The Demise of the Belt and Road Initiative
(this is an excerpt from our flagship published on September 7th. We will post the latter part tomorrow)
It’s the fifth anniversary of the Belt and Road Initiative and all is not well
As we approach the fifth anniversary of Chinese President Xi Jinping’s speech in Kazakhstan announcing his vision for a new Silk Road Economic Belt, the concept is mired in hyperbole, suspicion and disastrous financial decision making. Instead of catapulting China into the center of economic cooperation, the vast majority of the developed and emerging world now looks at the Belt and Road Initiative (BRI) with tremendous distrust. The West views BRI as an attempt to spread military influence. Smaller emerging economies, initially eager to accept Chinese capital to achieve their own development goals, now, in many parts, view the exorbitant debt burdens as a form of modern day colonialism. While despots across Central Asia and Africa are all too willing to accept Chinese capital for projects designed to solidify power, populist governments from Pakistan to Malaysia are questioning whether it is all worth it. With Western Governments especially the US and European Union making it virtually impossible for Chinese companies to buy assets, the global consensus is a rejection of Chinese investment. The world is saying to China, “we don’t want your cash”.
All of this puts into question whether or not China can achieve “superpower” status, however you define this. They are, of course, a nuclear power but so are many other nations, so the ability to obliterate the planet is hardly requirement for a superpower mantra. China is an economic behemoth; the world’s second largest economy and over the course of the next decade, should overtake the United States to be top of the heap. While the scale of China’s economic rise has no precedent, China cannot become a pre-eminent global force without allies. The United States, the dominant global power since the turn of the 20th Century, was able to maintain standing in the world because it has allies prepared to share its values. While there have been hiccups along the way and US alliances are facing an existential threat in the form of the Trump administration, few would argue that when the era of Trump comes to an end, Western democracies will work together to build bridges. China has no allies. No special relationships and as the failing of Belt and Road are amplifying, the use of capital to try and buy influence is destined to fail. Smaller nations and despots may be seduced by the funding of vanity projects to reinforce the legitimacy of illegitimate regimes, but as countries all along the Silk Road are expressing, the price for Chinese capital from extreme debt burdens to overarching domestic influence is far too high.
Belt and Road forecast never made sense
The grandiose claims of the size and scale of BRI both in terms of past achievements and future plans are borderline comical. Numbers of $4.00tn to $8.00tn are often cited as the ambitions of the plan, yet the numbers do not add up. With foreign exchange reserves at $3.1tn and falling as the prospects of structural current account deficits are increasing, China simply doesn’t have the capital to get anywhere close to these goals. Yes, China’s excessive savings rates can lead to high levels of investment that can be funneled abroad, but that would result in a sharply weaker RMB and that has consequences. Yes, Asian infrastructure needs are enormous, with the World Bank believing they could be as high as $1.00tn per year, but this doesn’t mean that the projects get executed or funded by the Chinese.
Depending on how you define a BRI project, the actual deployment of capital ranges from $20bn - $25bn per year. Even if you take the total global finance commitments by the Chinese and allocate it completely to BRI programs, the number of roughly $38bn would have to increase more than three-fold per year to meet Morgan Stanley’s estimate of $1.3tn over the next decade. This would require either a massive depletion in FX reserves or huge USD borrowing by Chinese banks in the offshore USD market, both which would significantly increase the cost of funding for many of the commercially unviable projects. One saving grace the global economy is that the debt burden is likely to be much lower than anticipated because China doesn’t have the capability to lend on the scale it has previously announced.
Examining the Debt Implications of the Belt and Road Initiative
Scott Morris is a senior fellow and director of the US Development Policy Initiative at the Center for Global Development in Washington D.C. His groundbreaking report “Examining the Debt Implications of the Belt and Road Initiative” is a critical assessment of the debt pressures being put on smaller countries through the acceptance of BRI funding for economically unviable projects that could force as many as eight countries, including Pakistan to seek IMF assistance. With China sitting outside the Paris Club, the organization that has set the rules for debt restructurings since 1956, and the political concerns regarding the use of IMF funding to pay of Chinese liabilities being amplified by the rhetoric of the Trump administration, Chinese debtor nations will face multiple headwinds if the debt load becomes too great. There is no process for the Chinese to work with other creditors regarding haircuts and their lack of involvement in international institutions like the Paris Club, adds to global instability.
The Belt and Road Initiative is predominantly an exercise in soft power. It is a grossly exaggerated economic program designed to portray China in a favorable light to the balance of the globe. It is designed to buy allies where the Chinese currently have none. The soft power initiatives by Beijing are designed to spread positive message to the world about China’s intentions. My recent conversation with Journalist, Isaac Stone Fish, on the topic of Chinese soft power, made me think why is such a determined campaign necessary if China was doing the right thing? China is offering to fund projects across Asia yet is expanding military capabilities in disputed territories. Governments across Asia are seeing the disconnect between words and actions and are refusing to take Chinese capital with strings attached. Forget the economic consequences of sovereign guarantees and high debt loads; countries across the region are refusing the temptation of closer economic ties with Beijing at any cost. While China’s economic might must be respected by its neighbors who fear the reprisals if they get on the wrong side of President Xi, it is clear that five years into the One Belt, One Road era, Asia remains skeptical of China’s intentions and no amount of soft power will change this.