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Economy

The New Silk Road – A boost for international trade?

It is both fascinating and at the same time colossal: the New Silk Road project. Under the official project name “One Belt, One Road”, China’s plan is to build closer economic ties between Europe and Asia, and also to strengthen trade links with Africa. It is a sort of modern Silk Road – with an investment of many billions in railway lines, pipelines and ports. This infrastructure could provide a boost for international trade – and also for insurance.

12.05.2017
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The Silk Road initiative was launched by Chinese President Xi Jinping in 2013. Its main aim is to develop cooperation between China and Eurasian countries along the route of the historic Silk Road in order to support China’s exports. At the same time, Xi made it clear that the new initiative was not only aimed at states in Central Asia, but that it should also stretch out towards Europe. And Africa is to be included along sea lanes.

This idea of opening up to the West is not entirely new. In 2011, after many years of construction, China inaugurated a railway connection between Chongqing and Europe. Since then, the frequency of freight trains using the line has risen rapidly. By 2015, the number of freight trains on this line between China and Europe was 815, representing a year-on-year increase of 165%.

Focus on establishing closer trading ties and expanding infrastructure

China‘s „One Belt, One Road“ plan is a sort of modern Silk Road. Investments in railway lines, pipelines and ports could boost international trade. © dpa Picture Alliance / Lv Bin
The key elements of the Silk Road initiative are strengthening political dialogue and cultural exchange, establishing closer trading ties, and expanding infrastructure. It comprises not only road and rail links, but also power grids and pipeline connections. This expansion – one of the largest infrastructure projects in Asia – has the highest priority in China’s foreign and trade policy.

As part of the One Belt, One Road project, a New Silk Road is to be built on the footprint of the old network of caravan routes. These trading routes are to link up 65 countries and territories, representing around a third of global GDP. They include not only land connections between countries (the Silk Road Economic Belt) but also waterways (the 21st Century Maritime Silk Road). The individual routes are to be linked to each other by connective corridors.

The Chinese government set up the Silk Road Fund in 2014 with US$ 40bn. The project is also being funded by the Asian Infrastructure Investment Bank (AIIB) and the BRICS Development Bank. The countries involved will contribute as well – for example, China and Belarus have agreed projects totalling the equivalent of around US$ 14bn. And China is also helping to finance the railway connections between Hungary and Serbia. The total cost of the One Belt, One Road project is estimated at US$ 900–1,100bn.

Provide a stimulus to economic growth and international trade

China’s ambitions in launching the project are vast. As well as developing infrastructure in the countries along the land routes and sea lanes, the focus is on strengthening foreign investment, and boosting international use of the renminbi. In addition, China is seeking to provide a huge stimulus to economic growth and international trade. China’s position as a trading power would be reinforced.

According to China’s trade ministry, the amount of goods and services traded with countries along the One Belt, One Road route in 2015 was US$ 995bn, representing around a quarter of China’s trading volume. Within a decade, bilateral trade is expected to increase to more than US$ 2.5trn.

The Silk Road initiative also offers opportunities for Europe: expansion of infrastructure in Eurasia will open up new markets and lower transportation costs for businesses. And major contracts are likely to be available to both Chinese and European companies.

But as well as opportunities, there are also risks. The Fitch ratings agency warns that the creditworthiness of many countries along the New Silk Road is rated as extremely low. This includes crisis areas such as Afghanistan, Iraq, Yemen, and Syria, as well as Laos, Tajikistan, Kyrgyzstan, Armenia and many others. According to Fitch, this significantly raises the risks for Chinese banks that are financing parts of the project.

Of course, we are a long way yet from full realisation of the project. However, the decision by US President Donald Trump to pull out of the Trans-Pacific Partnership (TPP) could give new impetus to the One Belt, One Road project. It could lead to a new level of understanding between China and other South East Asian states that are key figures along the Maritime Silk Road.

While this means that the USA is taking a step in the direction of protectionism, China is endeavouring to position itself as a pioneer and supporter of globalisation and liberalisation of global trade. This is a development that could benefit many classes of insurance. The more than 60 countries that are to be connected by land and sea, together with their 4.4 billion inhabitants, are for the most part developing markets with great economic potential. This could throw a new focus on both Chinese and other insurance markets concerned – particularly in the area of marine insurance.
China‘s „One Belt, One Road“ plan is a sort of modern Silk Road. Investments in railway lines, pipelines and ports could boost international trade.
The New Silk Road could provide a boost for international trade
„China‘s „One Belt, One Road“ project is a sort of modern Silk Road with a huge investment in railway lines, pipelines and ports. This could provide a boost for international trade.

Insurance density in many countries along the New Silk Road is low

During the rapid phases of economic growth in the country, the Chinese marine insurance market had already expanded to become the world’s second-largest market for cargo insurance, and the world’s largest market for marine hull insurance. Because of the fall in trading volumes as a result of the deceleration of the Chinese economy and increasing competition, cargo insurers have also experienced a fall in premium volume in China since 2014.

Most of the countries along the New Silk Road have an insurance penetration rate of less than 1%. Taken together, they comprised 15.5% of global property-casualty premium in 2016. Excluding China, this figure was only 6.6%. For marine, aviation and transport insurance, the global share of almost 20% in 2016 was somewhat higher, but still much lower than the share of global GDP. Therefore, the Asian insurance markets offer considerable catch-up potential. Asia is, and remains, the main growth region for the insurance industry – including in marine insurance.

Munich Re Experts
Dieter Berg
Global Marine Partnership, Head of Business Development
Monika Gruber
Senior Economist
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