China’s emergence from near-autarky to being a giant of the world trading system is a marvel unmatched in recent history. Along with that rise has come a surge of hyperbole about the tectonic plates of global power shifting fast, and claiming that China’s authorities will soon replace those of the US as the anchor of international economic governance.
The latest project to be given the breathless treatment is China’s Belt and Road project. At its most basic, it represents an attempt to improve overland transport on the old Silk Route between China, central Asia and Europe, noting that freight trains can cut weeks off the laborious sea journey to the world’s biggest consumer market. Even this is a colossal undertaking: estimates vary, but even the most conservative put the cost of the infrastructure plans in Asia, the Middle East and Africa as several trillion dollars, if not tens of trillions.
At its most expansive, Belt and Road is a multi-stranded attempt to use trade, investment, cultural exchange and financial links to reshape globalisation along a Eurasian axis, taking in the Middle East, sub-Saharan Africa and even Australia and New Zealand for good measure. That is the theory.
In practice, as often happens with China’s attempts to expand its global influence, the project is shaped by domestic imperatives and held back by domestic weaknesses. Whatever the grand internationalist rhetoric surrounding the initiative, its original intent was undoubtedly aimed largely at specific Chinese interests.
When it was conceived in 2013, China had excess foreign exchange reserves along with a chronic overcapacity problem, both of which meant it wanted to find new places to invest. Beijing was particularly keen to spread the export miracle from the industrial regions in the south of China, which ship goods out of ports such as Shanghai, to its poorer, landlocked western provinces, which would benefit from overland transport.
A few years later, that situation has changed. Terrified of capital flight and a collapse in the renminbi, and having burnt through almost a quarter of their foreign exchange reserves defending the currency, the Chinese authorities have ratcheted up controls on capital outflows. There is also considerable concern within China about past investments having gone sour, and a recognition of the importance of good lending practices.
The creation in 2015 of the Asian Infrastructure Investment Bank, a regional development institution set up jointly with more than 50 other countries, was widely regarded as an attempt to extend Beijing’s reach in the region. This was a misreading. The AIIB might have more accurately been seen as an attempt to bring in foreign expertise and credibility for Beijing’s foreign development finance projects, diluting rather than intensifying China’s political influence.
Indeed, although the AIIB was initially regarded as a vehicle for financing Belt and Road, the bank has emphasised its independence from the initiative, underlining that its tough governance and environmental standards must be met before it backs any project. The AIIB is evolving into a body much closer to the World Bank and other multilateral development banks than to the agent of Chinese influence that some had imagined.
Beijing can press its usual agencies such as the China Development Bank and Ex-Im Bank into service, but even their huge resources are likely to start to fall short of Belt and Road’s full plans. Accordingly, China now has a hugely ambitious project that it will struggle to fund by itself. And without the physical infrastructure, the initiative’s other aims, such as improving trade links, are unlikely to materialise.
Thus far, Belt and Road’s outlay has been tiny compared with Beijing’s ambitions – and indeed with its domestic investment. Some of the early projects, such as the vaunted railway between China and Europe, have been little more than symbolic. Given the financial constraints, projects already under way in countries such as Laos have been the subject of fierce haggling over plans and financing.
If returns on investments start to disappoint, China is likely to suffer from a backlash from its activities. And unlike, say, the US, China is a net exporter, not an importer. Countries that borrow from China to build up their transport infrastructure may simply find themselves importing more Chinese goods. This underlines a fundamental problem. China’s pretensions to global leadership generally involve serving largely its own interests, which still focus mainly on goods exports.
The US’s role as an economic hegemon rests partly on its role as a vast consumer market – and on its open capital account and willingness to run current account deficits to supply a reserve currency to the world. China does neither, and the limited internationalisation of the renminbi does not help when funding projects such as Belt and Road.
Similarly, there is much talk of China taking up the baton of trade leadership in Asia that the US has dropped by abandoning the Trans-Pacific Partnership (TPP). But Beijing’s supposed rival project, the Regional Comprehensive Economic Partnership (RCEP), contains little of substance except some cuts in goods tariffs. It may open up some more export markets to Chinese manufacturers, but it is not a model for the further development of Asia, nor for the diversification of its own economy.
China may have some interest in liberalising selective service sector industries, perhaps in a bilateral deal with the EU, but it is not in the market for a broad TPP-style agreement covering fast-growing areas of cross-border commerce such as data transfer. China’s entire foreign economic strategy remains too focused on gaining market access for its exporters while offering comparatively little in return.
Ultimately, although its economic size undoubtedly gives it clout, China currently has too many of its own internal problems to use that heft to full advantage in setting rules for the world economy. Belt and Road has certainly identified a need: the infrastructure of many central Asian and Middle Eastern countries needs updating. But a hegemon needs to give itself more room to throw its weight about than China can afford for the moment.
One of the big stories in the global economy this year is the apparent recovery in global trade after a few mediocre years. The export index kept by our colleagues at China Confidential, an FT research service, shows this recovery at work. They ask exporters in China how their volumes look month to month. Any reading above 50 indicates an increase. (And June marked the best reading
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