Clarifying OBOR through the China-Pakistan Economic Corridor€¦ · 29-06-2017 · •Six...

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

Clarifying OBOR through

the China-Pakistan

Economic Corridor

IHS Markit Country Risk and Forecasting Team

29 June 2017

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

1. What is OBOR?

▪ Key facts

▪ Recent Chinese overseas investment

▪ OBOR in Asia

2. China’s objectives

▪ Political

▪ Economic

▪ Security

3. The China-Pakistan Economic Corridor

▪ Overview

▪ Security and political risks

2

Presentation agenda

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.


• The economic and geostrategic

aspects of OBOR are

inseparable.

• OBOR is subject to rhetoric and

hype – but that’s not to say that

there is no potential.

• Individual projects face specific

political risks that will dictate their

success.

3

Key takeaways


What is One Belt, One

Road (OBOR)?

4


Global scope

As many as 68 countries in three continents will be affected by OBOR, potentially

impacting 4.4 billion people

5

South Asia

East Asia

S.E Asia

Central Asia

Middle East

Europe


Key features

6

A plan to connect China economically with the rest of Asia, Europe

and Africa along overland and maritime routes.

A replication of China’s own domestic focus on infrastructure

development over the past several decades.

Emphasis is on infrastructure, but OBOR involves Chinese investment

in nearly all other sectors.


• Asia Infrastructure Investment Bank (AIIB)

➢Estimated budget of USD100-billion

• Silk Road Fund (SRF)

➢Estimated budget of USD40-billion

• New Development Bank (NDB)

➢USD100-billion (BRIC-focused)

• China Development Bank (CDM) and Export-

Import Bank of China (EXIM)

➢Provides loans for Chinese machinery and

equipment bought for OBOR projects

• Chinese state-owned and private companies

➢These will be encouraged by the government

to invest in OBOR countries

7

Financing


• Hong Kong remains the largest

destination for Chinese overseas

investment.

• The UK, US and Australia follow make up

the top four.

• Only Indonesia, Russia, and Kazakhstan

are OBOR countries featuring in the top

10.

• Nevertheless, Chinese foreign investment

is less risk averse than investment from

more traditional countries.

• Lending from Chinese policy banks has

increasingly focused on Asia and OBOR

countries.

8

Outbound investment

0

100

200

300

400

500

600

700

800

900

2010 2011 2012 2013 2014

China's increasing total ODI

© 2017 IHS Markit

OD

I(U

SD

Bil

lio

ns

)

Source: Ministry of Commerce


• 21st Century Maritime Silk Road

• Silk Road Economic Belt

• Six economic corridors

➢China Pakistan Economic Corridor

➢China Myanmar Bangladesh India

Economic Corridor

➢China-Mongolia-Russia Economic

Corridor

➢New Eurasian Land Bridge

➢China-Central Asia-Western Asia

Corridor

➢China-Indochina Peninsula Corridor

9

Key components


Potential OBOR map

10


Southeast Asia

11

Thailand

USD16-billion invested as of end-

2016 with further cooperation likely

in Thailand’s Eastern Economic

Corridor.

Indonesia

Only USD6 billion so far realised,

but the government is seeking

more investment in infrastructure.

Malaysia

USD34-billion of investment

pledged for the the Melaka

Gateway project and the East

Coast rail line.

Myanmar

Twelve OBOR projects, including a

Myanmar-China gas and oil

pipelines.


South Asia

12

India

In excess of USD20-billion

pledged but India has since

opposed OBOR due to territorial

disputes.

Pakistan

More than USD50-billion

committed to various sectors,

including energy and

infrastructure.

Bangladesh

USD28-billion pledged for

Bangladesh’s railway and

infrastructure sectors.

Sri Lanka

Port development and airport

management, but local political

opposition has grown.


China’s objectives

13


China’s interests

Domestic politics

EconomicSecurity

14


• President Xi Jinping’s personal

power stands to benefit from

OBOR.

• That said, the objectives behind

OBOR pre-date Xi Jinping, and

are not serving only his

interests, but the larger political

interests of the Party-state

leadership.

15

Domestic politics


Regional development

• OBOR aims to address regional

disparities between China’s

developed coastal areas and

poorer inland provinces.

• Large-scale spending by the

central government has so far not

worked.

• China now plans to connect its

hinterlands with regional

economies that are much closer

in proximity.

16

Economic rationale

OBOR domestic programs

© 2017 IHSSource: local media

Silk Road Economic Belt

21st Century Maritime Silk

Road


Surplus industrial capacity

• OBOR is perceived as a solution

to China’s overcapacity

problems.

• Not only does this involve selling

surplus product to OBOR

countries, but also moving

equipment to the countries

themselves.

17

Economic rationale

0

1

2

3

4

5

2003 2005 2007 2009 2011 2013 2015

Cement Glass Pig iron Crude steel

China heavy industrial output volume

Source: IHS © 2016 IHS

2002=

1, 12M

MA


China’s transitioning economy

• OBOR is intended to assist the

Chinese economy’s broader

transition away from a low-cost

manufacturing industry.

• OBOR countries are perceived to

be ideal customers for high-end

Chinese technological products.

• Emphasis is likely on high-speed

railways.

18

Economic rationale


Peripheral diplomacy

• OBOR is tied with the advent of a

more pro-active Chinese foreign

policy.

• Greater interdependence with

neighbors gives China’s stronger

regional leverage.

• In contrast to: “hide your strength

and bide your time”

19

Security


Security: South China Sea dispute

20


Security

21

China’s growing diplomatic leadership


Internal security

• OBOR also attempts to address

some of China’s most pressing

domestic security issues.

• Bringing prosperity to contain

separatist sentiments in Muslim-

majority Xinjiang.

• Stemming social unrest triggered

by mass dismissal of industrial

workers.

22

Security


The China-Pakistan

Economic Corridor

(CPEC)

23


CPEC Overview

24


Beyond infrastructure

• Chinese investment in Pakistan is

overwhelmingly concentrated in the

energy sector.

• The emphasis is on speed, reflecting the

Pakistani government’s political priorities.

• Infrastructure investment is also present,

with development of highways, railways

and ports key components.

• Chinese companies have bought the

Pakistan Stock Exchange (PSX).

• They have also purchased power utility

firms and telecommunications companies.

25


What’s in it for China and Pakistan?

26

Alternate access to the Arabian sea

Development of Xinjiang

Foreign military base?

Quelling Muslim separatism

Unprecedented investment

Energy generation

Geopolitical balance with India

Development of restive regions

China Pakistan


Political risks facing CPEC

• Pakistan has generally been

politically unstable for some time.

• Contract certainty has been a

long-term problem.

• Projects are commonly disrupted

due to corruption and lack of

transparency.

27


Security risks facing CPEC

28

0

50

100

150

200

250

300

350

2014Jan

2014May

2014Sep

2015Jan

2015May

2015Sep

2016Jan

2016May

2016Sep

2017Jan

Attacks Killed

NSAG attacks in Pakistan: January 2014 - March 2017


Conclusion: Evaluating OBOR

29

Infrastructure spending

Regional integration/connectivity

Regional interdependence

New trade routes/business opportunities

China’s political ambitions

Transparency

Commercial rationale

High risk environments

Potential Benefits Challenges

IHS Markit Customer Care

[email protected]

Americas: +1 800 IHS CARE (+1 800 447 2273)

Europe, Middle East, and Africa: +44 (0) 1344 328 300

Asia and the Pacific Rim: +604 291 3600

Disclaimer

The information contained in this presentation is confidential. Any unauthorized use, disclosure, reproduction, or dissemination, in full or in part, in any media or by any

means, without the prior written permission of IHS Markit Ltd. or any of its affiliates ("IHS Markit") is strictly prohibited. IHS Markit owns all IHS Markit logos and trade names

contained in this presentation that are subject to license. Opinions, statements, estimates, and projections in this presentation (including other media) are solely those of the

individual author(s) at the time of writing and do not necessarily reflect the opinions of IHS Markit. Neither IHS Markit nor the author(s) has any obligation to update this

presentation in the event that any content, opinion, statement, estimate, or projection (collectively, "information") changes or subsequently becomes inaccurate. IHS Markit

makes no warranty, expressed or implied, as to the accuracy, completeness, or timeliness of any information in this presentation, and shall not in any way be liable to any

recipient for any inaccuracies or omissions. Without limiting the foregoing, IHS Markit shall have no liability whatsoever to any recipient, whether in contract, in tort (including

negligence), under warranty, under statute or otherwise, in respect of any loss or damage suffered by any recipient as a result of or in connection with any information

provided, or any course of action determined, by it or any third party, whether or not based on any information provided. The inclusion of a link to an external website by IHS

Markit should not be understood to be an endorsement of that website or the site's owners (or their products/services). IHS Markit is not responsible for either the content or

output of external websites. Copyright © 2017, IHS MarkitTM. All rights reserved and all intellectual property rights are retained by IHS Markit.

30

The Maritime Silk RoadTon van den Bosch

The Historical Silk Road

China’s belt & road initiative

1. development strategy proposed by Xi Jinping in 2013

2. initially referred to as “one belt, one road” (OBOR)

3. includes the:

1. Silk Road Economic Belt; and

2. 21st-century Maritime Silk Road (the “road” somewhatconfusingly refers to the shipping lanes)

4. proposed investment = USD $1,2 trillion

5. 12 times bigger in absolute dollar terms than the Marshall Plan

6. countries along the belt & road represent ~30% of global economy

7. is:

o a collection of infrastructure projects

o combined with (planned) free-trade agreements with 65countries

o to stimulate trade and export

8. commercial and geopolitical drivers

the 21st Century Maritime Silk Road

1. China aspires to become a maritime superpower

2. creates a network of ports in Asia, Africa and the Mediterranean

3. China has been investing heavily in ports, such as in:

o Kuantan in Malaysia

o Kyaukphyu in Myanmar

o Gwadar in Pakistan

o Colombo and new port at Hambantota in Sri Lanka

o Nairobi in Kenya

o Piraeus in Greece

4. will redefine trade patterns between Asia and Europe

5. enormous impact on the maritime sector

Maritime Silk Road

1. is not

o development aid

o foreign direct investment by the Chinese government

2. instead it

o includes loans (by Export-Import Bank of China, ChinaDevelopment Bank, Bank of China, the New Silk Road Fund andthe Asian Infrastructure Investment Bank (AIIB)

o is executed indirectly by state controlled companies such as

o China Harbour Engineering Co Ltd (CHEC)

o CITIC

o China Cosco Shipping

Impact on lines and on terminal operators

1. increased economic activity will boost volumes (the growing pie)

2. Chinese policy may influence port call and hubs decisions

3. increased competition

4. change in trade routes

5. 6 of the top 10 container terminals worldwide are in mainlandChina (with another in HK)

6. massive investments have made Chinese port operators worldleaders

Impact – change in trade routes

for example:

1. Mediterranean

2. ME and East Africa

3. US East coast

4. Singapore

Impact – Mediterranean

1. Egypt: China Cosco Shipping controls Suez Canal ContainerTerminal

2. Turkey: China Cosco Shipping and CIC Capital Corp acquired a 65%stake in the Kumport terminal in Ambarli

3. Italy: a €1bn offshore container terminal may be developed inVenice

4. Greece:

1. China Cosco Shipping acquired a 67% stake in Piraeus in 2016

2. Now 3rd busiest terminal in the Mediterranean

Impact on the ME and East Africa

Development of container terminals:

o Duqm Port in Oman

o Mombasa and Lamu port in Kenya

as well as Djibouti

o first naval port outside of China

o strategic location on the Horn of Africa (gate to the Red Sea)

o China will also invest to

o upgrade commercial port

o expand railway to Ethiopia

Impact - US East coast

1. Panama Canal has been widened but can still not accommodate thelargest container vessels

2. Suez canal as an alternative to the Panama canal

3. Suez and the Mediterranean are becoming more important to servethe US East coast

4. Resulting in a shift from the trans-Pacific to the trans-Atlantic routefor containers between Asia and the East coast

Impact on Singapore

o as transshipment hub

o as maritime capital

Impact - Strait of Malacca

1. shortest route between the Indian and Pacific oceans

2. > 60,000 vessels transit the Strait each year, carrying 25% ofglobal trade

3. > 13m barrels of oil flow trough the Strait each day

4. 80% of China’s energy imports pass through the Strait

5. geostrategic concern - the “Malacca Dilemma”

“Malacca Dilemma” – China aims to reduce dependence on the Strait of Malacca

1. Gwadar

o Development of port at Gwadar on the Arabian Sea

o Linked to railways and pipelines to carry oil and gas

o Part of the China–Pakistan Economic Corridor (CPEC)

2. Kra Canal

o proposal to construct a canal across the Kra Isthmus in southernThailand

“Malacca Dilemma” – China aims to reduce dependence on the Strait of Malacca

3. train to Europe: via Khorgos Gateway in Kazakhstan to Europe (>12,000km) in ~ 15 days

4. Kyaukpyu port (and pipelines) in Myanmar on the Bay of Bengal

5. East Coast Rail Line (ECRL), linking Kuantan Port on Malaysia’s Eastcoast to Port Klang on its West coast

Challenges for S’pore as transshipment hub

1. massive new capacity in other transshipment hubs - increasedcompetition

2. remember:

o historically, strategic location on Strait of Malacca has beenadvantage

o key driver for China is the Malacca Dilemma

o China wants to bypass the Malacca Straits for its trade andenergy

The Dubai example

o Until around 1980, Dubai was off the main shipping routes

o D-tour and concerns over the Strait of Hormuz

o After massive investment in terminals and intermodal connections,Jebel Ali is now the world's 9th busiest port

o Dubai itself now at risk from King Abdullah Port (planned capacity>10m TEUs per year) and other developments

Lesson: with ambition and investment, location is not everything...

Impact on Singapore - opportunities

Having said this:

1. strategic location still matters

2. Singapore is still the world's 2nd busiest container port (afterShanghai)

3. role as transshipment hub could be enhanced by increased trade(again, the growing pie)

4. Singapore works hard to remain very competitive (e.g.development in Tuas, investment in training and technologies)

5. limited security and geopolitical risks (U.S. navy uses Singapore asa gateway to the South China Sea)

Impact – Singapore as maritime capital

1. Menon Economics named Singapore The Leading Maritime Capitalof the World in April (again)

2. Maritime cluster:

o includes shipping lines, terminal operators, shipbrokers, banks,marine insurance, P&I Clubs, classification societies and lawfirms

o 5,000 establishments

o employs more than 170k people

o contributes ~ 7% to Singapore’s GDP

3. Singapore Registry of Ships

o is amongst the world’s top 5 largest ship registries in the world

o with over 4,000 Singapore-flagged ships

Impact – Singapore as maritime capital

4. Ease of doing business, clean government, efficient customsprocedures and quality of living

5. More “neutral” hub (consider tensions in South China Sea andconcerns that China may be too dominant)

6. Transparent, sound and predictable legal system

7. Singapore is becoming Asia’s hub for maritime law and arbitration

Impact – Singapore as insurance hub

1. regional insurance hub: major direct insurers, reinsurers andbrokers have the RHQ in Singapore

2. gateway to Southeast Asia

3. significant expertise in specialty insurance (marine, energy,catastrophe, credit and political risks)

4. Insurancetech: R&D on big data and smart analytics increasecompetitiveness

5. stable and well regulated

6. can benefit from increased activity resulting from the developmentof the Maritime Silk Road

So, in short, the Maritime Silk Road

o presents challenges and increased competition to terminal operators

and

o offers opportunities to shipping lines, underwriters, engineers,bankers, tax advisors, lawyers and other marine service providers inSingapore

Beijing Cologne Dubai Hamburg Hong Kong Le Havre London Marseille Monaco Paris Piraeus Shanghai Singapore

Why Ince & Co?

o World leading international firmo Focus on energy, maritime and port industryo Transactions, projects and dispute resolutiono Dedicated port practice with specialists in 13 offices in Europe, the Middle East and in Asia

Questions?

Beijing Cologne Dubai Hamburg Hong Kong Le Havre London Marseille Monaco Paris Piraeus Shanghai Singapore

Ton Van Den BoschInce & Co 16 Collyer Quay #19-00SingaporeE: [email protected] T: +65 6538 6660

Clarifying OBOR through the China-Pakistan Economic Corridor€¦ · 29-06-2017 · •Six...

Documents

Transcript of Clarifying OBOR through the China-Pakistan Economic Corridor€¦ · 29-06-2017 · •Six...