Silk Road Headlines_16th January, 2019
Warren Buffet stated: 'Someone’s sitting in the shade today because someone planted a tree a long time ago'. This horizon-expanding perspective is food for thought, in light of the accumulated wealth of Berkshire Hathaway and its perceived longevity. Contrasting to general sentiment in the financial market, where instant gratification (turn-around ratios) or quick-wins are considered determining factors for defining success. Both perspectives need to be judged by their own merits.
It is difficult to assess the BRI whilst taking solely short-term results into consideration. Especially when the long-term goals and the chosen path (or when to choose a new one) are not (fully) known by outsiders [Belt and Road: Just a vast mess?]. For the one the BRI is a mess, for the other it is similar to attested business models and -practices. In my opinion, the BRI has shown similarities with the 'Razor and Blades model' of Gillette (the safety razor company) with the pricing strategy of: 'Giving the customer the razor, and selling them the blades'. Nowadays, this is also known in the digital domain as 'freemiums'. Perhaps the infrastructural part is deemed financially unattractive, thus a mess. It is not unimaginable that China might recoup its loss via paired services, e.g. Hambantota port. Hypothetically, Chinese logistical companies might get a competitive (pricing) advantage over foreign companies in the long run, due to lower costs. The loss of these projects might be recouped by the increased future GDP or tax revenues, aside from other strategic advantages.
In this newsletter's editorial of 10 October 2018 I mentioned that the dwindling influence of regional/global powers is correlated with the increasing influence of China within the geopolitical domain, i.e. Ying and Yang. Others have the same notion [How BRI poses risks to 21st-century geopolitical landscape]. It is notable that the BRI is perceived as a huge financial risk, whilst the misuse of the architecture of Western powers might also have an adverse effect on the strength of its institutions within the geopolitical realm. For example, the credit rating of the US remains unaffected before or during the current government shutdown. This might be deemed plausible since the shutdown is a temporary suspension of (certain) payment obligations of the US. Also, the possible foresight of raising the debt ceiling might play an important role. Yet, the shutdown in 2013 affected the economic growth of the US in its fourth quarter, i.e. the economic output of the US of 2013. The treasury papers might become unattractive for certain financial groups, if the current shutdown continues. From a geopolitical point of view China might benefit from this, i.e. Ying and Yang. However, China could face a negative impact from the trade war, e.g. lower export.
Another factor that might work in favour of China comes from the EU, or more precisely the European Monetary Union. The European Courts of Auditors (ECA) urged the Parliament to intervene and ensure the European Central Bank (ECB) allows full access to documents for audits related to banking supervision. Already the ECA addressed this deficiency in the accountability and audit arrangements for EU banking supervision in view of the current efforts to complete the Banking Union. It is possible that this challenging institutional relationship might become a future risk, if appropriate measures are omitted.
It is not all bad news. China reaffirmed its intentions to open its economy to foreign investors. It already opened up its financial markets to a degree. However, this move also helps to internationalize its currency, the Yuan. Like everything in geopolitics it is about tit-for-tat.
Nonetheless, China and Warren Buffet see eye-to-eye in relation to investment strategy. Perhaps another quote of Warren Buffet might provide new perspective on the BRI: 'I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over'.