One Belt, One Road — and many questions – Financial Times

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If President Donald Trump is opening a void by withdrawing American leadership on global trade, President Xi Jinping is determined to fill it — and the world is taking notice of the shift. Nearly 30 heads of state, the chiefs of the International Monetary Fund, World Bank, the UN, and delegates from around the world converged on Beijing on Sunday for a conference promoting China’s Belt and Road initiative, its new Silk Road.

The plan is a hugely ambitious one, to build roads, rails, ports, pipelines and other infrastructure joining China to Central Asia, Europe and Africa by land and sea. Spurs from the overland “belt” and the maritime “road” reach into Southeast Asia and towards the Indian Ocean, as well. Some $900bn of investments, financed by a variety of Chinese or China-backed banks and credit funds, are projected.

Visitors to the conference will have both hopes and fears. Rising western powers also deployed finance to develop markets for their products and expand political spheres of influence. Poorer countries were happy to take the money — with mixed results for both sides. There is more going on here, however, than the repetition of a colonial pattern in the 21st century. China presents the Silk Road not primarily as a development project, but as a stimulus for trade in a world struggling with middling economic growth and stalling trade volumes. Lower trade barriers and regulatory harmonisation are, quite rightly, on the agenda alongside infrastructure. Many of the countries the initiative would affect need better infrastructure and deeper international trade relationships. There is the potential for it to do real good.

Whether that potential is realised depends in large part on what China’s objectives are, and whether it pursues them with discipline. The initiative plays to China’s strengths. The country has more savings than it can invest at home and experience with big projects. The worry is the plan will export the worst aspects of the Chinese economy, while increasing the strains on its already stressed financial system.

For all the success of the Chinese economic expansion over the past several decades, the country is burdened by inefficient allocation of capital, which one might expect from an economy dominated by state-owned enterprises, and the resulting overcapacity in many industries. China may be primarily interested in redirecting surplus savings, exporting its overproduction and giving its own construction companies work abroad. If that is so, the projects that are built might not be the ones the host countries need. As such, they will not generate the expected revenues. The loans that back them will not be repaid, hurting the host country’s credit rating — and leaving bad assets clogging the Chinese financial system.

These risks will be compounded to the degree that the Silk Road is also aimed at deepening China’s political hegemony across the region. If cheap loans are payment for submitting to China’s regional leadership, those loans are even less likely to go to productive use. And many countries may balk at taking money, even if they need it, when too many strings are attached. Indeed, there are signs overseas Belt and Road investments are declining.

How will the world know if the initiative is working as hoped? By looking at the projects. While they are being built, local and global businesses, not just Chinese ones, should be involved. Once built, they should be well utilised. If these conditions are not met, it will be a clue that China, instead of contributing to the global recovery, is trying to export its own economic imbalances while buying regional leadership.



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