China retained its position as Malaysia’s largest trading partner for the 7th consecutive year in 2015. Malaysia’s trade with China expanded by 11.1 percent to 230.89 billion ringgit (55.67 billion U.S. dollars), according to Malaysia’s International Trade and Industry Ministry.

Exports to China recorded a double-digit growth of 10 percent to 101.53 billion ringgit (24.48 billion U.S. dollars). Higher exports were registered for manufactured goods which saw an increase of 10.2 percent.

Malaysia’s export of petroleum products, manufactures of metal, chemicals and chemical products as well as optical and scientific equipment to China had contributed to the higher trade figure.

Exports of electric and electronic (E&E) products accounted for 42.6 percent of Malaysia’s total exports to China. Exports of mining goods increased by 53.6 percent in 2015, this significant increase was credited mainly to exports of aluminium ores.

China remained as Malaysia’s largest import source with 18.9 percent of total share, expanded by 12 percent to 129.36 billion ringgit (31.19 billion U.S. dollars) with higher imports recorded for apparel and clothing accessories, machinery, appliances and parts, as well as transport equipment.

China has been Malaysia’s largest trading partner since 2009, and Malaysia is China’s largest trading partner among the 10-member Association of Southeast Asian Nations.

The Belt and Road initiative has gained significant traction over the past few months, after the announcement in March 2015 that “Vision and Actions Outlined on the Joint Building Silk Road Economic Belt and 21st-Century Maritime Silk Road” by the China National Development and Reform Commission, the Ministry of Foreign Affairs and the Ministry of Commerce. This initiative would benefit Malaysia as a whole through various aspects.

Malaysia shall continue to benefit from this Belt and Road initiative by allowing businesses to operate out of Singapore and tap on growth opportunities in the region.

BENEFITS TO ASEAN

A recent unveiling of announcements by the Chinese government in 2015 places strong emphasis on directing the Maritime Silk Road towards the Association of South East Asian Nations (ASEAN). Even though South East Asia is rich in resources, it lacks construction funds to develop its infrastructure and suffers from low levels of industrial development and other related issues. Hence, strengthening the infrastructure of the ASEAN countries would allow such resources to be tapped upon. This initiative strives to promote Chinese capital and technology investment in these ports, transport routes and other infrastructure in order to improve the circulation of resources, market integration and allow for better facilitation of trade and investment within South East Asia.

POSSIBLE CHALLENGES AHEAD

Inter-connectivity and Credit Risk

Chinese companies operating abroad will face a series of challenges consequent to the enactment of this initiative. Firstly, as companies expand their global operations, there would be a rise in the risk of disruption in a particular country. This may affect the quality control or working capital issues. Credit risk would be the next concern as foreign customers may operate on different credit and payment terms. Chinese companies would then have to insure against such credit risks and counterpart defaults, participating in insurance programs.

Political Risk

With the increase in cross-border activities, there will be a rise in political uncertainty, relating to trade embargoes, infrastructure impediment and corruption, especially amongst the developing nations. Countries along the Belt and Road would then have to consciously work together to prevent or reduce such risks and organise a well-planned insurance program.

Social Implications

As China shifts its overcapacity to the countries along the Belt and Road, there would be a reduction in jobs, and the closing down of plants and factories in affected countries. This might lead to social implications amongst the large proportion of people in export related industries. The China Labour Bulletin reported earlier in 2015 that worker strikes and labour unrest in China increased significantly in 2014 as compared to the previous year, with the increase linked to the economic slowdown.

THE ROUTES AND ECONOMIC CORRIDORS OF THE OBOR

The ambitious OBOR action plan aims to connect Asia, Europe and Africa and potentially covers 55 percent of world GNP, 70 percent of global population, and 75 percent of known energy reserves. This is a long term strategy. Implementation may span as long as 35 years, completing in time for the 100th anniversary of the People’s Republic of China in 2049.

The action plan outlines five routes along the Silk Road Economic Belt and the 21st Century Maritime Silk Road. The Silk Road Economic Belt, aimed at facilitating land-based trade across the Eurasian landmass, encompasses three of the five routes:

(i) Linking China to Europe through Central Asia and Russia;
(ii) Connecting China with the Middle East through Central Asia; and
(iii) Bringing together China and Southeast Asia, South Asia and the Indian Ocean.

The 21st Century Maritime Silk Road uses Chinese coastal ports to:

(iv) Link China with Europe through the South China Sea and Indian Ocean; and
(v) Connect China with the South Pacific Ocean through the South China Sea.

The focus of these five geographical routes translates to the development and strengthening of six international economic corridors.

1)The New Eurasia Land Bridge Economic Corridor An international railway line from China’s Jiangsu province through Xinjiang province to Rotterdam in the Netherlands. After the existing portion of the corridor in China, the line will cross Kazakhstan, Russia, Belarus and Poland and will reach coastal ports in Europe. The new Eurasian Land Bridge benefits China by providing faster access to the EU market. The current average of five weeks for container shipping will be reduced to three weeks. For EU companies it provides a more cost effective route for exports and an efficient way for them to import their own production output that has been offshored to China. 

2)The China-Mongolia-Russia Economic Corridor In July 2015, at a summit in Ufa, Russia, the “Mid-term Roadmap for Development of Trilateral Co-operation between China, Russia and Mongolia” was officially adopted. Long established economic ties between the three countries connected by land will be strengthened by commitments to bring together the building of the Silk Road Economic Belt, the renovation of Russia’s Eurasia Land Bridge and the proposed development of Mongolia’s Steppe Road. The three countries have committed to this strengthening of rail and highway connectivity and construction, advance customs clearance and transport facilitation, and for the promotion of cross-national co-operation in transportation.

 3)The China-Central Asia-West Asia Economic Corridor The China-Central Asia-West Asia Economic Corridor runs from Xinjiang in China connecting to the railway networks of Central Asia and West Asia before reaching the Mediterranean coast and the Arabian Peninsula. This economic corridor primarily covers five Central Asian countries (Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and Turkmenistan) as well as Iran and Turkey.

4)The China-Indochina Peninsula Economic Corridor Chinese Premier Li Keqiang has proposed to deepen the relations between China and the five countries in the Indochina Peninsula by:

(i)  Jointly planning and building an extensive transportation network;
(ii) Creating a new mode of co-operation for fundraising; and
(iii) Promoting sustainable and co-ordinated socio-economic development. Current projects include the building of nine cross-national highways along the Greater Mekong Delta that will connect east and west and link the north to the south. An international rail line has also been opened, running from Nanning to Hanoi in Vietnam and air routes are planned to be introduced to several Southeast Asian Cities. 

5) The China-Pakistan Economic Corridor Since the concept of the China-Pakistan Economic Corridor was first raised by Premier Li Keqiang, during his visit to Pakistan in May 2013, various plans have evolved. Currently the long term plans between the two countries is to build highways, railways, oil and natural gas pipelines and optic fibre networks that connects Kashgar in China’s north-western territory of Xinjiang with the Pakistani port of Gwadar. The two countries issued a joint declaration in Islamabad in April 2015 committing to proactively advance key co-operation projects including renovating existing highways and building new expressways and a new international airport.

6)The Bangladesh-China-India-Myanmar Economic Corridor This economic corridor has been a joint China-India led initiative from the beginning and cooperation is well established. A Bangladesh-China-India-Myanmar Economic Corridor Joint Working Group has been formed. The first meeting convened in December 2013, resulting in several co-operation agreements. Extensive consensus has been reached on co-operation in transportation infrastructure, investment and commercial circulation, and people-to-people connectivity.

FINANCING THE OBOR

China’s push on ad-hoc financial architecture has included: the establishment of the Silk Road Fund in December 2014, under the People’s Bank of China (PBoC); the recapitalization of the China Development Bank (CDB) and the Exim Bank to support the Silk Road; the announcement in June 2015 by CITIC Group of an investment of around of $113 billion dollars into the OBOR Initiative and; the establishment in 2015 and 2016 respectively of the BRICS New Development Bank and the Asian Infrastructure Investment Bank (AIIB).

It is widely reported that China has committed a total of about $100 billion to a trio of new infrastructure funds: $40 billion to the Silk Road Fund, $50 billion to the AIIB, and $10 billion to the New Development Bank. Even further inflated amounts have been reported in Chinese media such as the China Development Bank’s reported May 2015 announcement of plans to invest $900 billion in the OBOR. While Chinese investments are already substantial with more waiting in the pipeline, it remains unclear how much of reported bilateral pledges overlap and therefore it is difficult for observers to judge what the actual sums involved are.

China’s ‘policy banks’, the China Development Bank and the China Exim Bank have been key players in these investments. The Silk Road Fund as well, with investments in infrastructure projects including road, rail and power schemes.

AIIB

The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank (MDB) realised for the 21st century, in which an estimated 60 countries have expressed their willingness to participate in a variety of content along the way, including policy communication, unity of facilities, trade flow, financial inter-mediation and people connection. The AIIB will target the development of infrastructure and other productive sectors in Asia, and also work with the existing MDBs to jointly address Asia’s daunting infrastructure needs.

Why the need for the ‘AIIB’?

In order to fulfil the One Belt One Road initiative, a huge amount of capital injection is necessary, hence the AIIB came into being. The AIIB is seen as an important strategy to support the implementation of this initiative.

The key reason behind the setting up of AIIB is to expand the development of partnerships amongst emerging nations – to build political mutual trust, economic integration, and bring together communities of cultural interests.

The AIIB was first unveiled by President Xi Jinping in Jakarta during talks with President Jokowi Widodo of Indonesia in 2013. He expressed interest to provide infrastructure support in financial and construction services for developing countries in the ASEAN region.

The AIIB serves as an important backing for the economic development of Asia by supporting developing countries to achieve common growth. According to the Asian Development Bank’s report, the Asian infrastructure requires a funding of approximately US$8,000 billion for the stimulation of Asia’s economic recovery and development. There are existing major institutions in the world, such as the World Bank and the Asian Development Bank, where there are very strict requirements and conditions for investing and borrowing, especially in obtaining funding for infrastructure projects. Therefore, there has to be an appropriate adjustment to better suit the reality of developing countries’ actual conditions.

By 31 March 2015, there were a total of 57 founding members according to chronological order in the chart below :

After the United Kingdom announced her intention to join the AIIB on the 12 March 2015, there was a chain effect which triggered other European countries to join the AIIB when the deadline of 31 March 2015 approached (Stage 4). Of the 57 founding members, there are 10 members, including China whose respective economy aggregate amounts to more than US$1,000 billion at the end of 2014. Also, based on the 2014 International Monetary Fund published data, of the top 10 global economic countries, other than USA and Japan, the remaining 8 countries have become AIIB’s founding members. Similarly, of the world’s top 10 most populous nations, 7 of them have become founding members, namely China, India, Indonesia, Brazil, Pakistan, Bangladesh and Russia.

Geographic Distribution of the 57 Founding Members of AIIB

Out of the total 34 Asian countries participating in the AIIB, 22 countries are part of the initial founding members of this initiative. Other than Indonesia, the remaining 21 nations signed a “Build AIIB Memorandum”. Due to the change of government, Indonesia delayed the formal signing of the memorandum until the 25 November 2014, and officially became part of the first 22 founding members of AIIB. There are 18 European nations, and the rest are from Oceania, South America and Africa.

Other International Financial Institutions

According to the latest World Bank allocated voting rights statistics, the past ranking of countries are as follows: United States (15.85%), Japan (6.84%), China (4.42%), Germany (4.00 percent), the UK (3.75 %), France (3.75 percent), India (2.91%), Russia (2.77 percent), Saudi Arabia (2.77%) and Italy (2.64%).

The Asian Development Bank includes the following countries with voting rights: USA, Japan, China, India, Australia, Canada, Indonesia, Korea and Germany. Other than the USA and Japan, most of the major countries involved in the World Bank and Asian Development Bank are also involved as the AIIB founding members. Amongst the 57 founding countries of AIIB, there are 10 countries with a total economic output ??????

The Silk Road Fund (SRF)

The SRF was established in December 2014 under the People’s Bank of China (PBoC) with the purpose of providing financing support for trade, economic cooperation and connectivity under the Belt and Road Initiative, primarily through equity investments. 

 The SRF has a total capital of US$40 billion. The first capital injection is US$ 10 billion, which is co-sponsored by official foreign exchange reserves (State Administration of Foreign Exchange – US$ 6.5 billion), China Investment Corporation (US$ 1.5 billion), the Export-Import Bank of China (US$ 1.5 billion), and the China Development Bank (US$ 0.5 billion).

 Notably, the SRF is commercial in its approach, looking for strong commercial deals to co-invest and while they would prefer for investments to involve Chinese companies, this is not a condition of their investments. The SRF will comply with market rules and the international order of finance, and welcome participation from domestic and overseas investors, such as the China-Africa Development Fund and the Asian Infrastructure Investment Bank.

 The first project of the SRF was an investment to finance a 720MW hydroelectric power project together with IFC, which will be run by a newly created subsidiary of China Three Gorges Corp. The Karot Hydropower Project, which is scheduled to become operational by 2020 and will be run by the Chinese side for 30 years before being handed over to Pakistan, is expected to cost roughly $1.65 billion, however it is not clear how much of the overall cost will come from the SRF. This investment is the ‘down payment’ for the $46 billion infrastructure China-Pakistan Economic Corridor.

Subsequent investments of the SRF included:

In June 2015, the SRF (together with one of China’s largest chemical enterprises, ChemChina) announced agreements to seek to acquire Italian tyre manufacturer Pirelli.

In March 2015, the SRF concluded a framework agreement with one of Russia’s leading independent gas producer, Novatek, on the acquisition by the SRF of a 9.9% equity stake in the Yamal LNG project.

The SRF has also been an active investor in recent Hong Kong initial public offerings, taking cornerstone stakes in both China International Capital Corporation’s October 2015 IPO and China Energy Engineering Corporation’s November 2015 IPO.

SRF signed a framework agreement with KAZNEX INVEST JSC, a major development institution in Kazakhstan to invest USD 2 billion in setting up special fund for bilateral production capacity cooperation.

SRF will provide $2 billion to BAITEREK JSC, Kazakhstan’s Baiterek National Holding Company, to invest in Kazakhstan’s priority industrial projects in forms such as investment and (or) participation in private equity and infrastructure funds.

The CITIC Group

CITIC announced in June 2015 that its banking, securities, trust and construction divisions will jointly invest more than 700 billion yuan ($112.8bn) to support the OBOR. CITIC’s pipeline of projects includes a network of railways, highways, oil and gas pipelines, power grids, internet networks, maritime and other infrastructure linking across central, west and south Asia to as far as Greece, Russia and Oman. More than 300 projects across over ten countries are stocked in the pipeline. The first batch of investment includes 27 projects and will cost around 90 billion yuan ($13.7bn) 

CITIC Bank announced it will establish and manage a One Belt, One Road fund, with 20 billion yuan ($3.2bn) in its first phase, to participate in mergers and acquisitions, public-private partnerships and financing Chinese companies to expand overseas. CITIC Bank expects to increase the fund to 100 billion yuan ($16.1bn) within five years to finance projects in the region. Even prior to the creation of the fund, CITIC will immediately provide 110 billion yuan ($17.7bn) in equity financing and debt financing to more than 30 companies with businesses related to China’s global initiative. 

Over the last two years, a number of other projects were announced in connection with the initiative, including a number of private Chinese companies’ foreign expansion and joint venture plans in Belt and Road Initiative countries, such as the machinery maker XCMG Group’s opening of new joint venture factories in Uzbekistan. Some projects, already on the drawing board, seem to have been co-opted into the new scheme by bureaucrats and business people scrambling to peg their plans to Mr Xi’s policy, particularly in the CITIC portfolio, but also across the so-called ‘policy banks’.