On January 18 a locomotive with 34 carriages pulled into Barking Rail Freight Terminal in London’s east end. Normally, this would not be in any way out of the ordinary. This particular train, however, had travelled 7,456 miles to reach its destination. Departing from Yiwu, China, the journey took 16 days and travelled across eight different countries to deliver its goods to the UK market.
The Yiwu-London route is just the most recent development of China’s One Belt, One Road (OBOR) policy; a massive international infrastructure development program which spans Eurasia and aims to remove the divide between separate European and Asian trading blocs. This investment program is the brainchild of current president Xi Jinping who sees it vital to the success of his presidency and China’s future economic prosperity.
A Slowing Economy
As Mr. Xi succeeded the outgoing Hu Jintao in 2013, it became clear that the country as a whole was also beginning to transition. China has been the engine of world economic growth for the last several decades due to its large manufacturing sector, powered by an almost unlimited supply of cheap labor in a constant human stream moving from rural areas to urban ones. This job powered movement has been described as the greatest migration of people in human history. The parallel construction of factories and accommodating infrastructure helped China achieve double digit economic growth rates during Mr. Jintao’s decade long presidency.
This remarkable growth started to slow as Mr. Xi took office partly due to the increasing wages and gradual aging of the working population. With an annual growth rate of 6.7% in 2016, the lowest in 25 years, concern has started to spread. Foreign owned factories began looking towards other regions to build their facilities. Countries like Vietnam have seen an increase in investment both in their development and in migrants working across the border in China for smaller wages. Worldwide commodity prices have tumbled at any rumor of a slowdown of the Chinese economy. Additionally, the 2008 economic crisis brought with it a massive debt burden. Currently nearing 44% of debt to GDP, China’s borrowing has not slowed, which makes it susceptible to another 2008 style crisis.
Mr. Xi’s answer to the economic slowdown came in the form of a throwback to China’s Golden Age; a time when a romanticized silk road linked the European and Asian markets in a constant stream of merchants, goods, and ideas. Much more than a romanticized notion, the economic benefits of an infrastructure and capital injection of a scale not seen since the post-war Marshall Plan, could rejuvenate a faltering economy and make Beijing a center of world trade and diplomacy.
Silk Road Redux
OBOR, at its heart, is a trade infrastructure investment program which aims to build or upgrade existing overland and maritime trade routes. The official figures associated with OBOR are so impressive that it is difficult to find a historical precedent which matches it in scale (apart from the aforementioned Marshall Plan). There are roughly 900 projects currently underway according to official state media. This puts a total valuation of both overland and maritime routes at approximately $890 billion. The Chinese ambassador to the UK even boasted that OBOR would include 60 different countries with about two-thirds of the world’s population. Clearly these figures should be taken with a grain of salt, but if they are anywhere close to reality, then it would be plain to see that China is tying much of its economic and strategic future to OBOR.
Individual projects include a planned dam in Pakistan, a new railroad in Uzbekistan, a transport hub in Germany as well as a stake in Greece’s second largest port, among many others. The Chinese government finances these projects through its sovereign wealth fund as well as through an investment bank created specifically for OBOR, called the Asian Infrastructure Investment Bank (AIIB). These combined funds currently provide a startup amount of about $140 billion. Additionally, private enterprise is encouraged to take part with Chinese regions and companies attempting to connect to the Silk Road network.
The increased activity of Chinese construction companies is a central facet of OBOR as the country looks abroad for economic opportunity. As part of its attempt to reign in state credit lending and debt, China is trying to offset the increasing production costs associated with Chinese goods with lower transportation costs to European and Asian markets. It also stands to make Chinese banks attractive to foreign lending as they standby to lend increasing amounts of currency in the form of Yuan to Silk Road countries to finance OBOR construction. Naturally, there are also some soft power incentives for Chinese officials as well. At a time when the struggles for influence over Central Asia, the Middle East, and even parts of Europe dominate the headlines, a potential finance power like China could consolidate its influence over these regions through strategic lending. If managed correctly, OBOR could be a multi-pronged approach to ensuring long term economic and diplomatic success for China.
If managed incorrectly, however, China could potentially be in a more precarious economic situation. As discussed previously, the $140 billion raised through the sovereign wealth fund and the AIIB is far short of what is needed for an $890 billion valuation of the projects. There has been little mention of how China may go about funding the rest of OBOR, but if the decision is made to risk borrowing the required funds, the world’s second biggest economy will be disappointed with anything short of complete success. The situation may become more unstable when taking into account the endemic corruption and potential for default of many of OBOR nations. Also, any nation involved in such an extensive undertaking would be in untested waters. Would Chinese construction companies and banks be capable and flexible to manage diverse projects in dozens of countries? And finally, the lack of clear framework and timeframe for completion leaves plenty of ambiguity for what a completed Silk Road may look like.
The One Belt, One Road development program is still in its initial stages. What becomes of it is still entirely up in the air with plenty of variables, moving parts, and agreements still to be made. The program’s ambition, however, cannot be doubted. If nothing else, an attempt to seamlessly link European and Asian markets is a noble one in terms of diplomacy. Economically, China has much riding on OBOR’s outcome. Its economy will not return to being what it once was, nor do most Chinese want that to happen. With new environmental regulations and a growing middle class, China seeks a new more modern way to prosperity. The foreign adviser to Mr. Xi, Yang Jiechi, who is also closely tied to OBOR, outlined China’s aims of being a well-off society by 2020 and a strong and prosperous one by 2050. If China’s future reality matches its present ambitions, then it is extremely likely that Mr. Yang’s aims will be realized.
