Asia blues: the new Silk Road
· Chinese market initiatives will ultimately marginalise Hong Kong
· "New Silk Road" programme will extend Chinese geopolitical power
· Current Chinese slowdown will likely precede future expansion
By Steen Jakobsen
I'm writing this from Hong Kong on route to Sydney. Every time I go to Asia I am inspired, but this time there is a strong scent of change and slowdown in the air, and with that comes new resolve from China.
Hong Kong and Macau are, in my opinion, being marginalised for both political and economic reasons.
Macau and Hong Kong have historically served as gateways to China for foreign investors but more importantly, have also been the door through which money has left China. The classic import-export businesses based in Hong Kong and Macau have, through over-and underpricing of goods, been a major source of prosperity for business people in mainland China.
Are Hong Kong's days as a capital of Asian finance numbered? Photo: iStock
Now that the anti-graft, anti-corruption struggle is running deeper than anyone expected, the loopholes are being closed. Monitoring has increased and both Hong Kong and Macau are feeling less loved than before, politically speaking.
Meanwhile financial market reforms are being rolled out, as seen by the launch of last year's Hong Kong-Shanghai stock connect programme. The programme gives foreigners access to mainland-traded stocks and allows mainlanders to access Hong Kong stock markets.
It's a small programme and it's mainly used by mainlanders, but it's an opening. This year will see a further extension of the scheme as the Hong Kong-Shenzhen stock connect comes online. Make no mistake: Shenzhen is a big stock market with a capitalization of almost USD 3 trillion (versus the Hang Seng's value of USD 3.5 trillion).
Shenzhen's A-shares index is up 35% on the year and the stocks traded are mainly small-and medium sized Chinese companies – the very segment I believe will outperform over the next decade in a global sense.
The stock connect programme should be seen for what it is – a dilution of Hong Kong's financial status and a confirmation of Chinese president Xi Jinping's intention to extend Deng Xiaoping's 1979 "reform and opening up" initiative.
Xi's version is called "the new Silk Road" and the initiative has just been given top priority by the Chinese National People's Congress here in March. Now it is being implemented with both political capital and hard currency. In terms of the latter, a new Silk Road fund has been launched and it has USD 40 billion with which to support infrastructure investment in countries involved in what Chinese more commonly call the "One Belt, One Road" plan.
It may not be a "Chinese Marshall plan" in the fullest sense, but the result should mirror the gigantic boost that the US gave Europe after World War II where (through access to credit and infrastructure investment) the US oversaw a quick European recovery that left Washington as its main financial and geopolitical beneficiary. The Marshall plan gave birth to the rise of the US' hegemonic power.
Xi's vision is to create a Silk Road in Eurasia – a link across Western China (which is underdeveloped and politically unstable) to Venezia in Italy and down to Cape Horn in Africa. The plan is to give access to credit and investment, which should in turn build close ties between China and Eurasia. Unlike the Marshall plan, everyone can partake without – at least officially – any pre-conditions attached.
China has over USD 4 trillion of foreign reserves that are presently earning close to nothing in an economic environment characterised by weaker global growth, challenging social tension and capital flight. China is running out of export markets, but the New Silk Road will secure for Beijing not only commerce, but also influence in emerging economies throughout Asia and into Europe.
A traveler heads along the ancient Silk Road near Urumqi, China.
Soon the old trade route will have a modern equivalent. Photo: iStock
By doing so, it will also come to offer a real alternative to the US- and European-dominated International Monetary Fund and World Bank.
This is clearly a testament to the coming-of-age of not only China but also Asia. Their influence over the last few decades has mainly been as engines of growth and investment, but now they want to have a political say as well. Also, China wants (and is trying) to step into the void created by the financial crisis and by a Western political establishment that seems content with simply buying time and avoiding reforms at all costs.
China and Asia can't afford to stand still.
The plan's rationale is to work towards China's wish to internationalise the yuan and to secure more geopolitical power. The global response from other major powers has been predictable: The US sees it as an escalation of China's geopolitical emergence and a direct response to its increased focus on Asia.
The Silk Road is under-reported in the Anglo-Saxon media, but more than 60 countries have now signed on to the Asian Infrastructure Investment Bank and the BRICs' new development plan. The US (of course), Japan (of course) and India (of course) remain on the sidelines, for now at least.
The scent I smelled in Hong Kong is one of slowdown, yes, but a slowdown before a new Asian leap forward. When you recalibrate a factory, you need to halt production (at great cost) – hence the present slowdown in China.
I think China and Asia are using this crisis to redefine their overall economic plan. They learned in the 1990s (Asian crisis) not to "trust" the western banks for credit. Now in the 2010s, they have learned that in order to continue growing their export markets, they need to invest by increasing the supply of credit and infrastructure.
They are first movers in terms of taking money from the realm of "paper" money (read: reserves in US Treasuries) and moving it to the real economy.
This forms the basis of two conclusions:
One, China will continue to see significant growth after this slowdown, which will serve as a platform for anti-corruption efforts and aligning political interests in China before President Xi takes full power of the country in his final four years (2017-21). A Chinese bull market could be a reality, especially as Asian equities remain under-owned globally.
Two, the world now have two equal superpowers: the US and China. This is clearly a win-win for China and win-lose for the US (it will lose hegemonic power but gain access to higher world growth), and this makes for more volatile markets.
Every time history has seen a "handover" or two equal superpowers, it meant instability – and I don't think this time is any different. This is the price you pay when you avoid all opportunities for reform and change.
You become a slave of history instead of defining it.
— Edited by Michael McKenna
Steen Jakobsen is chief economist and CIO of Saxo Bank
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