign investment and expand its production capacity, which, in turn, has boosted its exports. 
Ultimately, these developments result in a more cost-effective and economically efficient trade environment. Chinese products can be transported more swiftly and at a lower cost through Vietnam to reach international markets. This leads to improved competitiveness and more significant profit margins for businesses engaged in exports. Economic efficiency is a crucial outcome of reduced trade barriers.

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Expansion of Chinese SOEs (Kelvin)
In the BRI, companies engaged in the construction of the projects are usually Chinese State-Owned Enterprises (SOEs). The Chinese government controls most or all of the shares of the SOEs, meaning that they are useful tools for the Chinese government's diplomacy internationally. In the BRI, in particular, China intensively used SOEs to construct the projects, as this would mean expansions of these companies' overseas business.

Malaysia:
In Malaysia, the East Coast Rail Link (ECRL) project has been financed and constructed by Chinese companies like the China Exim Bank and the China Communications Construction Company (CCCC). The project is a major rail infrastructure project connecting the east and west coasts of Peninsular Malaysia. According to a report by Fitch Ratings, the ECRL project is valued at approximately $16 billion, which will be paid to the two Chinese SOEs. This showcases China's government’s ability to use diplomatic means to expand overseas departments of its SOEs.

Saudi Arabia:
As mentioned before, multiple Chinese SOEs are involved in the construction of NEOM, Saudi Arabia’s futuristic city. 
For instance, China Railway Construction Corporation (CRCC铁建重工) exported a batch of tunneling equipment for the NEOM tunnel project in September 2021. 
China Railway Construction Corporation (CRCC中国铁建) obtained the contract package for NEOM tunnel portals and access points in June 2021, as reported by Middle East Economic Digest (MEED) in August 2022. 
In early July 2022, China Energy Engineering Corporation (CEEC中国电建) signed a contract for the super-tall tower pile foundation project in NEOM New City. 
In April 2023, Sinohydro Foundation Engineering Co. Ltd (水电基础局), signed the sixth quantity list for the pile foundation project in the future New City of Saudi Arabia. 
In October 2022, China State Construction Engineering Corporation (中国建筑) signed the general contracting contract for "The Line" transportation tunnel project, which is the largest transportation and public infrastructure project in Saudi Arabia.

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Digital Silk Road (Barnabas)
The Digital Silk Road, a visionary initiative by China, heralds a new era of technological advancement and digital connectivity, propelling participating nations into the forefront of the global digital landscape. It embodies a strategic push towards digital connectivity and technological cooperation across a network of countries spanning Asia, Europe, Africa, and beyond. Much like its ancient namesake facilitated trade and cultural exchange, the Digital Silk Road aims to foster innovation, information-sharing, and economic growth through the seamless flow of digital technologies, data, and services. This ambitious endeavor holds the potential to reshape industries, empower societies, and bridge the digital divide in participating nations, ushering in a new era of global connectivity and technological progress. The digital Silk Road in turn allows China to construct new infrastructure, allowing a bigger range and variety of goods to be traded much more efficiently as transport durations and costs will be cut.

Kenya
In Kenya, the BRI has contributed to the establishment of the Konza Technopolis, often referred to as "Africa's Silicon Savannah." This ambitious project aims to create a cutting-edge technology hub, promoting research, innovation, and technology-driven industries. Chinese investment and expertise in digital infrastructure play a pivotal role in accelerating the realization of this technological ecosystem, which is expected to have a transformative impact on Kenya's economy and technological landscape.

Indonesia
Moreover, in Southeast Asia, countries like Indonesia have witnessed significant strides in digital connectivity and technology adoption due to their involvement in the BRI. For example, the Jakarta-Bandung High-Speed Rail project incorporates state-of-the-art digital systems for operations and passenger services. This not only facilitates efficient transportation but also sets the stage for the integration of smart technologies in the region.

Sources:

• Schrag, Jacque. “How Will the Belt and Road Initiative Advance China’s Interests?” ChinaPower Project, 26 Aug. 2020, chinapower.csis.org/china-belt-and-road-initiative/. 

• https://documents1.worldbank.org/curated/en/471731593499938164/pdf/South-Caucasus-and-Central-Asia-The-Belt-and-Road-Initiative-Kazakhstan-Country-Case-Study.pdf