The Geopolitics

Why would China even want to undertake a massive modern silk road project through 69 countries, connecting 40% of global GDP?

To understand that, we have to understand a bit of history, geography, and the problem China currently sees for itself.

Stay with me, it won’t be bad. Promise.

The History

The original silk road was the dominant trade route from Europe to Asia from 200BC to 1500AD.

1700 years of trade traveled overland. It’s beautiful country. If you ever get the chance, go travel through the northern ‘Stans and see some of the ancient cities. Highly recommend it, but go early. The mountain passes close as early as October.

In the 15th century, a maritime route was found from Europe to Asia. It cost less, and was less dangerous than the overland route. Win-win.

Most trade shifted to ships and the importance of the Silk Road declined.

The Geography

Ever wondered why Singapore and Kuala Lumpur are located where they are?

Singapore and Kuala Lumpur literally sit at the intersection of maritime trade between Europe, Africa, and Asia for the last 600 years.

They are located on either end of the Strait of Malacca. The strait is 500 miles long, 1.7 miles across at the most narrow.

I’ve been through the Strait of Malacca, and at times, you could almost walk across the decks of ships, one to another, going from Indonesia on one side to Malaysia on the other and not get your feet wet. There are that many ships transiting, over 100,000 per day.

Nearly 18% of all oil produced in the world transits through the strait.

This includes eighty percent of China’s oil imports, with China the largest importer of oil in the world.

The importance of the Strait of Malacca to the world economy and to China’s economy specifically, and therefore her national security, cannot be understated.

Remember, Christopher Columbus sailed right off the map to the west to find a more direct route to Asia. In a way, the Strait of Malacca has shaped the last 600 years of geopolitics and empires, and will continue to do so.

The Problem

America was the clear winner from World War II. Its cities, manufacturing, capital markets, and infrastructure untouched by the devastation due to it’s geographical advantage of having oceans separate it from the conflict.

America capitalized on this advantage by continuing to project power through maritime force, establishing military bases and friendly relations with countries surrounding China for the last 70 years.

And there is the problem — China is surrounded. Held hostage by the Strait of Malacca and U.S. influence.

China is keenly aware that eighty percent of their oil supply has to pass through a 1.7 mile wide strait, and even the natural gas shipping routes north from the Western Australia Gorgon and Wheatstone projects must pass through waters largely controlled by the U.S. and their allies.

The first step to minimizing the risk this poses is for President Xi to continue to build bases and aircraft carriers.

He’s playing the hand he’s been dealt, and the U.S. has been dealing for 70 years.

This was the reason for the island building in the Paracel Islands, Scarborough Shoal, and Spratly Islands in the South China Sea.

China is building a buffer between their ports on the mainland and U.S. allies in the South China Sea to be able to guarantee keeping a shipping lane open to the Strait of Malacca and open ocean.

Both of these are not permanent solutions. The One Belt One Road Initiative is the permanent solution to the problem.

If you don’t like the game, change the rules.

Europe bypassed the Silk Road in favor of the maritime route through the Strait of Malacca in the 15th century because it was less costly and less dangerous.

What was old is new again.

China will go back to the overland route for the same reason Europe went to sea. It’s less costly and dangerous for them.

How is building an entire economic corridors of roads, railways, powerlines, pipelines for the next 30 years less costly and dangerous?

The cost they are measuring against is the total economic destruction of the country and the end of the Communist Party if 80% of their oil imports can get turned off by other countries.

That makes thirty years of construction and loans to other countries for the OBOR look like a great deal.

It’s much less dangerous to build a road and seek mutual cooperation than to continue to build aircraft carriers and compete head on against the U.S. Navy.

By reconnecting 40% of the world’s GDP along a land trade route, China is going to completely reset the geopolitical power dynamics which most everyone alive today has taken as absolute — in essence turning the clock back 500 years.

Long live the Emperor

In March, President Xi was elected to a second term with 100% of the vote. This was after lifting the presidential term, meaning he can now be President indefinitely.

Could President Xi pull a George Washington and step down after his second term in office, retiring to his farm in peace?

Maybe. We’ll see.

In the meantime, President Xi, and by extension, China has a distinct advantage in politics and long-term strategy over our leaders in the West.

They are united in their goal of winning the Blockchain race and pursuing their long term strategic goals. Completely undistracted by the politics of election cycles.

The fact that China even knows there is a race to win shows how far ahead they are than the leaders and legislators in the West.

President Xi is giving clear direction to China’s Central Bank and the country that China will win the blockchain race.

China is the largest holders of blockchain patents in the world with the People’s Bank of China submitting 41 patent applications in the last 12 months alone.

China’s State TV has said China expects blockchain to be 10x more valuable than the internet.

The China Center for Information Industry Development (CCID) officially publishes their ranking of crypto and blockchain projects consisting of the top 33 projects in their view.

The CCID is under China’s Ministry of Industry and Information Technology, a state agency of the People’s Republic of China.

China’s Communist Party has even released a book titled “Blockchain — A Guide for Officials”.

Not only is the Communist Party expecting state officials to be studying the book and understand blockchain, but one of the cabinet-level ministries is working on a blockchain standardization for the tech’s development in the country.

There is no one in a western government doing anything similar to this, and at this point, the chances of catching up are slim.

To put this race into scale, the current total market capitalization for the five largest internet based stocks in the U.S. are: Facebook ($470B), Amazon ($934B), Apple ($1.05T), Netflix ($157B), and Google ($813B).

Widely referred to as the FAANG stocks with a total market cap of $3.404 trillion U.S. dollars.

When the Chinese State TV is broadcasting to the country that blockchain will be worth 10x what the internet is worth, China believes the prize money for the country who can win the blockchain race and dominate this new frontier is at least $34 trillion U.S. dollars.

China believes blockchain will be worth more than the entire U.S. Stock market which is $30 trillion.

Wait a second.

How is a Chinese Mayor running around Shenzhen with his “Blockchain Guide for Officials” and building a deep water port on the coast of Pakistan so ships don’t have to go through a strait named Malacca going to make blockchain more valuable than the entire U.S. stock market?

It comes down to two factors. Adoption and network effect.

Adoption

China is about four to five years ahead of the West in mobile pay. Everyone uses their phones. No one uses cash or credit cards.

This is mostly due to the fact that credit cards never took off. When you’re sitting in Din Tai Fung eating some of the best dumplings you ever had in your life in Beijing, you just scan the QR code and pay with your phone.

Wall Street Journal video showing how widespread and easy mobile pay is in China.

For comparison, China does $9 trillion per year in mobile pay, compared to $112 billion in the United States.

So for China, as more blockchain comes online, the user interface isn’t going to change. They are already used to scanning QR codes and paying with their phone.

Network Effect

The most common way to value network effect is through Metcalfe’s Law.

In fact, Wall Street analysts use Metcalfe’s Law to value the FAANG stocks.

Essentially Metcalfe’s Law says that for every person who is added to a network the increase in value isn’t by one person, but exponentially by the number of interactions that one person can have with others on the network.

Now, we’re talking about China using blockchain along the One Belt One Road Initiative and connecting 69 countries through economic corridors, totaling 40% of the worlds GDP with trade from three continents.

And before it even starts, China is already at $9 trillion on mobile pay.

Thinking about the network value exponential increase, I don’t think I can accurately comprehend the exponential value increase that blockchain is going to provide when multiplied by the number of people along the One Belt One Road Initiative, all using blockchain.

It would only take a bit over a 300% increase to equal the U.S. stock market, and considering bitcoin has gone up over 80,000% using the network effect in the last seven years from 2011–2018, I would consider 300% easily doable by 2049.