With China markets closed for the Spring Festival, it is a good time to consider the prospects for the Year of the Dragon. The dragon feeds on pearls of wisdom, so that is a good signal to look beyond the common areas of discussion about the Chinese economy.
From its very inception, the Belt and Road Initiative (BRI) was derided by many observers and they have been quick to call its demise. It was launched in 2013 as the New Silk Road, but the name morphed into the Belt and Road Initiative to more accurately reflect its spread.
The BRI provides the wind beneath the dragon’s wings
The “Belt” part of the name is obvious. It encompasses the Central Asia trade routes that were the original Silk Road. The “Road” part of the project name seems superfluous as a road is surely the same as the Belt. However, it is a fundamental misunderstanding of the BRI and that misunderstanding continues to undermine a full appreciation of the BRI.
Every time I travel along the East Coast to and from Changi, I see many ships at anchor in the “roads”. This maritime term is the “road” in the Belt and Road Initiative, and it plays out in the construction of new ports and the jostling in the South China Sea.
We start with the obvious, and Western, understanding that the BRI is all about hard infrastructure — ports, railways, roads and electricity supply. This was initially a substantial component of BRI activity. The fast train between China and Malaysia is a good example. The engineering work that pushed the railway through the mountains and jungles in Yunnan and beyond were the Chinese construction industry at its best.
Opportunity in Global South
This infrastructure build has expanded to Africa and South America. It provides a major part of project funding for the infrastructural needs of the Global South. The needs in these areas are great, so it is reasonable to project continued growth in these areas in this Year of the Dragon.
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This can be traded, or invested in, directly through major China infrastructure companies which often involve the security guarantee offered by being state-owned enterprises. There are also a host of Chinese companies involved in providing support services as infrastructure is built and in providing work to service and support the railways and ports.
The BRI facilitates international trade for China. It provides growing markets that are a substitute for the reduction in access to US markets. Western economies are moribund. Even at the best of times, growth is in the order of 3% to 4%, so the opportunities for significant export expansion are limited.
This is a stark contrast to the expanding consumer segment of the Global South. This is where double-digit growth is common. These are attractive new markets for China to service with the supply of goods that are essential for consumer growth. As this consumer market grows, so too does its demand for household goods, for electronics, for phone and internet services and all the trappings of the middle class found anywhere in the world.
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The China economy thrived in supplying these goods to the new prosperity found in European and US markets in the early years of this century. That opportunity no longer exists there, but it does exist in the Global South. That signals a very prosperous Year of the Dragon.
Soft infrastructure
But the BRI has another factor which is vastly under-appreciated. The BRI rests on soft infrastructure and enables the foundations of the digital economy. For China, this is the path to increased prosperity and a way out of the middle-income trap.
Globally, this BRI-fuelled e-commerce has revolutionised how we think about international retail commerce. These advanced technologies make cross-border trade more accessible and efficient. Anybody with a handphone can become an international trader. Not every small business wants to do this, but it is indicative of the way the digital aspects of the BRI have enabled trade efficiency.
China is at the forefront of the realm of financial technology, or fintech, and the use of blockchain for certification of all aspects of trade. This extends beyond the gamified apps that help you with the household budget or let you access your bank outside normal hours.
This BRI-enhanced fintech is blockchain-enabled. It allows the “unbanked” to access banking services. Instead of hoarding money under the mattress, people can now access bank-like services and develop a credit history. This frees them from the clutches of the money lenders and loan sharks. It enables access to business loans. It is an immediate advantage to the unbanked in China, but it is of inestimable value to those unbanked in the Global South.
The simplification of cross-border transactions by Chinese fintech innovations provides settlement efficiency for both Chinese and foreign companies. It reduces counter-party risk because cross-border settlement is instantaneous and blockchain-certified. It reduces the reliance on, and the costs involved with, the US dollar-dominated Swift foreign exchange settlement system.
This technological revolution is transforming China and global trade dynamics. Chinese technologies are paving the way for new trade routes and partnerships as they gain worldwide popularity, particularly in the Global South. Emerging markets are particularly poised to benefit because these tech innovations provide them with unprecedented ease of access to global markets.
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These technological developments are inseparable from the BRI. They are an inevitable part of the soft infrastructure benefits that flow from BRI programmes. These trade efficiencies are enhanced by China’s advances in AI, blockchain and advanced logistics.
“AI-driven logistics solutions are reducing delivery times and costs, making international trade more viable for businesses of all sizes,” explains Mei Zhang, CEO of a logistics start-up in Guangzhou. Although he was referring to Chinese companies, the same advantages flow to companies in the Global South that are adopting BRI standards and protocols.
The BRI is a vital contributor to China’s development and success in the Year of the Dragon. Bette Midler sings “you are the wind beneath my wings”. There is no doubt that the BRI is the wind beneath the wings of the dragon in 2024.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia China Business Council. The writer owns China stock and index ETFs
