China’s Belt and Road Initiative

The Chinese Communist Party (CCP)’s 19th Congress in October 2017 enshrined the Belt and Road Initiative in its constitution, highlighting how Beijing sees the plan as a grand strategy for investment, and an important means to underpin its regional ascendancy.  For the initiative to embed its power, China must assuage its neighbours’ fears, provide huge amounts of funding, and ensure its economy maintains momentum.  Doing so will prove challenging.

Kit Dawnay | 23 November 2017


The lofty vision

The Belt and Road Initiative is the latest sign that China is becoming more assertive in its foreign policy.  Indeed, Xi Jinping’s work report at the 19th Congress outlined a departure from Deng Xiaoping’s adage that China should “hide its strength, and bide its time”; he said instead that China had become a “great power”, and would take “centre stage” in the world. 

The grandiose vision of an integrated infrastructure network across Eurasia, divided into a northerly New Silk Road through Russia and Central Asia, and a southerly Maritime Silk Route through South East Asia and the Indian Ocean, is an important aspect of this shift.  The Belt and Road Initiative comprises a grand strategy for investment to replace the Going Out investment programme launched in 1999. 

The need for change was clear.  The Going Out strategy has proven successful – outward investment rose from a value of USD3 billion in 1999 to USD100 billion in 2013. It was also unruly, prompting the government in recent years to tighten capital controls, curtail “irrational” investment, and impose a traffic light approval system on investments, as “encouraged”, “restricted” and “banned”.  Needless to say, Belt and Road investments are “encouraged”. 

A strategic boon

If realized, a functioning Belt and Road Initiative would place China at the centre of a regional trading network, perhaps encouraging neighbouring states to accept constraints on their actions, for fear of economic loss. In extreme cases, the initiative could engender a degree of “Finlandisation”, meaning the loss of autonomy in foreign     policy for certain states.  Such a structure might recall China’s “tributary” system, which operated in East Asian international relations prior to 1842.  

Signs of such a shift are already discernible.  The Philippines has scaled back its dispute with China, and Thailand is drawing closer to Beijing, notwithstanding its military alliance with the US.  Lately, Vietnam has prioritised trade over the South China Sea issue, and Singapore is discussing whether to tack away from Washington.  Even Australia is debating the merits of a more “independent” foreign policy.  Japan and South Korea are more circumspect, of course, Tokyo owing to distrust of China, and Seoul to fear of North Korea; even so, both feel China’s gravitational pull. 

A waning US presence – whether real or just perceived – has added to the sense that the future is with China.  America’s weakening was discernible in the Obama administration’s pivot to Asia – which promised the deployment of a bigger proportion of fewer military assets – but accelerated after Donald Trump took office, thanks to missteps such as withdrawal from the Trans-Pacific Partnership, a regional trade pact.  US involvement in another war in the Middle East, say with Iran, would only add to perceptions of American decline and distraction. 

Even so, China may struggle to realise its vision.  Most Asian states are wary of China’s power, and actively hedge against it.  To achieve its ends, then, China will have to refrain from aggression, as in the South China Sea.  For now, Beijing seems to have learnt that lesson; the handling of a dispute with South Korea over deployment of the Terminal High Altitude Area Defence (THAAD) missile defence system was more nuanced than hitherto.  However, Beijing’s record in this regard is not promising.

Paying the piper

A separate question relates to funding.  President Xi promised investment of USD5 trillion in Belt and Road projects by 2022, a sum that would go far to fill the infrastructure gap in the 65 or so target states – but is a lot of money to find in a hurry. 

Of course, China has various options. One might be to provide funds unilaterally, through policy banks, such as the China EXIM Bank and the China Development Bank, or through commercial lenders.  Alternatively, Chinese banks might offer funding in Chinese yuan, although any borrower would thereby accept a quasi-barter arrangement.

The trouble is that unilateral funding in dollars could put strains on China’s foreign reserves, which have fallen of late; the State Administration of Foreign Exchange (“SAFE”) controlled USD3 trillion in reserves as of August 2017, down from USD4 trillion as of mid-2014.  Moreover, funding in both dollars and yuan would expose banks to non-performing loans, and could inflate China’s offshore debt, to over 50% of GDP by 2022, up from 12% today.

Multilateral funding is an alternative, with policy banks such as the Asia Infrastructure Investment Bank (AIIB) working with foreign syndicates to raise funds from international capital markets.  The state-owned nature of China’s banks would provide an implicit government guarantee that could keep down interest rates and draw in investors, and could win support from the European Union or other partners. 

Even so, the provision of USD5 trillion a year in investment by 2022 will prove challenging – and is probably unlikely; by way of comparison, only 5% of Chinese investment pledged to Indonesia between 2005 to 2014 was delivered.   For now, USD250 billion a year seems more realistic – a large sum, to be sure, and liable to strengthen China’s sway, but not enough to win over the region wholesale.  

Maintaining momentum

A further challenge is that the Belt and Road Initiative will depend on China’s economy maintaining momentum.  So far, the outlook is solid.  GDP growth for the third quarter of 2017 was about 6.9%, with projections for growth of 6.4% through to 2022 (although unofficial measures are much lower).  China’s industry has modernised, and a reliance on investment-led growth has slipped, from 47.5% of GDP in 2010, to 44% in 2017, and perhaps to 41% by 2022.  

However, credit growth is a risk.  The International Monetary Fund (IMF) predicted that China’s non-financial sector debt will rise from 235% of GDP in 2016 to 290% in 2022, a trajectory it characterised as “dangerous”.  The IMF added that rates of credit efficiency have fallen steeply; CNY6.5 trillion in 2008 boosted nominal GDP by CNY5 trillion, but in 2016 as much as CNY20 trillion was necessary for the same CNY5 trillion boost.  The Chinese government has taken some steps to tamp down debt, but, all the same, levels continue to rise. 

Other reforms have proven sporadic and slow.  Notwithstanding its much-touted promise as an alternative to investment-led growth, private consumption amounted to only 39% of China’s GDP in 2016.  Moreover, supply side reforms have stalled, and efforts to cut excess industrial capacity are patchy.  In some cases, the trend has been towards greater state control; the government imposed a range of restrictions on securities after the August 2015 stock market crash, and is seeking to merge state owned enterprises, turning them into behemoths.   

Without real reforms the risk of a slowdown, or even of a financial crisis, will grow.  For now, a malaise seems the bigger threat, as the Chinese government has immense coercive capacity, and could order its banks to lend, or pass debt onto asset management companies.  Any malaise, though, would still choke off funding for the Belt and Road.


Kit Dawnay is based in Singapore. He advises clients on the international affairs and finance of China and the Asia Pacific region.

Citation: “China's Belt and Road Initiative?,” Current Intelligence (23 Nov 2017).

Drafted: 2017-11-17. Published: 2016-11-23.



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