Born in late 2013, the Belt and Road Initiative (BRI) is a development and cooperation strategy launched by China. It includes 80+ countries mainly from Asia, Europe and Africa and spans an area accounting for nearly 36% of global GDP, 68% of world population, and 41% of global trade.
We expect merchandise trade flows between China and BRI partners to grow by +USD117bn in 2019 (after an estimated +USD158bn in 2018). This and boost global trade by +0.3pp, would add +0.1pp to global GDP in 2019.
For China, exports to BRI markets are expected to grow by +USD56bn in 2019 (after +USD76bn in 2018). BRI will support: business internationalization, overcapacity reduction, economic upgrading, RMB internationalization and the reduction of regional imbalances. Central and Western Chinese provinces will likely be the first direct winners of the project.
For partner countries, we see the impact being threefold: a boost in capital (already + 410bn Chinese investment to BRI over 2014-18), a boost in external demand (+USD61bn additional exports to China in 2019) and an improvement in competitiveness thanks to lower transaction costs transportation cost and time of travel, e.g.) and better infrastructure. ASEAN and the Eastern European market are best positioned to take advantage of the project.
However, the BRI will not be a walk in the park. Three challenges remain unaddressed:
·Financial sustainability, given China’s limited financial resources (total non-financial debt at 253% GDP) and only partial control over the inderlying risks in BRI markets (country risk, e.g.). Funding needs are considerable. We estimate that the capital need to fund infrastructure for Asia (excluding China), Europe and Africa combined would amount to USD1.7tn per year.
·Legal and regulatory risks, given the absence of a uniform regulatory framework among countries with different law regimes (common law, continental law, Islamic law). This creates uncertainty and complexity for trade and cross-border investment.
·Political risks, as political tensions among BRI members (Saudi-Iran, India-Pakistan), some BRI members with China (India or ASEAN vs China, e.g.), and battles for influence with other superpowers (with the US, EU) hamper partnerships.