One Belt, One Road, Many Problems

Photo: Council on Foreign Relations: James McBride & Julia RoPhoto: Council on Foreign Relations: James McBride & Julia Ro

‘One-Belt, One-Road’ (OBOR) is the chunky umbrella term for a series of Chinese funded infrastructure projects that aim to link China, the rest of Asia, and Europe. At a cost of $1 trillion, spread over sixty-eight countries, it is thought to be the largest infrastructure project ever. There are three main parts of the project. The ‘belt’ is a series of overland transport improvements that branch out from China into Central Asia, Pakistan and Southeast Asia. The ‘road’ is a series of port developments in the Indian Ocean. These projects are then often accompanied by further infrastructure projects such as stadiums and airports.

China’s motives for OBOR can be divided into economic, diplomatic, and political. By cutting travel times between China and Europe, and stimulating economic development, OBOR aims to maintain China’s exporting strength. In addition, China hopes that these infrastructure projects can soak up some of their excess capacity in basic manufacturing industries (such as steel and concrete). With the US is retreating under President Trump, China is keen to score a diplomatic victory by bringing Asia into its sphere of influence. Howard French, of Columbia University, also points to Xi Jinping profiting off nationalism by reasserting China on the world stage after centuries of humiliation. It is no surprise that Mr. Xi, whose presidency has been defined by this narrative, is its chief planner and promoter.

However, lofty ambitions contrast with reality. The benefits suggested by Chinese officials, such as those from a faster train route to western Europe, are exaggerated. In terms of moving goods between China and western Europe, the train sits in an uncomfortable niche between air cargo and shipping. After OBOR, shipping will still be the cheapest form of transport, and the train will only be suitable for goods that need to get to market quickly, such as electronics and clothes, but not quickly enough to warrant the high cost of air cargo. Undeniably, there is room for growth. Data from Accenture, a consultancy, show that China-Europe rail volumes increased from 114 tonnes in 2013 to 511 tonnes in 2016, but the fact that shipping volumes are almost 100 million tonnes shows the relative unimportance of the train. To this regard, China is developing ports in the Indian Ocean as part of the ‘road’. The Gwandar port in Pakistan, which connects China’s interior to the Indian Ocean, is the most promising, but it is notorious for corruption and delays.

Some argue that a benefit of OBOR is to use state money to absorb excess industrial capacity. This is misguided. Overcapacity is a problem because it prevents the economy from directing resources to their most efficient use. China should not address overcapacity by artificially pumping up demand, but by allowing its economy to restructure. A team led by Sai Ding of the University of Glasgow argue that overcapacity is a result of overinvestment, and overinvestment is itself a result of China’s institutions. They argue that economic management is local whilst political power is centralized. The central government incentivises local government officials through promotions and rewards to meet its objectives, which tend to be growth and investment rather than managing capacity. This process is helped by the fact that the state-owned banks are happy to lend to state-owned industries (SOEs) without too many checks on the investments’ return. The government’s attempts to resolve overcapacity have largely involved directing SOEs to reduce production volume rather than capacity, according to Andrew Polk of Trivium China, a think-tank. This has often led to cack-handed solutions by local officials – one mine in China was ordered to only open for 276 days of the year to prevent ‘overcapacity’.

The diplomatic success of OBOR is dependent on whether it can bring lasting benefits to the recipient countries. The Asian Development Bank calculated that Asia needs to invest $1.7 trillion in infrastructure per year to maintain its growth momentum. However, most of this figure is made up of basic infrastructure needs in developing countries (such as sewers, power lines, and basic road and rail connections). Flashy international airports, deepwater ports and four-lane highways are less essential to needs of a developing country. Take Kazakhstan, a centrepiece of OBOR and where it was announced in 2013. Before OBOR, it was a poor country, led by a tyrant and heavily dependent on oil and gas exports. Now, it is still a poor country, led by a tyrant and heavily dependent on oil and gas exports, but with a better train line.  The ‘New Silk Road’ suffers from misleading branding. As Peter Frankopan, author of The Silk Roads, points out, the extravagant wealth of old Silk Road cities like Samarkand, Bukhara and Kashgar was based on the fact that intermediary traders were able to charge a high markup on the goods they moved because of the risk and difficulty of the journey. The dividend to Kazakhstan of moving goods by a cheap and efficient train is much, much smaller.

Kazakhstan is a relative success story for OBOR. Sri Lanka, on the other hand, is an example of the danger to countries who open their arms to Chinese financing. China financed and built a large complex around Hambantota, in southern Sri Lanka, which included a $1.5bn deepwater port, a $200m international airport dubbed and a 35,000 seat cricket stadium. This is no 21st century Marshall Plan, however. The project, like most in the OBOR scheme, was financed by Chinese state-owned banks. The recipient countries tend to have a bad credit rating, so when China offers them cheap credit, they are eager to accept. However this can result in countries with poor credit ratings having dangerously high levels of debt. In the case of Sri Lanka, being overburdened by debt meant they were forced to hand over their deepwater port to China in a debt write-off agreement. Sri Lanka is unlikely to harbour any diplomatic goodwill to China, and other countries will see it as a reason to be apprehensive.

Sri Lanka was not helped by the fact that the port development created little revenue – the airport has been dubbed the ‘world’s emptiest international airport’. China seems to be exporting its inability to make poor investment decisions, which should worry developing countries. The underlying reason for this is its command economy. Researchers from Oxford University led by Atif Ansar have found that around half of Chinese infrastructure investments destroy, rather than create, value, by moving funds that could have been more productive into unnecessary infrastructure. The fact that private Chinese banks are increasingly apprehensive about the project, whilst state-owned banks carry on regardless, is indicative of the poor quality of potential projects, according to the Lowy Institute, an Australian think-tank.

Domestically, OBOR has been a success. Although the Chinese population has learnt to see past some of the state-media fanfare around projects like OBOR, many, as Howard French notes, still wish to see a more active China on the world stage, and this will have only boosted President Xi’s popularity within China.

There is a history of western dismissal of China, and it’s possible that the project will be a great success story that enriches China and much of Asia. At this point in time, however, it looks like President Xi is happy to destabilise China’s economy and damage its relationships with its neighbors for the sake of domestic popularity: a fragile and dangerous game.