The One Belt One Road Initiative: Opportunities And Challenges For Singapore Companies

Background on the One Belt One Road Initiative

Question:

Discuss about the “One Belt One Road” (OBOR) that was declared by the Chinese President, Xi JingPing during the year 2013. 

The current study elucidates in detail about the initiative of “One Belt One Road” (OBOR) that was declared by the Chinese President, Xi JingPing during the year 2013. Essentially, this scheme was necessarily a crucial foreign strategy for China as this scheme had the intention to promote monetary assistance amongst countries together with the belt as well as road way. The OBOR scheme can hereby be considered as an outline for generation of superior cooperation and assimilation by means of development of an infrastructure network. The current study also presents the capabilities of Singapore companies to grab this opportunity, probable challenges encountered along with the government support and assistance delivered.

The exclusive position of the nation Singapore under the scheme “One Belt, One Road” can be evaluated for comprehending the potential of the country to capture this opportunity. As per the framework and structure of Vision and Actions, particularly South East Asia can be considered to be a significant area of the scheme and reinforcing the framework of the nations together with the course is an important priority (The Straits Times 2017).

As far as connectivity is concerned, there are nearly 200 shipping streak that join the nation Singapore to more than 600 ports in over and above 120 countries right round the globe. Essentially, Chinese enterprises have necessarily observed about impact of the city and their influence on businesses and trade in Southeast Asia in recent years and China has enhanced the entire ante in the deal in Singaporean outline (Winter 2016). The transportation infrastructure includes highway, roads as well as railways that can be considered as one of the obstacles that that these come across in attaining the complete economic prospective. The scheme makes every effort to endorse capital as well as outlays for technological advancements by mainly China into particularly linkages such as ports, courses and ways of transport as well as other infrastructure. This in turn can help in enhancement of the processes of resource circulation, assimilation of the market and permit improved facilitation of both business and ventures in Southeast Asia (The Straits Times 2017).

Singapore can be considered to be principal financial centre and the best hub or centre for particularly commodities as well as oil business in primarily Asia that can help in acquirement and distribution of equity and debt capital. This can help in facilitating investment on other areas of the region counting the ASEAN nations. There is also a crucial association centre for the country China, markets of Asia-Pacific and Asia (Yuan et al. 2016). In essence, consistent with the position, the country Singapore can be considered to be strong and well-regulated and clear capital markets. This has important concentration of speciality in the areas of banking as well as financial services, finances along with investment management along with private equity (Yuan et al. 2016).

Position of Singapore in the Initiative

Singapore is a focal point for foreign venture that has a well synchronized legal framework with very lower corruption levels. As such, foreign financiers do not necessarily enter into definite joint course of action and has more than 70 monetary as well as tax treaties with other countries, and proved to be a lucrative spot for multi-state business concerns

Rationale for selection of economic policy

The initiative can be observed as an attempt to augment trade as well as political associations amongst nations such as China, Asia together with Europe. Also, this “One Belt One Road” strategy is anticipated to augment growth by exporting huge capital, innovative and advanced technology and capacity internationally (Winter 2016). The adoption of this policy can thereby be said to be effective as the implementation of the development plans together with the trade route might help in improving overall connectivity in five specific areas. The identified areas include policy, trade, people as well as infrastructure. Therefore, with the adoption of the OBOR initiative, the nation can adopt the strategy of augmentation of trade as well as facilitation dimensions, development of requisite infrastructure (Tsui et al. 2017).

Economic conjecture that can help in explaining the adoption of the OBOR:

The economic initiative of “One Belt One Road (OBOR)” is expected to enhance the infrastructure and serve as a blueprint or a roadmap for growing worldwide influence. As rightly indicated by Mankiw (2014), economic potential of the initiative is said to enhance the investment scenario in Singapore and affect the overall aggregate demand. Mankiw (2014) mentions that aggregate demand is necessarily the entire demand for particularly goods as well as services manufactured within a specific economy over a specific time period.

The equation for aggregate demand (AD) is as presented below:

Aggregate Demand (AD) = Consumer Expenditure (C) + (Gross Capital Investment- Investment Expenditure on diverse capital goods)+Government Spending+(Exports-Imports of goods and services)

The increase in investment can lead to an increase in aggregate demand. The increase in investment directs the way towards lower rates of interest and makes borrowing for the purpose of investment cheaper. In addition to this, this can also lead to increase in overall confidence in the overall economic outlook, enhanced technology, augmented economic growth in order to satisfy augmented demand of corporations to enhance capability. Mankiw (2014) asserts that investment implies expenses on capital spending. Therefore, investment can be regarded as an element of Aggregate Demand (AD).

Infrastructure and Connectivity in Singapore

Nevertheless, in case if the economy is close enough to full capacity, then increase in aggregate demand can direct the way towards inflation and not an enhancement in real GDP. Nevertheless, there are other facets that affect the aggregate demand besides investment. For instance, the in case if there is a decrease in consumer spending or else a decline in the exports, then this leads to an increase in investment that might not perhaps enhance the aggregate demand.  

In addition to this, the economy of Singapore essentially has scarce capability and an increase in investment can create multiplier effect. The initial increase in investment enhances economic growth, however, in case if the firm acquires more number of sales and profit. Again, they are eager to put into this in further amount of investment (Tsui et al. 2017). In addition to this, households that again acquire employment from specific investment have more earnings to spend.  For example, an investment worth USD 2 billion can lead to final increase in real gross domestic product by around USD 3 billion. In this case, there is said to be a multiplier effect of approximately 1.5(Borio 2014).

In essence, investment undertaken by the nation particularly for development of advanced infrastructure as well as capital can enhance the overall productivity together with the productivity capability (Heijdra 2017).

The above figure hereby reflects that investment can hereby direct the way towards higher real gross domestic product and without overall increase in price (inflation).

The adoption of the OBOR initiative reflects government investment that in turn can enhance overall industrial capacity. However, in general there is also misplaced government expenditure that can ideally be inefficient and fail to attain productivity in the nation. Also, there are nations that might have various supply limits specifically in case of public goods such as infrastructure, roadways as well as bridges (Agénor and Montiel 2015).

Politic risks: As rightly put forward by Mankiw (2014), with enhancement of diverse cross border actions, there might be an increase in the political uncertainty, associating to the trade embargos, framework, impediment as well as corruption particularly amongst developing countries. Nations together with the belt and Road would have to deliberately operate together for preventing this kind of risks and arrange a well structured insurance program.

Financing the projects: National Development Minister, which is Lawrence Wong reported that Singapore can contribute towards policy of financing projects and deliver proficiency in infrastructure planning. OBOR proved to be an appropriate platform for national integration that in turn can deliver a tremendous boost trade, connectivity and infrastructure development. In essence, financial institutions namely the Asian Infrastructure Investment Bank as well as BRICS New Development Bank are instituted to enhance the overall extent of multilateral financial assistance.

Impact of the One Belt One Road Initiative on Aggregate Demand

Corruption and poor governance: As correctly mentioned by van Vliet (2015), government failures, starting from corruption to ineffective execution of different reforms also pose a severe threat as social as well as political tensions does. In essence, the challenges might possibly be very complex; nevertheless, the formula for navigating the challenges can prove to be very simple.

Risk of exchange rates: Yuan appreciation can essentially systematically reduce the overall acquisition cost of certain foreign assets and enhance the profitability of corporation’s foreign branches as well as subsidiaries. Again, exchange rate volatility in OBOR nations is not very much sensitive to volatility in the rate of exchange. In essence, this specific risk group enumerates the devaluation risk against the reference currency (Mankiw 2014). Particularly, currency risk rating is mainly informed by specific scores for a blend of cyclical, political, strategy as well as structural variables.

Influence of the maritime lanes: The involvement of Singapore in particularly Chongqing Connectivity Initiative (CCI) can permit the republic to acquire advantage from the Belt and Road programme. The Maritime Silk Road can necessarily complement the entire Silk Road Economic Belt, concentrating on using sea routes as well as Chinese coastal ports to necessarily link China with necessarily Europe through South China Sea, Indian Ocean, and South Pacific Ocean via the South China Sea.

The government intends to utilize OBOR as a specific platform that can help in addressing the nation’s surplus capacity (Aoyama 2016). The government have the need to regulate as well as coordinate effectively, whilst operating to make certain that competition is fair as well as constructive.

Monitoring financing condition (public or private sector)

The government of the nation monitor both the domestic as well as worldwide trends and thereby undertake different research studies that have a bearing on different economic policies and management. Thus, the governing bodies monitor the entire project financing structure for building, operating as well as transferring a project. Also, the governing body can examine the financing mechanisms that include process of government financing, financing by private operators and project finance (YANG et al. 2015)

Affordable loan financing

The loan financing refers to a specific mechanism of financing in which a corporation can accept a loan and provide the same to make repayments of the loan.

Implementing skills training/retraining program

Gaps can be noticed in areas of knowledge as well as skills that can be related to the implementation of OBOR. The One Belt One Road initiative necessarily has worldwide strategic significance and involves economic growth, trade alteration, transportation and generation of political flexibility (Yeixa and Liang 2017). Thus, it can be hereby mentioned that the government can focus on making investments on training of different workers and providing adequate education. Therefore, training the labour force, provide education as well as other associated skills will essentially enhance the quality of the corridor.

Challenges and Risks Associated with the Initiative

Strengthening RMB business hub

Strengthening RMB indicates towards the fact that the currency comparatively has higher power in comparison to different other assets/reserves (Huang 2016). In essence, a strong RMB can provide China the advantages related to the international currency such as dollar else wise Euro. As such, the positive trend of strengthening RMB can lead to emergence of a huge market of Chinese consumers as the purchasing power of the nation increases. Development of this market can call for the need of broad reforms and better governance. Both Singapore and China can strengthen cross-border flows of Renminbi (RMB) and collaborate on capital market connectivity that in turn can create huge opportunity for businesses interested in investing.

Conclusion

The above study has helped in gaining comprehensive understanding regarding initiative of “One Belt One Road” (OBOR) and the economic concepts and theories associated to the same. In essence, this study has provided an insight regarding the capabilities that the Singapore companies have to realize the advantages of this initiative along with the challenges that are encountered by them. Moving further, the study also presents recommendations regarding the government support that can boost the initiative.

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