China’s Belt and Road (BAR) project, formerly known as One-Belt-One Road, is a political-economic strategy conceived to “kill three birds with one stone” by achieving long-term international, domestic and political objectives.
Internationally, it will unleash a regional infrastructure boom by connecting China with Asia, Europe and Africa by land and sea, and boost renminbi internationalisation by encouraging its use in both trade and financial transactions. Domestically, it will help export China’s excess capacity, which should enhance investment returns and stabilise growth. Politically, Beijing is using the project to secure foreign trade relationships in response to some major trade pacts that have excluded China. However, the potential risks to China associated with the BAR strategy are not negligible.
Kill three birds with one stone…
BAR has three pillars: 1) spreading economic development through infrastructure investment and new trade routes; 2) creating interdependence between China and other countries and regions via global partnership networks; and 3) focusing on Asia as part of a new “neighbourhood diplomacy”.
By building closer economic ties with the regional economies along the BAR route, Beijing is aiming at tying these regions’ prosperity to their relationship with China, hence laying the foundation of an economic empire centred in China.
Greater financial cooperation between China and the BAR countries should encourage deeper integration of markets, backed by the increased use of the renminbi for trade and financial transactions.
Arguably, BAR is the next level of China’s strategic development after its “absorption” policy (to attract foreign investment and technology) and “expansion” policy (to encourage Chinese companies to go abroad) strategies. It is also an extension of the “go west” policy, initiated in 2000, to boost the under-developed western provinces.
It will help China’s growth by providing an investment platform for boosting national infrastructure spending, urbanisation and trade. These initiatives will unleash a regional and domestic infrastructure boom, helping to stabilise China’s growth while structural reforms are being implemented.
China’s large state companies will likely lead most of the BAR projects, paving the way for the private and foreign companies to follow.
Politically, BAR is an effort by China to counter US-driven trade agreements, such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, both of which exclude China.
These new trade pacts are seen as part of the effort by the US to contain China due to concerns about China’s ulterior motives for naval expansion and energy security. Since 2010, the US has been working closely with South Korea, Japan, Taiwan, the Philippines, Australia and India in its “pivot to Asia” policy initiative. This has made it hard for China to expand its influence over regions to its east and prompted China to rethink its strategy of concentrating investment in the eastern coast.
From China’s perspective, however, economic growth is key to its national security, as it legitimises the Communist Party’s rule and BAR is part of its survival tactics. Through BAR, Beijing is trying to find an alternative by targeting the western and southern parts of the country and expanding internationally to the west.
The Real Question…
The real question is not whether China can be contained, but through which channels it will exercise its influence as a new international player. Economic expansion is one possibility; military confrontation is another.
China’s former leaders pursued a “peaceful rise”. The current generation of leaders may not necessarily take the same reserved approach. Nevertheless, it seems likely that Beijing still sees its geopolitical and security interests as best served by tying other countries into ever closer trade and investment relationships. It is a strategic vision based on economic power.
Granted, BAR will enhance China’s economic and political clout, which would imply an expansion of its military influence. But as China builds closer economic ties with the world, it will also have a lot to lose if it upsets international relations. It is not in Beijing’s best interest to instigate international instability.
However, BAR also carries some potentially big risks for China. Some of the countries that would be participating in the BAR scheme have poor economic fundamentals, including large fiscal and current account deficits. Beijing will be taking on greater default risk by investing in them or by providing them with capital. A wider use of the renminbi may also expose China to Forex risk.
The politics may also backfire on China. Given China’s poor track record in operating in foreign countries, including clashes in work ethics and the lack of human rights in labour treatment, a major increase in the scale of China’s external activities could increase the risk of damaging Beijing’s political image or creating instability in the host countries. Expansion of Chinese influence throughout central and south Asia will also create tensions with major players in those regions.
Nevertheless, if China encourages free trade and abides by international norms and market rules, BAR would be positive for global markets by fostering new trade networks and better allocation of capital. The investment opportunities will outweigh the risk.
Senior Economist, BNPP Asset Management (Asia) Ltd., and author of “Demystifying China’s Megatrends: The Driving Forces That Will Shake Up China and the World”, Emerald Publishing 2017, and ten other books on the renminbi, China and Asian economic development. Lo was listed on the International Who's Who Professionals in 2000 and 2011, and has many years of international research experience in economics, financial markets and public policy and standards development, covering North American and Asian economies.