As the US appears to be retreating from the world, China is making big investments in regional and even global connections, especially under its “Belt and Road Initiative”. But is the strategy feasible? In other words, is China capable of translating the “belt and road” into feasible development plans?
China’s vision involves funding a very ambitious collection of infrastructure projects that are intended to enhance connectivity and improve cooperation between China and countries across Asia, Africa and Europe. The stated aim of the initiative is to promote shared prosperity and inclusive growth, with an emphasis on enhancing land and maritime routes through the development of highways, railroads, sea lanes, ports, energy networks, fibre optic cables, and even new financial systems.
While the belt and road strategy is intended to enable participating countries to replicate China’s rapid economic growth, it is unclear whether and how this can happen.
China’s success has been largely predicated upon its unique economic, political, and social characteristics. In the Chinese context, the massive scale of infrastructure development over the past decades has been dominated by government planning and public financing, and supported by state-owned banking and industrial systems that are able to recoup their investments through monopolistic control of steadily growing domestic markets. Within this system, all the financial, political, and policy risks involved in these huge infrastructure investments can be absorbed internally.
It is not clear whether the belt and road countries will be able to replicate this experience, given that they do not share many of the characteristics that enabled China’s dramatic growth. It thus remains to be seen whether and how the belt and road-driven infrastructure projects will provide adequate return on investment for the private sector.
In many of these countries, the World Bank and the Asian Development Bank have been striving to eliminate infrastructure deficits for decades without success. How will the belt and road succeed where these institutions have failed?
As a matter of fact, infrastructure projects operated by private investors always face the problem of insufficient return, due to its nature of being a public good – that is, significant positive externality to the public but limited measures to collect service charges from everyone that has benefited. Thus, government subsidies are generally needed to incentivise investment, as well as sustain the operation of the infrastructure. The subsidies required to sustain the operation of the belt and road infrastructure may become a fiscal burden.
And the immediate question is who should bear how much of such a fiscal burden, especially in the case of cross-border projects, like highways, railways and pipelines. Assuming that China benefits most from belt and road interconnection projects, will a proper mechanism be established so that the Chinese government will shoulder most of the fiscal burden for operation costs? At this moment, the answer is uncertain.
Even assuming that it is possible to finance and implement the infrastructure side of the grand development vision, will the belt and road be able to facilitate high levels of inclusive economic growth in other countries? Which particular economic sectors will be positioned to take advantage of this infrastructure? How will the additional infrastructure generate new economic activity in the belt and road countries?
The key to addressing this issue is understanding the role of the Chinese economy in global value chains, and China’s ability to reshape and relocate these value chains to belt and road countries.
Unfortunately, global value chains are still largely controlled by multinational corporations from outside China, which implies that, for belt and road countries to benefit, new opportunities to either participate in or move up global value chains do not rely on the Beijing-led initiative alone.
Taking Asean economies as an example, the relationship between China and the 10-member bloc is characterised by both competition and dependency. On one hand, China and the Association of Southeast Asian Nations overlap in their top category of commodity exports: electrical machinery, equipment and appliances. With costs rapidly rising in China over the past decade, low-to-medium technology manufacturing firms, which used to flood into China through foreign direct investment by multinationals, are increasingly shifting to Asean. This means Asean countries are becoming competitive vis-à-vis China in this sector.
On the other hand, the second largest Asean export and the second largest Chinese import also happen to be in the same category: mineral and energy resources.
Thus China is very dependent on Asean economies for the supply of raw material inputs and Asean economies are dependent upon these exports to China. In this case, will the belt and road increase the competition from Asean industries, or will it turn the Asean into a bigger supplier of raw material inputs?
Last but not least, if the belt and road initiative were to forge closer economic and financial ties between China and participating countries, does China have a strong commitment to ensuring that its economic, industrial, fiscal, monetary and financial policies will be sufficiently transparent and consistent, and thus predictable? Given that the Chinese economy is already the world’s second largest, its influence on the economic and financial stability of other nations, especially belt and road ones, will be crucial.
At present, the Chinese economy seems to be characterised by a property market bubble, the ambiguous status of non-performing loans of Chinese banks, and dangerously high levels of private and public sector debt. The renminbi has been under significant pressure, and the government has chosen to impose tight controls on foreign exchange rates, the capital account, and the domestic property market.
Such blunt forms of government interference could raise warning signals for belt and road countries regarding the stability and predictability of the outcome of the plan.
The belt and road plan’s stated principles of inclusive growth and shared economic prosperity are very attractive. Indeed, the history of economic and social development also clearly indicates that addressing infrastructure deficits is a vital means of enabling higher rates of economic growth. So far, initiatives from advanced Western economies have failed to enable the majority of developing nations to achieve their aspirations. It is therefore very tempting for these countries to turn to this new alternative.
However, the above-mentioned crucial questions must be resolved as the prerequisite for belt and road to be feasible. In fact, serious reflection on some of these questions is equally important for the internal reforms that the Chinese economy has longed for under China’s version of the “new normal”.
Yanfei Li is an energy economist at the Economic Research Institute for Asean and East Asia (ERIA). The views expressed here are personal and do not reflect ERIA’s position