6 Dec 2016

"One Belt, One Road": China's Great Leap Outward

European Council on Foreign Relations

Introduction

China has created an action plan for its Silk Road concept in the form of the “One Belt, One Road” (OBOR) initiative. It is grandiose, potentially involving an area that covers 55 percent of world GNP, 70 percent of global population, and 75 percent of known energy reserves. China’s financial commitments to the project seem huge: some multilateral and bilateral pledges may overlap, but it is still likely we are looking at up to $300 billion in infrastructure financing from China in the coming years – not counting the leveraging effect on private investors and lenders, and the impact of peer competition. Japan, for example, has just announced a $110 billion infrastructure fund for Asia, and the Asian Development Bank is hurriedly revising its disbursement rules to increase its lending capacity. This does not even include the grand bargain being discussed with Russia on overland transport, energy, and cyber-connectivity.

However, concrete details are scarce, especially at the bilateral level, where potential partners seem to supply more information than can be found in published Chinese sources. Implementation may span a very long time period – as much as 35 years, according to some of our sources, reaching completion in time for the 100th anniversary of the People’s Republic of China in 2049.

This is also a geopolitical and diplomatic offensive; Xi Jinping talked first of a “community of destiny” among Asians, and our sources offer reassurance that China is seeking to “supplement” the existing international order rather than to revise it. But money also talks, and a strategy largely based on loans and aid is building China’s financial power, in addition to the trade power it already possesses.

The world’s great expectations further increase the audience for what the Chinese sometimes describe as the country’s “second opening”, after the 1979 model which led to China’s rapid growth over three decades. For example, there is much discussion of the success beyond all expectations of the China-founded Asian Infrastructure Investment Bank (AIIB). Intense debate is being carried out about the Silk Roads in countries that have reason to worry about some of their implications.

China also risks overreaching itself, and there is much uncertainty about the process. Our Chinese sources keep returning to some caveats: this is a concept based on giving, in terms of finances and in terms of leadership. China faces the possibility of losing money or stirring up opposition. The competition among potential Chinese actors – now including everybody up to China’s maritime coast – could provoke a “blind development” very much along the lines of events in China’s past. It could also happen that the aggregated projects shift some of China’s main trends of recent decades. Emphasising the westward continental overture represents a return to the late 1950s, when Mao rebalanced growth away from the coast with massive investments inland. The project also extends abroad the western development policy of the past decade. Is this a viable strategy, considering the obvious integration of coastal China in the global economy? Can geopolitical action trump economic interdependence, or will it drag down China’s overall competitiveness?

Much of China’s logic on the project is based on geopolitics and on the export of its huge infrastructure-building capacities. But even within China, these sectors are leading loss-makers. Geographical and geopolitical conditions differ widely outside China, especially along the continental routes. There is a debate about whether it is wise to pour such huge amounts into low-return projects and high-risk countries. Will this turn out to be a repeat of old mistakes, with overreliance on public financing and state-owned enterprises? Can China leverage private firms and investment in its grandiose plans? The answers are as yet unclear.

For the time being, however, no partner can ignore China’s throwweight and its track record in building massive infrastructure. Europe itself is also setting up a €315 billion infrastructure investment plan that is contingent on market financing. How it will manage to leverage China’s capital export drive for European growth is another interesting question – and perhaps a more important issue than that of a European minority stake in the AIIB.

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