China’s leaders lay foundation of new Silk Road

BEIJING — For centuries the Silk Road, stretching across deserts, steppes and mountains, linked the imperial dynasties of China with Europe. Chinese rulers used the thoroughfares to expand their power and influence deep into Asia. Today, a newly assertive Chinese empire is undertaking a gargantuan project to re-create those ancient trade routes and the political and economic clout that came with them.

Nicknamed One Belt, One Road, China’s plan is to construct roads, railways, ports and other infrastructure across Asia and beyond to bind its economy more tightly to the rest of the world. The scheme was honoured with a prominent place in the country’s latest five-year plan, released late last month, and has become a favourite subject of top leaders, who sell it as an international initiative to foster peace and prosperity. The programme will “answer the call of our time for regional and global cooperation”, President Xi Jinping proclaimed at the Boao Forum in March.

In reality, though, One Belt, One Road is all about China. It is designed to forward Beijing’s strategic and economic interests around the world and offer lucrative opportunities abroad for Chinese companies enduring a slowdown at home. In the end it is a boondoggle that could set back China’s reform, expose its banks to financial risk, and alienate the very nations it is meant to woo.

Although the details remain fuzzy, some estimates of the programme’s scale boggle the imagination. In a May speech, China’s ambassador to the United Kingdom, Liu Xiaoming, boasted that the programme would involve 60 countries with almost two-thirds of the planet’s population.

China has a long list of reasons to promote this grand vision. It is in the interest of the country, as one of the world’s biggest trading nations, to reduce the costs of transporting goods and to secure access to key markets and commodities. The infrastructure push could also boost China’s role in global finance. Beijing and the financial institutions it backs are gushing loans and investments for the initiative. Last December, the country inaugurated a US$40 billion (S$56.3 billion) Silk Road Fund to invest in One Belt, One Road projects. China’s state banks are already lending big to countries along the new routes. The expansion of China-backed finance could propel Beijing’s quest for greater international stature for the yuan, which it is promoting as a global reserve currency.

This powerful concoction of trade and finance could draw more emerging economies closer to Beijing. For many developing countries in desperate need of upgraded roads, ports, railways and power systems, Chinese assistance is almost irresistible. “Any time the Chinese dangle yuan in the face of foreign officials, they kind of swoon,” said Mr Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies in Washington. “All along the Silk Road they have opened their hearts to the Chinese.”

One Belt, One Road is geared ultimately to boost Chinese industry. At home, Beijing is attempting to decrease the economy’s dependence on astronomical levels of credit-driven investment for growth, and that spells tougher times for Chinese construction companies, equipment makers, and other businesses that had gorged on the country’s building boom. A key motivation behind Beijing’s big infrastructure schemes is to find fresh outlets for these companies overseas.

Even with China’s banks and special funds running full tilt, it is uncertain where all of the money will come from to finance the scheme. A report on Chinese state media says the number of projects under its umbrella has already reached 900, with an estimated price tag of US$890 billion. With many projects destined for economically weak countries with dubious governance, China’s money could get lost to corruption or be wasted in poorly conceived plans.

According to data compiled by the American Enterprise Institute (AEI), about a quarter of all overseas investments and construction and engineering projects undertaken by Chinese companies from 2005 to 2014 — worth US$246 billion — have been stalled by snafus or failed. Almost half were in transport and energy — just the sort of projects that will be key to One Belt, One Road.

Nor is there any guarantee that China’s cash will win it camaraderie. In Africa, where China has a long record of investment, a Gallup poll released in August showed the approval rating of Beijing’s leaders had dropped among Africans in seven of the 11 countries included in the survey. “The goodwill expressed at the highest levels doesn’t trickle down into warm sentiments,” said Mr J Peter Pham, director of the Africa Center at the Atlantic Council, a think-tank based in Washington. “Chinese soft power is relatively weak.”

China’s infrastructure bonanza also presents dangers to its own economy. Local governments are jumping on the bandwagon, announcing a slew of projects aimed at connecting their provinces to Silk Road routes. In an April report, HSBC estimated that the projects already planned within China could total US$230 billion. That may help sustain growth in the short run but delay the economy’s crucial transition away from investment-led growth, which would lead to even harder times in coming years. In fact, One Belt, One Road is, in its essence, the export of China’s old growth strategy — using state banks to fund investment by Chinese companies on foreign soil.

None of these concerns is likely to matter in the end. China’s international infrastructure push is, after all, a diplomatic endeavour, one to which the reputation of the state has become intimately tied. “The Chinese are going to work very hard — throw money at any and all problems — to make sure prized ‘belt and road’ projects all work out,” said Mr Derek Scissors, an AEI scholar. That could turn China’s grand Silk Road dreams into an even grander disappointment. BLOOMBERG