China’s One Belt One Road Strategy: The New Financial Institutions and India’s Options
Publication dateSep, 2015
DetailsNIPFP Working Paper No. 155
The revival of ancient Silk Road strategy into the One Belt One Road (OBOR) Strategy or the new Silk Road project signals China’s ambitious approach to global issues and challenges. Its outward-oriented strategy attempts to encourage new trade and connectivity throughout Asia with road and maritime links to Africa, the Middle East and on towards Europe. The new financial institutions linked to the OBOR strategy - the US $100 billion Asian Infrastructure Investment Bank (AIIB) and the US $40 billion New Silk Road Fund (NSRF) have been set up. These together with the US $50 billion New Development Bank (NDB) and the US $100 billion Contingent Reserve Arrangement (CRA) represent Chinese backed new financial institutions that are not part of the existing Western dominated financial architecture. They will adhere to the Paris declaration but will not abide by the conditionality driven DAC framework. They are designed to help address issues of infrastructure underfunding, to create new pathways to sustainable development, south-south cooperation and mutually compatible solutions to development problems.
The Yuan’s sudden devaluation, coming on top of a sharp correction in China’s stock markets and a slowing economy are an indication that the old model of Chinese growth has reached its peak. China must restructure its economy from an investment led model to a consumption led model. This is the path that Japan and South Korea followed earlier. But with large State Enterprises and rising debt whether China can emulate them will not be easy. China’s OBOR strategy represents an option to investing abroad and utilising some of this excess capacity.
India and China have a competitive yet cooperative relationship. India has not signed on to the OBOR strategy as it has concerns over some aspects of it – especially the China Pakistan Economic Corridor and the Maritime Silk Road and has proposed its own “Spice Route “ or SAGAR project with India at the centre of Indian Ocean relations. .. Nevertheless India has joined the new financial institutions the NDB, and the AIIB (as its second largest shareholder after China). These new banks are a potential source of long term infrastructure finance for India, however small in magnitude. China and India have growing but yet somewhat unbalanced economic linkages – with a large trade deficit in favour of China. This paper attempts to discuss India’s options to collaborate with China at the event of the formation of new financial institutions and how should India engage with China’s new Silk Road strategy.