The New Silk Road … China’s “belt and road” strategy will change the landscape of global trade

February 23, 2018

Gaige kaifang was the period of China’s economic reforms and opening-up to the world that began in the 1970s. During this time, the country largely adhered in its foreign relations to the taoguang yanghui (“hide our capacity and bide our time”) mantra devised by the party leader, Deng Xiaoping.

Today’s general secretary and state president, Xi Jinping, who cemented his dominance at the 19th party congress recently, has jettisoned this approach, with a new confidence in China’s development path, and a belief that the country can consolidate a leading position on the world stage.

His promise to deliver “the great rejuvenation of the Chinese nation” implies that he seeks China’s return to a powerful player in world affairs – politically, economically and militarily.

Stepping into a power vacuum

China’s opportunity to re-assert itself is highlighted by United States’ backstepping in taking a leadership role in global affairs. Indeed, Xi has stated his view that “trends of global multipolarity” are gaining ground, leading to a situation where “relative international forces are becoming more balanced”. A period when the US has played the role of global hegemon has given way to a period where no state is yet powerful enough to challenge the US for global hegemony, and yet the US has begun a process of relative decline.

China is aided by indications that the US is stepping back from its erstwhile support for globalisation, both in terms of less full-throated backing of free trade and reduced willingness to co-operate internationally on issues such as climate change. US president Trump, told the meeting of the Asia-Pacific Economic Co-operation (APEC) forum in Vietnam in November that “chronic trade abuses” had to be dealt with. By contrast, Xi told the gathering that globalisation was “irreversible”, and that all countries could benefit by “boarding the express train of China’s development”. This continued a theme he first developed in a speech to the World Economic Forum.

Higher priority for foreign policy

Accordingly, China has begun to give higher importance to foreign policy, an area traditionally overshadowed by domestic development priorities. The 19th party congress enshrined Mr Xi’s flagship international policy, the Belt and Road Initiative (BRI) – a project to raise Chinese trade and investment in countries along its key land and sea trade routes – in the CCP constitution. The congress also saw the promotion into the party’s 25-member top-level CCP politburo of Yang Jiechi, marking the first time a career diplomat has sat on the body for decades.

Alongside the BRI, China is developing a stronger voice on global governance issues. Its influence over international financial institutions has grown to the extent that the managing director of the IMF, Christine Lagarde, has speculated about relocating the institution’s headquarters to the Chinese capital, Beijing. The China-led Asian Infrastructure Investment Bank has made a solid start since its inception in 2014. China is a major backer of UN peacekeeping operations and wants to protect a global climate change deal. China is thus marketing itself as a responsible power whose rise could be good for the globe as a whole. This message is readily received by a global audience concerned about US policy unpredictability under Mr Trump.

Implications of Chinese leadership

Enhanced Chinese global leadership could influence international politics and economic developments in several ways, in part stemming from its attachment to a more traditional statist form of sovereignty. For instance, China’s understanding of “globalisation” differs markedly from that in most Western countries, despite the apparent contradictions between Mr Xi’s support for the idea and the bars on foreign investment in many parts of China’s economy. Although an advocate for multilateralism, China adopts a primarily bilateral approach in its engagement with blocs such as the EU and Association for South-East Asian Nations (ASEAN). Meanwhile, China does not countenance any perceived interference in its domestic politics.

The government’s state-led approach is unlikely to create solutions to pressing international challenges. Chinese-style globalisation will not drive the global economy forward in the manner that waves of trade and investment liberalisation did in the past. State-centrism could hamper international policy debates on climate change and economic development by squeezing space for civil society actors to contribute.

The Belt and Road Strategy

Strategy+Business Magazine gives its perspective: “As of early 2018, a new elevated railway in Hanoi is giving commuters a smoother journey into the city. The 13.5 kilometer (8.4 mile) line, which snakes across the Vietnamese capital’s shimmering West Lake, is one element of a much larger rail project that will connect the landlocked Yunnan Province in China directly to the northern Vietnamese port city of Hai Phong, providing access to markets in Southeast Asia and beyond.”

Many time zones to the west, the London suburb of Barking has the distinction of being the first English town with direct rail access to China. In January 2017, it welcomed the arrival of a freight train that had traveled 12,000 kilometers (7,500 miles) from eastern China’s Zhejiang Province, with a cargo of garments and handbags. The so-called “East Wind” train made history by retracing part of the ancient Silk Road that more than 2,000 years earlier had linked northern China to the Mediterranean. The railroad traversed Kazakhstan, Russia, Belarus, Poland, Germany, Belgium, and France on its journey to Britain. But it should not be regarded as a pure U.K.-to-China transport link. Once fully operational, it will pick up and drop off goods at many countries in between, thereby opening up parts of Russia and Central Asia that have never before had this type of entrée to the global economy.

These rail projects, which share the same visionary origin, are just two of dozens of road, rail, port, and power generation plans within China’s much-vaunted Belt and Road Initiative (BRI). Formerly known as One Belt, One Road, this vast, interconnected infrastructure project spans at least 65 countries with a combined population of 4.4 billion and about a third of the world’s economic output.

The plan is notable not just for its scale, but for its time frame. Its first phase focuses on infrastructure development, specifically in transportation, communications, and power. The second phase will involve softer sectors such as e-commerce, healthcare, education, and financial services. The first projects are just starting now, and the whole initiative is not expected to conclude until at least 2050.

Already, the rail elements of the plan alone rank as one of the biggest infrastructure pushes ever undertaken. The total estimated value of its 18 planned Chinese high-speed rail projects — of which five are under way — comes to US$143 billion, according to calculations by the Center for Strategic and International Studies, a U.S. think tank, and the Financial Times. That is larger than the U.S.-led Marshall Plan, which spearheaded the revival of Europe after World War II and cost about $130 billion in today’s money. Indeed, compared with the BRI, the Marshall Plan was modest in its ambition: It sought to rebuild the old, war-torn economies of Europe. The BRI is focused on developing new economies around the world, and fostering global trade among them, not just with China.

Moreover, the BRI represents a multistage conception that goes beyond basic capital investment. It will eventually embody leading-edge digital technologies such as embedded sensors and data analytics, thereby giving participating countries the ability to leap past current Western supply chain practices. In doing all this, the BRI could spark a 21st-century expansion of global economic growth, technology exchange, and, inevitably, Chinese influence.

The BRI is not the only comprehensive initiative of this sort emerging in the 21st century, however. Industry 4.0 initiatives from Germany and cloud-based platforms from the United States may eventually interface with it, compete with it, or both. But the ambition and scope of the BRI are even greater than those of its international counterparts. That’s why it is such an important — and complex — strategic opportunity for global enterprises. China has invited companies from other countries to do business with the BRI by investing their financing, technology, or other forms of capital. These investments may give them access to barely tapped markets destined for future growth, while cementing a better foothold in China itself. The relationships companies build with their Chinese partners, including host companies from countries along the BRI pathways, could lead to many opportunities in China and around the world.

Pursuing the Chinese Dream

With all these uncertainties at play, an assessment of the best strategy for your company must start with an understanding of China’s motivations, capabilities, and limits. The concept for the initiative was first unveiled in 2013 by Chinese president Xi Jinping (see “Historic Roots, Grand Ambitions”). Its goals were reaffirmed in late 2017 at the 19th Chinese Communist Party Congress (the congress is held every five years). There, a reference to the initiative was formally added to the party’s constitution. Along with the elevation of Xi to the status of “core leader” (a title held previously only by Mao Tse-Tung and Deng Xiaoping), there could be no clearer sign of the BRI’s importance to China’s national development.

The BRI plan aims to build out the overland and maritime infrastructure needed to create a broad web of new trade connections from the Eastern hemisphere to the West. It will do so by developing six broad economic corridors. Four are predominantly land routes connecting China to Europe through Central Asia. For example, a New Eurasian Land Bridge economic corridor is intended to be a major logistics passageway between China and Europe with transcontinental rail connections, including that China-to-London freight train that ended its journey in Barking. The two remaining corridors are maritime routes, establishing land–sea connectivity across Southeast Asia, South Asia, the Middle East, and Eastern Africa.

The BRI’s goals are multipronged. The initiative will provide markets to absorb China’s industrial over-capacity and facilitate trade with and between participating countries, while also potentially strengthening China’s diplomatic relations across its six economic corridors. It could also help internationalize the renminbi. Finally, it will enable China to gain global recognition in developing complex transnational infrastructure projects, such as high-speed rail networks.

The initiative will establish a greater capability among Chinese companies for building, innovating, and maintaining infrastructure around the world, ensuring that more of them will be profitable outside China’s borders. A specific recommendation on this issue has been made by the Center for China and Globalization, a Beijing-based think tank that works on the BRI. The center said in a May 2017 paper that China should prioritize the construction of overseas industrial parks, as they could help Chinese companies abroad increase exports.

But the most remarkable aspect of the initiative is not its impressive scale, scope, technology, or level of investment. Rather, it is the challenge that China’s leaders have set themselves in building what Xi has called “a big family of harmonious coexistence.” In its previous large-scale multinational endeavors, China provided overseas funding and construction on a project-by-project basis. The BRI represents a holistic approach, designed to kick off a giant self-reinforcing circle of rising prosperity, investment, market development, and technological advance — all helping to burnish China’s credentials as a global power.

Indeed, many BRI projects are designed for geopolitical as well as commercial impact. In 2010, the Arabian Sea port of Gwadar, in Pakistan, was in complete disrepair. The China Overseas Ports Holding Company, a Chinese state-owned enterprise (SOE), took over operations of the port in 2013 and rebuilt the terminal, in return for a 43-year lease, signed in 2015. The port is now expected to handle more than 400 million tons of cargo a year, much of it carried from China along new highways.

Commercial infrastructure of this sort will also expand markets for Chinese goods and services, providing outlets for the country’s massive industrial overcapacity and its workforce. Construction of railways, pipelines, and other projects could boost steel demand by 150 million tons and keep Chinese mills — many of them currently operating at a loss — running for years, according to Australia-based mining company BHP Billiton.

The initiative may also invigorate Chinese stock markets. According to a PwC research project presented at the annual meeting of the International Business Leaders Advisory Council in 2017, about 235 of the 2,000 largest private companies in the world are located in 11 emerging economy countries along the Belt and Road routes.

Finally, for China, there is a strong potential payoff in political stability. Improved infrastructure and a steadily growing regional economy increase the odds that China’s neighbors — and other countries in its potential sphere of influence — will be primarily oriented toward peace and prosperity. China does not want political and economic instability on its western and southern borders. By enhancing the standard of living of other countries, China is creating new markets for all to trade with, not just China.

Many countries along the path are already counting on the BRI to be a catalyst for their own economic growth. Some of the higher-potential developing economies, such as Indonesia, Thailand, and Pakistan, expect to gain new market access for their enterprises through increased trade with other Belt and Road countries. And just about all the countries on the route expect to benefit from the infrastructure investment; the BRI will finance and build desperately needed transportation, water, communication, and power systems. The Asian Development Bank estimates the total infrastructure investment needs in Asia to be $1.7 trillion per year at least through 2030; the power and transport sectors will require the greatest investments. Spending of this sort will have a multiplier effect that should accelerate development in many BRI countries.

A Tall Tree Attracts the Wind

Largely because of its scale, a major strategy such as the BRI inevitably finds itself having to navigate numerous obstacles. As the Chinese saying goes, “A tall tree attracts the wind.” Many commentators see the project as an effort to gain advantage and global leverage at the expense of geopolitical rivals, such as the U.S., India, and Germany. The same concerns that have been expressed in the past about investment in China — limits on access to lucrative markets, forced partnerships with Chinese companies, pressure to yield technological knowledge and intellectual property, and restrictions on information flow — have also been raised about the Belt and Road Initiative.

However, we believe some commentary has been too quick to narrowly label the BRI as a purely geopolitical play by China intended to strengthen its influence across East Asia and Central Asia. There are also signs that China’s state-owned enterprises are changing their behavior. The association of the BRI with “Xi Jinping thought” suggests that Chinese companies are being encouraged to focus on quality growth and profitability, not just growth at any cost. Furthermore, the BRI’s association with global funding entities such as the World Bank and the Asian Development Bank demonstrates its commercial focus.

The crucial question of funding is answered only in part. The Chinese government has allocated huge sums to BRI projects. Major funding sources such as the Silk Road Fund and policy and commercial banks have committed to financing $186 billion, as of 2016. At a BRI summit in China in May 2017, Xi announced the expansion of the Silk Road Fund by $14.8 billion, in addition to its starting capital of $40 billion. Policy banks are also setting up BRI multicurrency special lending schemes totaling about $56 billion.

Yet even this will not be enough to cover everything. China is actively seeking partnerships with foreign companies because, owing to domestic financial constraints, it cannot afford to fund all these BRI projects on its own. More than 600 million Chinese people still live below “middle income” status, and the indebtedness of Chinese corporations and provinces looms as a significant issue.

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