Last updated October 20th, 2018.
The New Silk Road, or One Belt One Road (OBOR) initiative, deserves far more attention than it gets. China’s pet project could change the very nature of our global economy during the next few decades.
For over 1,500 years between between 100BC and 1450AD, China ruled the land and seas. The “Middle Kingdom” controlled the Indian Ocean, Strait of Hormuz, and far beyond. Multiple trade routes flowed from the eastern world into Western Europe.
This helped China become one of the wealthiest nations on the planet. Exporting to Europe was much easier because of the country’s well-established trade routes.
Mongols and Turkmens invaded and eventually led to the decline of the Silk Road. However, China has big plans to revive its historic trade routes for the 21st century.
A massive amount of infrastructure investment will make these plans a reality. Billions worth yuan worth of ports, railways, and roads are already being built across Eurasia. China is financing the vast majority of it.
China’s not giving away all this modern infrastructure just for the benefit of others though. The terms vary based on the specific project and country. But typically, China either loans money for these projects or gets the right to operate and profit from them.
The New Silk Road will also let China export its products easier, faster, and at a lower cost. Workers and materials are also exported during the construction phase. This is aimed at keeping the Chinese economy strong as the mainland becomes oversaturated with new roads and railways.
Who Will Profit from the New Silk Road?
China is the obvious beneficiary of the New Silk Road. However, some places have even more upside because of their geographic location.
Kazakhstan is one of these countries. It’s the 9th largest in the world by land size and shares China’s northwestern border. This makes Kazakhstan essential for China to build infrastructure between them and Europe.
China has only two ways to build a land-route into Western Europe without Kazakhstan. The first is a much longer route through Russia. The second means going through the far more unstable middle-East.
Both of these options are too expensive and risky.
Just looking at Kazakhstan on the map should make you understand why China needs them for the OBOR initiative.
Cambodia stands out as a major beneficiary too. It isn’t nearly as vital to transportation across Eurasia. But the Southeast Asian nation is one of China’s only “true friends” in the region. Geopolitical necessity means it will see a large amount of investment.
For example, Cambodia stopped the Association of Southeast Asian Nations (ASEAN) from having a unified stance about disputes in the South China Sea. They use their veto power against fellow ASEAN members Vietnam, Malaysia, and the Philippines whenever the issue comes up.
There’s an unspoken treaty where Cambodia protects China’s interests in Southeast Asia. In return, China takes care of Cambodia economically. This “agreement” will remain for the foreseeable future.
Mongolia will also get a lot of financing relative to its size. It’s the least densely populated nation in the world. But Mongolia is also rich in natural resources such as coal, tin, copper, and iron.
More importantly, Mongolia shares its southern border with China. This naturally prompts a surge of cross-border trade and investment between the two. After all, China’s starting to deplete its own natural resources.
Of course, Mongolia also needs China. This is because the country is landlocked between China and Siberia. There’s no other option besides having a modern rail transportation system, and good relations with China, if Mongolia wants to profit from its vast resource wealth.
Less About Making Money, More About Power
Some people are skeptical about China’s true motives. The developmental benefits are obvious. However, it’s very possible that China’s goals are more geopolitical in nature.
The New Silk Road gives China vast economic and political leverage over its investment “partners”. In some cases, the infrastructure loans given out by China have high interest rates and recipients have little ability to pay them back.
Nations in debt to China could have to compensate with other favors.
Furthermore, China can “lock in” future military and economic alliances with the countries they invest in. Would you really want to side against China in a possible war when they own and operate all your infrastructure?
These are very interesting topics to me. Our global power structure could depend on how these events unfold. But as investors, our concern is making money – not political speculation.
The good news? There’s lots of money to make with the New Silk Road. Investors should carefully choose their target countries though.
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