China’s Belt and Road Initiative (One Belt, One Road- OBOR)

The program’s goal is to open China up to new and untapped trade opportunities, and put a shot in the arm on economic development in the “belt”—the land route starting in western China that crosses through Central Asia to the Middle East—as well as to the “road”: the maritime route around Southeast Asia, the Persian Gulf, and the Horn of Africa.

The Initiative is based on historic trading routes between Asia and Europe 2000 years ago and involves more than 60 countries which represent a third of the world’s total economy. It aims to enhance the cooperation on trade, investment , technology and innovation as well as pursue development projects that enhance the domestic economic viability of potential trade partners  such as large infrastructure projects—ports, energy plants, and urban housing.

What does this mean for Florida?

Many view the OBOR strategy as “China’s Marshall Plan”.  It is still too soon to tell what the overall impact will be or how it ultimately gets implemented.

Europe is a key market and anchor for OBOR.  Europe and China have significant interests at stake and both are at crucial points economically speaking.  Europe is looking to strengthen its economic recovery and China’s is continuing to slow.  China is transitioning from an export-oriented economy that is more stable in the long run and the OBOR is an essential element in that transition.  In the process, Chinese infrastructure investments will prop up economies along the OBOR leading to increased market access not just for China and Europe but globally.

Economies that were developmentally challenged could become markets of opportunity as Chinese investment could prove to be transformative.  This is one to watch.

How Worried Should we be About China?

A recent PriceWaterhouseCoopers report shows that a slowdown in economic activity by China will be felt by emerging economies but less so on developed economies. China still has many serious issues to address and overcome.  How those issues are handled will have impacts that will affect the global economy overall.

Why has the Chinese slowdown not been so bad for the U.S. and Europe?

One of the side effects of the Chinese slowdown on the global economy has been the lowering of commodity prices – oil in particular. This has had a positive effect the bottom line of the companies that still depend heavily on oil as well as on transportation costs.  Europe is a net importer of oil and the reduction of oil prices has helped its economic recovery.  Oil prices along with other economic measures will help spur along a gradual growth.  For the U.S., the problems in China have contributed to the Fed’s decision to postpone a rate increase. While one is still expected, not raising it has kept the U.S. dollar at current levels and kept it from further hampering export activity.

What is the impact on emerging economies?

Those which are commodity exporters, particularly oil producing nations, have been hit the hardest. But others, like India, will gain from lower commodity prices, as will China itself as a significant net importer. Brazil and South Africa have taken a particularly big hit as a decrease in commodity prices, coupled with high trade deficits which left them more vulnerable to a Chinese slowdown.

Commodity producers in the Asia-Pacific region which depend on exporting to China have also been impacted. This has included more advanced economies such as Singapore, Taiwan, South Korea and Australia, as well as emerging economies like Malaysia, Thailand and the Philippines.

The more advanced economies, while impacted due to strong GDP ties to China, are proving fairly resilient.  South Korea, Thailand and Malaysia have been running healthy trade surpluses which will help them weather the storm.

What does this mean for Florida?

While events in China should be watched carefully and emerging markets have taken a hit, we should not lose sight of the long term over the short term.

China is an economy in transition – from export oriented to more services oriented as its middle class grows.

Many studies and forecast highlight that the long term growth rates of emerging economies as still significantly higher than of many developed economies.  While they may be undergoing a short term slump, the prospects of their strength and growth are great.