By Colm McDonagh, head of emerging market fixed income at Insight Investment, a BNY Mellon Company.
Development of the vast One Belt, One Road (OBOR) infrastructure initiative could signal major changes ahead for both China and the wider global investment community.
In May this year Chinese President Xi Jinping hosted 28 heads of state in Beijing to showcase its OBOR initiative, arguably the most ambitious trans-continental infrastructure project the world has ever seen.
A leviathan development strategy that inspires comparison with the ancient Silk Roads – terrestrial and maritime trade routes that connected Asia and Europe - the scale of ambition of OBOR is vast. Similar to its antecedent, the project will also encompass land and sea routes, the extent of which could cover some 60% of the world’s population and one third of global GDP. China’s financial commitment to the programme is estimated at US$ 150bn per year in some 65 countries that have signed up to the initiative.
The OBOR represents yet another step cementing China’s position as a major economic power. It involves clear aspirations to strengthen China’s investment, influence and trade-linkages with the rest of the world. Yet it also sets the stage for China’s emergence as a global financial and monetary power. As I see it, the world is emerging along the lines of three poles of financial and monetary influence. The US and Europe remain the traditional centres, but China’s increasing influence and clout continues apace. With this new Silk Road, I expect that we will see this process accelerate.
There are two clear avenues through which this happens in my view: a furthering of the Chinese renminbi (RMB) as a global reserve currency and the development of a RMB-denominated Eurobond market. On the first, China has already made significant inroads. In October 2016, the IMF added the RMB to the basket of currencies that make up the Special Drawing Right (SDR) - an important milestone in the integration of China into the global financial system. As the OBOR picks up momentum, I expect the same to happen with RMB internationalisation.
There are clear benefits for China beyond the ‘exorbitant privilege’ attached to global reserve currency status which include both increased soft power and reduced capital raising costs. As RMB internationalisation takes hold and global RMB savings levels increase, the emergence of an international RMB Eurobond market - similar to the USD one that developed in Europe in the 1960s – is likely to follow suit. For investors, this will mean managing global sovereign and corporate risk that is RMB denominated, marking a real departure from the USD and EUR hard currency issuance of today.
The OBOR has been trumpeted as a global trade and infrastructure initiative. In my mind, it is this, but it is also much more. It represents a great leap forward for China’s financial and monetary pre-eminence toward a truly tri-polar world.
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