China’s risky rewarding game is about to begin.
On May 14th, Beijing rolled out the red carpet for the launch of the Belt and Road Forum. The two-day gathering of 29 heads of state and other high profile attendees was more celebration than substantive discussion on the future policies of challenges associated with the ‘One Belt, One Road’ initiative (OBOR), or whichever of its noms de guerre it went by at the time. But its importance cannot be underestimated.
President Xi Jinping’s pet project aims to foster connectivity between Asia, Europe and Africa. OBOR consists of an overland ‘Silk Road Economic Belt’ and a ‘Maritime Silk Road’. The terrestrial route covers much of what was the ancient Silk Road, and areas of South Asia, Eurasia and Indochina, in six separate corridors. The seaborne track is a complimentary endeavour, linking ports in the South Pacific Ocean, the South China Sea and the broader Indian Ocean area.
The OBOR initiative is focused on satisfying Asia’s need for infrastructure, which the Asian Development Bank estimates requires USD26 Trillion in investment over the next 15 years. That is not a typo. USD26 Trillion. But given the calibrated ambition, the project is bound to take a reasonable length of time, read 2050. With 65 countries, and more than 4.4 billion people of the world connected, there is a necessity of investments close to USD 5 Trillion, as yet. The Chinese government is estimated to be spending USD150 billion a year, and around USD900 billion worth of projects are planned to have commenced already, in 68 committed countries.
The inherent economic benefits for China are ample. If successful, OBOR will open neighbouring economies to even more Chinese products. The building of railways, ports and highways is expected to stimulate participating economies, even as China’s growth softens. This provides China’s industries with an outlet for their productive overcapacity, which domestic demand has simply failed to match. This will be particularly important in regards to China’s heavy industry. During the 2008 Global Financial Crisis, debt and state-financed Chinese infrastructure projects stimulated the world economy. The GFC has passed, but major infrastructure projects need to be maintained, in order for China to maintain growth and support domestic industries. More than 50 Chinese State Owned Enterprises have been involved in around 1700 OBOR-related projects already in the last three years.
China also hopes that the OBOR stimulates regional development domestically. Western and Central Provinces are likely to be the first areas to see completed OBOR initiatives, which the government hopes, will lead to increasing ties with neighbouring countries and a consequently, an economic boost. Beijing has sought means of addressing the inequality between prosperous Eastern provinces, and underdeveloped and underperforming Western provinces, including autonomous, and restive, Muslim-majority Xinjiang.
If the potential benefits from the project are not realised, however, then China runs the risk of exacerbating already existing issues. When the project was conceived, financing the OBOR was seen as an economically beneficial use of China’s USD4 Trillion foreign reserves. However, capital outflows have reduced reserves to less than USD3 Trillion today. OBOR financing funds – such as the multilateral Asian Infrastructure Investment Bank and the USD40 Billion Silk Road Fund – are essentially backed by China’s State Owned Banks. Despite assurances from Chinese government officials, OBOR projects do not demonstrate a level of commercial viability that would attract foreign investors. Failing infrastructure projects would only add to the huge credit bubble evident in the Chinese banking sector. As such, the ‘One Belt, One Road’ initiative represents high economic risk, and high economic reward, for China.