The ‘Silk Road’ Verdict Why China's massive infrastructure plan won't measure up to economic reality By Valentin Schmid, Epoch Times | July 20, 2017 AT 10:54 AM Last Updated: July 20, 2017 2:18 pm
Chinese workers at a pier in Qingdao, China, on April 13, 2017. The Belt and Road Initiative is supposed to boost trade both by land and by sea. (STR/AFP/GETTY IMAGES)
The idea, at first, sounded good: Plow trillions of dollars into infrastructure projects in the barren wasteland that is most of central Asia, and trade will start to bloom, economies will prosper, and peace will reign. However, most experts believe real world problems will result in the whole idea turning into nothing but a pipe dream.
(VCG/VCG VIA GETTY IMAGES)
The concept is called the Belt and Road Initiative (BRI), also known as One Belt, One Road, launched by Chinese regime leader Xi Jinping in March 2015. It has two elements: one landlocked route from China to Europe through Asia, called the Silk Road Economic Belt, and one seaborne route going from China to Europe past India and Africa, called the Maritime Silk Road.
Although estimates vary, China has called for up to $5 trillion in infrastructure investments over the next five years in the 65 countries along these routes. Ports in Sri Lanka, railways in Thailand, and massive roads and power plants in Pakistan are just a few examples of the planned investments.
Speaking at the Belt and Road Forum in Beijing in May this year, Xi said: “In pursuing the Belt and Road Initiative, we should focus on the fundamental issue of development, release the growth potential of various countries, and achieve economic integration and interconnected development, and deliver benefits to all.”
His statement sums up the problems with the multitrillion dollar project: It talks about desirable outcomes but is exceedingly vague on the details. This is just like the BRI’s official plans. They call for improving intergovernmental communication, coordinating infrastructure plans, developing soft infrastructure, and strengthening tourism and trade, but the specifics are shaded over.
“There are no concrete action items set out in the Chinese government’s action plan for what has become one of Xi’s most visible policy initiatives. The document contains a number of generic proposals interspersed with platitudes about cooperation and understanding,” research firm Geopolitical Futures states in a July report.
But despite the lack of concrete programs, the vast sums involved show that the BRI has garnered support from many countries. China-led institutions, like the Asian Infrastructure and Investment Bank, have also pledged $269 billion dollars for the project. Even Japanese Prime Minister Shinzo Abe voiced his support at the recent G20 meeting in Hamburg, Germany.
It is completely overhyped. The numbers they published, $4 trillion to $5 trillion, they are completely unrealistic.
— Christopher Balding, professor of economics, Peking University
Objectives Measured Against Reality
China’s objectives, explicit and implicit, need to be measured against reality. On this account, most experts think the project is not economically viable—but it will allow China to gain political influence.
“It is completely overhyped. The numbers they published, $4 trillion to $5 trillion, they are completely unrealistic,” said Christopher Balding, professor of economics at Peking University.
Economically, it is mostly about investment and exports. “China has surplus capital and excess productive capacity, which is motivating this set of initiatives. With a high savings rate in China and a slowdown in industrial investment at home, they are looking for overseas projects that can be financed and a new outlet for Chinese exports,” said James Nolt, professor of international relations at New York University.
The result is the BRI, which would see China team up with countries along the routes to raise money for building infrastructure to facilitate trade. And Chinese companies would do the construction.
The China Overseas Ports Holding Company has expanded the Gwadar Port in Pakistan and has an operating lease until 2059. This is just the first, small step in connecting the Silk Road Economic Belt with the Maritime Silk Road. Highways, pipelines, power plants, optical connections, and railways are planned for the China–Pakistan Economic Corridor, with a total investment of $62 billion.
Of course, local and international companies are going to bid for these projects as well, but with China providing most of the funds, Chinese state owned enterprises (SOEs) will get most of the contracts.
If Chinese companies got $5 trillion in contracts, this would indeed boost exports, but there are several problems with this notion even in theory.
First, infrastructure projects are very resource intensive, and with few exceptions China simply doesn’t produce commodities. Much of the value-added, therefore, will be absorbed by international commodity producers like Australia (though the Chinese steel industry will certainly get a boost).
Impossible to Finance
Then there is the question of financing these investments. The countries where the investments are going to take place, like Pakistan and Cambodia, don’t have the money to spend trillions and also can’t raise it in international financial markets. This leaves China to come up with a way to get the hard currency financing to achieve its economic goals.
At the beginning of the BRI, China still had almost $4 trillion in foreign exchange reserves, and it was looking to diversify. These have dropped to $3 trillion in 2017, a threshold the central planners in Beijing have made clear they will not cross.
“They have to tap international bond markets for that money, or they have to exhaust their foreign exchange reserves and even then go out and borrow. Even by global bond market standards, a $5 trillion bond sales program spread out over a couple of years is an enormous number. They are not going to shoulder that type of repayment risk and they are not going to deplete their reserves,” said Balding.
Research by investment bank Natixis estimates that such a borrowing binge would increase Chinese external debt from 12 percent to 50 percent of GDP. This would expose the country to exchange rate risks and put it in the same vulnerable position that the Asian tiger economies were in during the financial crisis of 1998.
Loans from China denominated in yuan from Chinese banks are not an option for two reasons. This “poses its own risks to the overly stretched balance sheets of Chinese banks. In fact, their doubtful loans have done nothing but increase during the last few years, which is eating up the banks’ room to lend further,” especially for risky projects, wrote Natixis Chief Economist for the Asia Pacific Alicia García-Herrero, in a blog post.
In addition, recipient countries could only pay back a loan in yuan by selling goods and services to China, thus procuring the Chinese currency. This would be directly counterproductive to the goal of promoting exports from China with construction contracts and eventually through improved trade infrastructure.
“How is Pakistan to repay a yuan loan? They are going to generate a trade surplus in yuan. So China has to run a trade deficit with all the countries it lends to. Even if they don’t do that, Pakistan is going to have to generate some type of trade surplus with another country to have enough capital to pay back China,” said Balding.
Given that most of the infrastructure will be built to facilitate trade with China, this is highly unlikely. So in the end, China will be left to vendor finance these projects. The only way to achieve its economic objectives will be hard currency loans that are completely repaid, with interest—which China currently has no clear means of financing.