Published on 2015- 2016

In October 2013 China has announced to reinvigorate the historical silk road that was once the basis of international trade. This new silk road program is now being called Silk Road 2.0 or One Belt One Road (OBOR). The Silk Road 2.0 consists of various investment programs in ports, railway lines including high sped railways (hsr), roads, cities, different infrastructural investments. The basis of this huge fund will come from China’s huge foreign exchange reserves that have been acquired from huge current account surplus and capital account surplus maintained by China. Actually from 1980s to 2010s China has become the largest exporter and manufacturing hub of the world. And hence China has become destination of global investments as well as global trade. By 2008, China had foreign exchange reserves to the level of $ 4 trillion.

Now China wants to invest this huge source of forex reserves in real infrastructural investments and Silk Road 2.0 is part of this grand investment program. Till 2007-09 financial crisis, China used to invest almost all its net export earnings, remittances and investments by foreigners in US Treasury Bills. That means China gives loans to US Federal Reserve which the later uses to distribute debts in US asset market and goods market. Due to this debt US asset price inflates and hence profits is made out of asset trading. This financial profits became the basis of US business and USA starts to specialise mainly in finance i.e. asset trading. The profit generated from finance became the basis of demand for Chinese exports and hence it can be said that Chinese exports and manufacturing depends a lot on US finance based import capacity. But the process results in debt/GDP ratio soaring to unimaginable levels and hence the asset price bubble bursts in 2007. Now in 2008 G-8 meeting China was ready to provide to bail out US Federal Reserve to boost the asset market since that will create demand for China’s manufacturing exports. But USA went on for years with Quantitative Easing i.e. creating US dollar out of thin air and hence devaluing US Dollar and making Chinese imports to USA costly in the process. Hence from 2009 it was quite clear that USA would no longer the basis for Chinese manufacturing exports. So China finds it meaningless to go on providing loans to US Fed. Hence China began to seek to new investment opportunities for its huge forex reserves other than US Treasury Bills.

While seeking new investment opportunities China had two options. One was to create its own financial market and two to make investment in real infrastructures across the world. Creating a financial market mimicking USA is not easy. USA is the inheritor of 300 years old Anglo geo-political domination that started with British Empire. USA has military arrangements across various countries of globe including oil rich Gulf countries. Because of this Gulf countries sell oil in US Dollar only and hence OPEC cartel also had to sell oil in US Dollar only. Since entire world needs oil to pay Gulf Arab led OPEC all countries have to use US Dollar. As a result every country has to store its reserves in US Dollar i.e. all countries have to buy US Treasury Bills and hence provide cheap loans to US Fed. We call this arrangement petro dollar. This arrangement makes US Dollar most sought after currency in the world both for exchange as well as for store of value. Thus continuous demand for US Dollar keeps value of US Dollar high and also US financial market through US Fed has cheap source of credit. These facts make US financial market profitable. Even in times of crisis, globe finds US Dollar safe heaven for investment. Thus US financial market has no match.

China is global production hub but it has no special cheap credit availability like USA. It has no parallel of petro dollar. Hence when China looked to boost its own financial profit by doling out cheap credits to inflate its asset prices, China had to rely on its huge forex reserve as cover. Once asset bubble bursts in Chinese financial market in middle of 2015, People’s Bank of China has to stem in capital flight by selling almost 1 trillion US Dollar reserves since only that way it can keep RNB value stable and reduce capital flight from its financial market. But this policy is unsustainable as that would only result in depletion of China’s forex reserves. Thus creating its own financial market is not an option for China leave alone for any country which does not have petro dollar type arrangements.

Hence China is only left with real investment in infrastructures. Now for infrastructural investments we have several problems: one they require lot of time for covering cost alone and two the cost itself is difficult to calculate since different elements and raw materials used for infrastructure may have price fluctuations due to different demand and supply conditions. Hence many project that be calculated high profitable may turn out loss making and many projects may fail to recover costs. Since recovery of costs takes long time short term profit hunting investors will shy away from such investments. So only state based companies can invest there. In several cases, government may change in such a long time and new government may fail to agree to terms to which previous government agreed. Another problem is huge infrastructures need huge displacements of people. Hence such investments are always vulnerable to anti land acquisition movements, livelihood right movements, environmental movements, etc. Now question is how can these problems be avoided.

By noting these problems we can say that Silk Road 2.0 or OBOR has the following specific characteristics:
1) OBOR came into being mainly due to over capacity in global economy and failure of short sighted financial demand based system where China has to bear the maximum burnt of it since it has emerged as the global manufacturing hub.
2) OBOR mainly deals with infrastructure and hence it needs long term planning, long term realisation, long term trust all in all, long term philosophy.
3) Existing short term thinking financial capitalist neo liberal system may not be appropriate for such a long term leaning program like OBOR.
4) The existing international business rules need to be not only market friendly, property rights respecting, investor friendly but also should be abiding by long term vision and must be flexible to changes in socio-economic-political situations.

Since Silk Road 2.0 has its origin in lack of demand in global economy as a whole it has to be open to different ways of creating demand. Investing infrastructures is one way to create demand. But there can be other ways as well like patronage of rural and traditional handicrafts, artisans, agro/pisci/seri culture, etc. i.e. all pre-industrial revolution industries, cultures and products. To this we can add patronisation of sports, films, cultural goods, preserving environment. Investing in these fields may help to check the problems like movements against displacements or keeping society stable so that long term vision of OBOR can be realised. If these concerns are not taken into account then it is unlikely that OBOR will get success. Silk Road 2.0 is more about creating real demand in a system plagued by over capacity. Hence building infrastructures must be part of it. But one must be open to other avenues of creating real demand. China must get that while financial demand was short sighted, OBOR has a long term vision. Neo liberal financial capitalism has produced a short sighted society and politics. Hence OBOR needs to act in such a way that the society and politics must think in long term as well. For such social engineering, OBOR needs to be not just investment in infrastructures but also must be about creating social and political institutions that is far sighted and thinks with long term vision.


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