China’s Belt and Road in the Long Term

bri_map
Source: https://www.worldbank.org/en/topic/regional-integration/brief/belt-and-road-initiative

There is no hiding that China has become an influential economy in the world, second in size only to the United States. They are not about to settle though. China has taken a bold new turn over the past few years in order to not only have the economic size, but also the global influence and leadership of economic super power.

I would like to introduce this initiative and take a look at its long term viability as it compares to past global development initiatives.

A Brief Overview of the Belt and Road

Starting in 2013, China announced a massive initiative called “One Belt, One Road,” often just referred to as the Belt and Road Initiative (BRI). The plan aims to economically connect China to some 70 countries throughout East and Central Asia, the Middle East, Africa, and Europe through vast infrastructure projects such as ports, roads, pipe lines, and rails.

The initiative’s goal is to connect China to 1/3 of the global economy and could cost over $30 trillion by 2030 to maintain the current growth trajectory.

The BRI has two main components. The belt is a series of roads and rails aiming to connect China, all the way through Eurasia, to Europe. And the road is a network of major ports within the Indian Ocean.

Through the initiative, China aims to create a streamlined trading network between their vast industrial cities and the economies of many developing countries. For example, the expansion of rail lines could help cut shipping time from China to Central Europe from 30 days to roughly 15 days, helping to significantly reduce the cost of doing trade there.

Is such a large economic plan viable in the long run, though? Being only 5 years old, the initiative is still in its youthful stages, but there are various indicators pointing toward long term headwinds for China as they move forward with BRI.

A Chinese Marshall Plan

In a nutshell, the BRI is China’s way of using its economic clout to build up other economies that in the long term would be able to serve as new markets for Chinese goods. The plan also aims to push China up the status ladder among global economies as they compete with western countries like the U.S. for global economic influence.

Due to similar goals, the BRI is often compared to the Marshall Plan of the 1950’s, when the U.S. led the charge in helping to restore Europe to its pre-world war capitalistic glory. The Marshall Plan was essentially the U.S.’s way of developing Europe into a strong market for our manufactured exports, and our way of creating  an ideological ally to deflect the influence of other world powers (the communist USSR and their allies at the time).

The Marshall plan was widely successful. Western Europe developed into one of the wealthiest regions in the world and one of the U.S.’s strongest trading partners. The U.S. dollar became the world’s reserve currency and still stands there today, as many developing countries are still required to take out loans in U.S. dollars. And the capitalistic west successfully out influenced communism in the long term ideological cold war.

Although the BRI’s goals are similar to the Marshall Plan, the route it has taken to achieve these goals is different. A few of these key economic differences are a major reason why the BRI will likely have a more difficult road to success in the long run.

The Issue of Debt

There is no hiding that the BRI is a massive plan. The sheer monetary size of it is one of the major differences between it and the Marshall Plan.

Where the Marshall Plan included about $110 billion in aid to Europe in today’s dollars, the BRI in its first three years has included about $500 billion in Chinese bank loans, direct aid, and future commitments. This is only the early days of the BRI, and more money is yet to come.

This leads to one of the primary drawbacks of the BRI: the substantial amount of loans and the debt that will follow. Where as the Marshall plan focused primarily on aid that was conditional on policy changes (lowering of tariffs, pegging to the dollar, etc.), the BRI is in the game of granting unconditional loans to countries.

These loans are then used to build the infrastructure that China is looking for: a major port in Sri Lanka, rail ways in Laos and Pakistan, energy infrastructure in Central Asia. The projects are aimed at boosting GDP in these developing countries by helping to connect them to China, and in turn, giving China new ways into the countries’ economies.

The returns have not come fast enough for many major countries in the BRI, and has led to some countries becoming trapped by Chinese debt.

For example, Sri Lanka turned to China to finance its Hambantota Port prior to the official beginning of the BRI back in 2010 with a $1.5 billion investment. The port did not end up as an immediate success though, and Sri Lanka had to sign it off to a Chinese state-owned holding company as a result. Now a major economic site within Sri Lanka is controlled by a foreign power.

Pakistan serves as another example. The debt they have accrued from Chinese loans for building new ports and railways has helped push them into a current account crisis, requiring a possible bailout from the IMF.

If debt pushes too many countries toward crisis, the payout of the BRI projects may be subdued as countries push off further investment to deal with debt loads. In the case of Sri Lanka, it could also lead to a one way benefit where China gets the majority of the payout. While the Marshall Plan financed pro-growth projects and more controlled spending, the BRI has fostered debt traps that are holding back the desired growth of participating countries.

Exporting the Yuan

Along with the debt issue, the ability of China to influence other countries to buy assets in yuan serves as another headwind for the BRI. A major successful pillar of the Marshall Plan was the implementation of the Breton Woods system where the U.S. dollar became the basis for all commerce.

Most major currencies in Western Europe were pegged to the dollar, which was pegged to the U.S. gold stockpile. The cost of trade was the thus far less volatile since Europe did not have to worry about rapid appreciation/depreciation against the dollar during the 1950’s. This helped stabilize their own currencies and created a reliable international monetary order that persists today (even with developed countries not pegging to the dollar anymore).

Can the Chinese yuan foster a stable system like the dollar did? It will likely be more difficult. One major reason is the control the Chinese central back exerts on it. Rather than being on a path of liberalizing their currency, China has been more in the game of capital controls and devaluing the yuan.

This puts BRI countries at the whim of Chinese interests rather than market forces. If China sees fit that they need a strong currency, countries using the yuan will have to deal with that decision by China. Without a floating currency, the decision to take on the yuan as a base currency becomes more difficult compared to the decision to take on a stable currency like the dollar.

Along with this, China also faces the hurdle of the dollar already holding the crown of being the reserve currency. Oil is priced in dollars, many currencies (including China’s) are propped up by dollar reserves, and the majority of international loans come from U.S. banks.

During the Marshall Plan days, the dollar was the only viable hard-currency after World War II, making it an easy choice as the global reserve currency. China faces a more difficult task today as they not only have to prove that they have a more reliable currency than the dollar, but also they have to compete with other strong, stable currencies like the euro and the yen.

If China cannot successfully export the yuan, they will not be able to create a monetary order revolving around their currency, limiting the economic sphere of influence of the BRI.

Many Years to Go

The Belt and Road is still a young program at this stage, and it is not at a point yet where conclusions can be made about it. In comparison to the Marshall Plan though, the initiative faces many economic headwinds as it aims to develop the Chinese economic sphere. We will see over the next decade if they can overcome these early issues and truly compete with the United States in terms of economic and monetary influence.

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