Commodity price slump boosts Silk Road plan

Models of a high-speed train on display at the China High Speed Railway On Fast Track exhibition in Jakarta last August. Construction began yesterday on a US$5.5 billion high-speed train line between Jakarta and Bandung, according to China Daily.
Models of a high-speed train on display at the China High Speed Railway On Fast Track exhibition in Jakarta last August. Construction began yesterday on a US$5.5 billion high-speed train line between Jakarta and Bandung, according to China Daily.PHOTO: REUTERS

Easier now for China to sell ambitious vision to build roads, railways, pipelines and ports

HONG KONG • While commodity producers grapple with the lowest prices in more than a decade, the slump could prove a blessing for President Xi Jinping's signature initiative to build an intercontinental web of infrastructure and trade links with China at the centre.

The New Silk Road programme announced by Mr Xi more than two years ago is finally gathering steam just as the prices of oil, steel, concrete and other building materials sink. That is making it easier for China to sell its ambitious vision to build roads, railways, pipelines and ports from Xian to Athens, diversifying the country's trade options and exporting the excess industrial capacity that is dragging down its own economy.

The so-called Silk Road Economic Belt and 21st-Century Maritime Silk Road - or One Belt, One Road (Obor) for short - sits at the centre of Mr Xi's effort to bolster geo-economic clout across more than 70 countries in Asia, Europe and Africa. With many nations along the route dependent on commodity exports, the price slump could make them more willing to accept Beijing's investment pitch and a share of its US$40 billion (S$57.5 billion) Silk Road infrastructure fund.

"It will help to ease cost pressures on Obor construction projects, potentially boosting their financial viability," said Mr Andrew Wood, the head of Asian country risk at BMI Research in Singapore, about the effect of the commodity meltdown.

The Silk Road, which until recently appeared to be a nebulous collection of existing projects and civil engineering pipe dreams, is finally taking shape.

Mr Xi hosted senior financial officials from 57 countries in Beijing on Saturday to mark the formal launch of the Asian Infrastructure Investment Bank, which he envisions as a big sponsor for Obor projects. 

Construction began yesterday on a US$5.5 billion high-speed train line between the Indonesian cities of Jakarta and Bandung, the official China Daily said. It is being built by a joint venture between the two countries and financed with a loan from the China Development Bank.

China signed more than 20 country-to-country energy cooperation deals last year to facilitate the plan.

The People's Bank of China announced last April that a dam project in northern Pakistan would be the Silk Road fund's first recipient, with a total investment of US$1.65 billion. China also started building a highway between Karachi and Lahore, and took over a 923ha free trade zone at the deep-sea Gwadar Port.

More nascent projects have helped expand Chinese influence in places such as South-east Asia and the former Soviet states of Central Asia, where Russia has long been the dominant power.

However, Mr Mark Patrick, head of Asia-Pacific country risk for JPMorgan Chase, said the commodity slump is not a clear positive or negative for the new Silk Road because it reflects weak Chinese demand and a domestic production glut.

Still, it provides extra incentive to expedite the plan, he said.

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A version of this article appeared in the print edition of The Straits Times on January 22, 2016, with the headline 'Commodity price slump boosts Silk Road plan'. Print Edition | Subscribe