China’s ‘Projects of the Century’

“China is a sleeping giant. Let her sleep, for when she wakes she will move the world.” said Napoleon, 200 years ago.

In 2013, China’s president Xi Jinping, arguably the world’s most powerful man, announced the One Belt One Road (OBOR) initiative: a development strategy that aims to foster economic connectivity and cooperation between Eurasian countries. The ‘belt’ refers to the land-based pathway linking China with Europe through Central and Western Asia, while the ‘road’ is the maritime trade route connecting China with Southeastern Asia, the Middle East, Europe, and Africa. Dubbed as the ‘project of the century’, China is betting big on infrastructure. The plan is to build roads, ports, railways, and pipelines totaling more than $1.2 trillion in this region, which makes up 55% of world’s GDP, 70% of its population, and 75% of known energy reserves. Given its ambitious scope and impact, the Chinese-led infrastructure project is certainly too extensive for the world to overlook.

This initiative comes at a time when the world is in the process of deglobalisation. The UK’s decision to depart from the EU poses the risk of a broader fragmentation in the single market. Meanwhile, the US has pulled out of negotiations in the Trans-Pacific Partnership deal under, retreating from its global role. Through OBOR, it is obvious that China is consolidating the role as a leader of globalisation and economic integration.

Honest Intentions?

Not surprisingly for a project of this scale, there is some controversy around its intention: would it be a new impetus of growth or is it more of a geopolitical power play? The project will, for sure, expand China’s geopolitical influences across the region. By placing itself as the middle kingdom of the ‘belt’ and the ‘road’, China is taking on a larger role in global affairs with a China-centered trading regime.

However, OBOR could help to bridge the infrastructure shortfall in Asia. The Asian Development Bank estimates that the continent will need $8 trillion of infrastructure investment between 2010 and 2020, in order to meet demand. It is without a doubt that such an ambitious project would drive growth, improve living standards, and promote peace in developing countries in Asia, which is home to two-thirds of the world’s poor. According to global management consultancy McKinsey, this increased economic integration could boost the region enough to generate 80% of global growth by 2050.

Of course, China has other incentives to alleviate poverty: to create new markets for its products. OBOR can be seen as a stimulus policy to sustain a high growth rate for the second largest economy in the world. The revival of protectionism of the US and the weak recovery of the EU mean that China’s growth can no longer rely on its traditional trading partnerships. Burdened with a lower domestic growth rate and shrinking labour force, China is set to relocate much of its low value-added manufacturing to other less developed countries, such as Bangladesh and Vietnam, benefiting from the demographic dividend. Through investment in other countries, China could reduce physical and regulatory barriers to trade, while helping partner countries tap into a new source of growth- a win-win situation.

Investment in the infrastructure of foreign countries could also guard against the risks posed by China’s crippling overcapacity and corporate debt. Moreover, OBOR is also consistent with the Beijing government’s effort to help the less-developed West of China catch up with the coastal cities such as Shenzhen and Shanghai. For instance, the western city of Chengdu has special industrial parks for foreign businesses and a railway linking with Lods in Poland. This has helped shape Chengdu as one of the leading high-tech hubs in China, enjoying an average growth rate of above the national average, at 7.9% in 2015.

Challenges remain

First, doubts have been cast on the efficiency of Chinese corporate and banking systems. The returns on equity for state-owned enterprises in China are far from satisfactory, achieving only 3.5% per annum, compared with an average of more than 10% for private enterprises. The $1.2tn needed to fund OBOR will also most likely come from China’s banks, which could be problematic. The credit rating agent, Fitch, has publicly expressed scepticism as to Chinese banks’ ability to assess the profitability of projects on commercial potential, rather than political criteria. This means that it would be much more challenging to attract investment overseas, considering 60% of OBOR partners are of below investment grade or not rated at all. Also, projects built in some of the world’s riskiest countries may not generate sufficient revenue to cover debt repayments. If they fail, it will add mounting pressure to China’s already overleveraged banking systems. Second, there have been difficulties in setting up a concrete plan for the project. Four years after the announcement, OBOR is less of a practical package of specific projects than a broad vision. Several projects in countries such as Mexico and Venezuela have been postponed or cancelled, due to concerns about transparency and the lack of well-designed planning. Other than these, few investment plans have been announced outside of China. This is, in part, because Chinese firms are now more aware of the risks in operating businesses overseas, following a widespread over-valuation of foreign assets from a series of overseas investments. To mutually benefit all participating countries, trades will also have to flow in both directions- into and out of China. Given the huge imbalances in both net exports and bargaining power, it is no wonder that the progress of the initiative has been slow so far.

 

Conclusion

In spite of these hurdles, OBOR is likely to be a landscape-changing initiative to the world, and China is certainly making its presence felt more and more. Should the scheme succeed, China will no longer only be the engine of the global economy, but will rival the US as the setter of global order.

Roy Li

China’s ‘Projects of the Century’