By Tony Boyd / Source Financial Review

One way of explaining the amazing surge in commodity prices in the wake of Donald Trump becoming US President-Elect is that there is going to be an infrastructure investment surge on both sides of the Pacific.

The idea is that Trump's commitment to rebuilding America's infrastructure will coincide with an increase in China's policy of investing in infrastructure from China to the Middle East.

Ironically, this confluence of commodity-friendly investment, which would benefit Australia's terms of trade, would be triggered by Trump's isolationist and protectionist trade policies.

"A more domestically-focused US will probably make more room for China to expand its geopolitical and economic interests through initiatives like "One-Belt-One-Road", according to Steven Sun, head of China Equity Strategy at HSBC.

One-Belt-One-Road is a regional infrastructure investment plan involving the investment of billions of dollars in infrastructure in 60 countries.

Other economists agree that a logical Chinese response to the imposition of tariffs on Chinese exports to the US would be to turn inward and step up its stimulatory domestic policies.

"The trade tensions will also put more pressure on domestic macro policy, introducing an easing bias on the fiscal policy," according to economist Haibin Zhu at JPMorgan in Hong Kong.

Commodity prices were on a roll before the Trump wildcard was thrown down this week. That surge in the price of base metals as well as iron ore and coal was attributed to China's fiscal stimulus over the past nine months and its decision to wind back the production of coal.

Following Trump's election, key commodities took off. Copper, which is a bellwether of global industrial production, rose 3.4 per cent on the London Metals Exchange, taking its gains over the past two weeks to 17 per cent.

A participant at the recent LME Week event in London said the bullish mood towards copper was far greater than in previous years. The metal is now trading at a 15-month high despite evidence this week that Chinese imports in October were the lowest since February 2015.

Coking coal prices rose 4 per cent on Wednesday night to a five-year high of $US295 a tonne.

The other commodity sprinting ahead this week is iron ore. It rose 3.9 per cent after Trump's election victory and has now gained 21 per cent in two weeks.

That helps explain the significant increase in the share prices of irone ore stocks, including Rio Tinto, BHP Billiton and Fortescue Metals Group.

There is a common theme evident with these stocks. When analysts plug in the spot prices for iron ore into their models for these companies there is a material upside risk to their earnings forecasts.

Investors have been reluctant to rely on the high spot prices because of caution about what might happen in China. But the optimists have pointed out that China's President, Xi Jinping, has many incentives to continue his stimulatory policies to maintain growth in the Chinese economy ahead of his reappointment by the Chinese Communist Party early next year.

Xi has as much incentive as every Western leader to ensure that the social harmony, which has been a feature of the country's extraordinary growth over the past decade, is maintained. He does not want a populist, extremist upheaval upsetting his plans to appoint a range of chosen colleagues to important party positions next year.

Trump's election holds out the prospect of the world's largest economy competing with China for the mantle as global infrastructure investment leader.

It is telling that the equity futures markets in the US were down substantially when Trump rose to give his victory speech. The sentiment changed and the futures prices reversed dramatically from negative to positive as soon as Trump mentioned infrastructure.

As with most things that Trump has said, his victory speech was light on detail. But the message was clear that America is going to need a lot of concrete and steel.

"We are going to fix our inner cities, and rebuild our highways, bridges, tunnels, airports, schools, hospitals," Trump said. "We are going to rebuild our infrastructure, which will become ... second to none and we will put millions of our people to work as we rebuild it."

One of Trump's campaign pledges was to work with lawmakers to introduce legislation to "spur $1 trillion in infrastructure investment" over the course of a decade, according to FTI Consulting.

Trump claims the infrastructure bill would be "revenue neutral" and leverage "public-private partnerships, and private investments through tax incentives"

This law is meant to go through in his first 100 days.

By Tony Boyd / Source Financial Review

MINSK, 10 November (BelTA) – Belarusian Economy Minister Vladimir Zinovsky invited Latvian businesses to become residents of the Chinese-Belarusian industrial park Great Stone as he met with a Latvian delegation led by Economy Minister Arvils Aseradens on 10 November, BelTA has learned. “Belarus is a good investment platform. We are building an industrial park in cooperation with China, and we invite all European companies, not only those of Belarus and China, to join the project. We would like to see Latvian companies in the park. Its residents are given good preferences,” Vladimir Zinovsky noted. He stressed that businesses can enjoy preferences not only in the industrial park Great Stone, but also in a number of free economic zones in Belarus. Vladimir Zinovsky said that the trade between Belarus and Latvia has declined recently. However, the minister expressed confidence that the countries have not yet exhausted their potential and will manage to improve the situation. “We are ready for open and constructive work.

Now it is important to catch up and switch to new forms of cooperation and projects with good economic returns,” the minister emphasized. He noted that Belarus seeks to develop fruitful and effective relations with Latvia and to strengthen the mutually beneficial economic cooperation. In this context, Vladimir Zinovsky said with satisfaction that Belarus' cargoes traditionally account for a considerable share of the total volume of Latvia's rail transportation. Belarus' and Latvia's participation in the large-scale Chinese projects Silk Road Economic Belt and 21st-century Maritime Silk Road will enhance the countries' appeal and intensify their cooperation in logistics.

Arvils Aseradens said that the relations between Belarus and Latvia are fruitful. He said that Latvia is eager to develop close economic cooperation. “There is great potential with respect to the Belarusian economy. I think we can expect the mutual trade to double,” he noted. Besides, the minister said that Latvia would like to cooperate with Belarus within China's One Belt, One Road project. Arvils Aseradens emphasized the importance of the Days of Latvia which are currently underway in Belarus. “It is very good that Belarusians will have a chance to learn about the life in their neighboring country,” Arvils Aseradens said.

Source Belarus News

The ultimate purpose of the Belt and Road Initiative is deep economic integration through the development of global value chains. Importantly, the initiative is supposed to abide by market rules. Either geopolitical considerations were never taken into account or everything in the Vision and Actions document was carefully checked and revised to make it read like a business plan.

even in the milder forms of expanding Chinese soft power. Issued in March 2015 with the clunky title “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road,” the paper offers a vision of greater economic integration between mutually complementary economies. Such integration is meant to promote the “orderly and free flow of economic factors, highly efficient allocation of resources and deep integration of markets.”

Global Value Chains

Patterns of international specialization and division of labor are particularly relevant in the age of global value chains. Today, very few products are manufactured in a single country. A country’s manufacturing imports are more likely to be intermediate goods—that is, commodities, components, or semifinished products that a country uses to make its own products. These could be final products or new segments in a global network of producers and suppliers. Global value chains can become so complex that imports can also contain returned value added that originated in the importing country. In China, nearly 7 percent of the total value of imported intermediate goods reflects value added that originated in China. For electronic goods, Chinese intermediate imports contain over 12 percent of returned Chinese domestic value added.

The Belt and Road Initiative is the first example of “transnational” industrial policy. “Formerly, all industrial policy was national,” he said. He has a point, as even the European Union, when it created an ambitious transnational framework of rules and institutions, tended to abandon industrial policy on the grounds that such a policy could not be reproduced at a transnational level.

The image of the original Silk Road is particularly misleading in this context, as indicated by the inclusion of the small code words “belt” and “road” in the names of the project’s two components. The land element is called a belt to pinpoint that its ultimate goal is the creation of a densely integrated economic corridor rather than a transportation network linking two points. The maritime road is meant to adapt sea transportation to new patterns of global trade.

Transportation and communications networks are no doubt a precondition for the development of global value chains. But the crucial element is the set of industrial policy decisions by which countries strive to move into new chains or segments in an already-occupied value chain. To avoid the middle-income trap—a situation in which a country becomes stuck with its previous growth model after attaining a certain level of income—and speed up the process of moving into higher-value segments, China wants its industrial policy to be sufficiently coordinated with those of countries that occupy other segments and chains. In return, China can offer cheap financing and its experience of an economic model that has proved very successful in boosting industrialization and urbanization on an unprecedentedly fast timescale.

Take the case of the steel industry. Hit by falling steel prices, the performance of China’s steel industry has been sharply decreasing. The industry generated a sales revenue of 7.2 trillion yuan ($1.1 trillion) in 2015, down 13.9 percent on the previous year, and a total profit of 97.2 billion yuan ($14.3 billion), down 60 percent. Chinese policymakers are aware that some of the industry will have to move abroad, and they have started looking at Central Asia, with its lower production costs, as a possible destination. As governments and the private sector in the region invest in energy development, transportation infrastructure, and residential construction, the demand for steel products in Central Asia is expected to boom in coming years, but Chinese producers have to compete with Russian, Turkish, and Ukrainian steel enterprises that benefit from easier trade regimes. These competitors would lose that advantage if Chinese companies established steel production units in Central Asian countries, which are rich in mineral resources and have low labor costs. In the integrated framework of the Silk Road Economic Belt, new transportation infrastructure could both boost demand for steel and prepare the ground for China to import steel from Central Asia as it moves into higher-value products and value-chain segments.

Chinese companies have built 46 cooperation zones [industrialization zones] in countries along the routes, while China's Ministry of Education has inked over 60 deals with those countries, according to Zhao.

In 2015, nearly half of the international students in China came from countries along the routes, Zhao added. Nearly 400,000 foreign students from 202 countries and regions came to study in China in 2015, data showed.

Meanwhile, China was building more railways, highways and ports along the routes while sealing more MOUs with its neighbors and partners.

SOURCES - Carnegie Endowment, China National Development and Reform Commission, China Daily, EY