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China's belt loosening

China's economy isn't skipping ahead as it once did, but its role as an engine for global expansion is only rising

There is a Chinese proverb that says: "To become rich, one must first build roads." As IMF president Christine Lagarde pointed out in mid-May during China's Belt and Road summit, with roads goes new ports, power and other industrial infrastructure as well as vastly improved social benefits from schooling to health.

It's only now that economists are beginning to recognise that the vast Belt and Road (or One Belt, One Road—Obor) initiative, popularly known as the "Silk Road", will drive demand for energy right across the region for years to come. And Obor is gathering momentum at the very time that the Chinese economy is steadily becoming more consumption than manufacturing and capital-led. According to a consensus of economists, over the next few years this will mean reduced domestic demand for energy, as distinct from regional demand.

It's clear that the long-term impact of Obor has been underestimated, even denigrated. "At the start [Obor] involved 64 countries but its scope has since broadened to over 100," points out the OECD. "The initiative also includes strengthening environmental and energy cooperation." Having seen the potential, more and more countries are jumping onboard. The leaders of no less than 29 nations attended the summit in mid-May.

6% - minimum GDP growth in 2017 and 2018

They were visiting a country where, despite oft-repeated concerns about slowing rates of growth to the detriment of the global economy, the long-term outlook remains promising. According to the latest IMF assessment of the country: "China's growth is slowing as it transitions to a more consumption-based economy. However, [it] continues to drive global growth, accounting for about a third of it."

Further, the IMF believes that Beijing is dealing successfully with the dangers inherent in the transition: "Sustained progress on reforms and the reining-in of vulnerabilities will reduce downside risks, thereby boosting confidence and lifting investment in trading partners."

Economic slowdown

But concerns remain about the "spillover effect." China accounts for more than 10% of global demand for crude oil and, as the economy inevitably slows, it would "have a significant impact on the demand for—and prices—of commodities closely related to investment activities," according to the IMF. In a study last year, the fund estimated that China's economic transition, known as the rebalancing, accounted for between a fifth and a half of the declines in broad commodity price indices between mid-2011 and mid-2015, albeit with marked differences across different kinds of commodities. And as the process gathers pace, China's influence on commodity prices could be expected to continue or even deepen.

The OECD broadly agrees with this assumption. Pointing out that the end of "everlasting investment and import-intensive, double-digit growth" is over, it concludes that "much slower growth and possibly a sharp and disruptive slowdown would have much more significant negative spillovers." In short, the rest of the world can't rely forever on China's breakneck economic performance.

However, pessimism is inappropriate. As the IMF summarises: "While growth is slowing gradually, GDP per capita remains on course to almost double between 2010 and 2020. As a result, the Chinese economy will remain the major driver of global growth for the foreseeable future." Nearly all forecasters agree with this prediction—the general consensus for GDP growth is well over 6% for 2017 and just over 6% for 2018. While these aren't the soaring increases of the past few years, they are seen as good enough to avoid a serious spillover.

These are only domestic figures though. Albeit fueled by huge swathes of debt, the rapidly proliferating number of cross-border Obor projects are in a real sense expanding the Chinese economy right across the region in a string of mutually beneficial relationships.

The proverb originally referred to roads within China but, as the region is seeing, it equally covers both roads—and sea routes—into the wider world.

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