Advancing sustainable growth in the United States and China

Belt and Road Initiative

China today is embarking on perhaps the most ambitious economic initiative in modern history. The Belt and Road Initiative (BRI), proposed by President Xi Jinping in 2013, would connect 65 countries, 29 percent of global GDP, and 60 percent of the world’s population through a sprawling network of ports, roads, and other infrastructure projects—a modern-day equivalent of the ancient Silk Road.

Click to view full-size infographic (Source: South China Morning Post)

 

The initiative is about much more than just infrastructure. The Chinese government has pledged significant social support for BRI initiatives, ranging from anti-poverty programs, emergency food aid, health recovery projects, and education opportunities for countries along the Belt and Road.

As the title suggests, the initiative has two major components. First is the land-based “Silk Road Economic Belt” that stretches from China to Europe to Central Asia. Second is the “21st Century Maritime Silk Road,” which extends across South and Southeast Asian sea routes all the way to the Dutch city of Rotterdam

Given its scope, the initiative holds enormous potential to benefit China, its neighbors, and much of the world. But it also raises questions about possible business challenges, as well as China’s broader political vision for the region and how other countries fit in.

Why was BRI conceived?

The motivations behind the Belt and Road are a matter of far-reaching debate. From the perspective of the Chinese government, BRI was conceived to “promote the economic prosperity of the countries along the Belt and Road and regional economic cooperation, strengthen exchanges and mutual learning between different civilizations, and promote world peace and development.”

A report from the Peterson Institute for International Economics points to some other economic motivations. These include, first, helping to curb China’s overcapacity problem—the fact that China’s industries have too much supply chasing too little domestic demand—by opening up new markets for Chinese industry. Second, given the planned improvements in transport routes, it would lower shipping costs. Third, it would contribute to China’s energy security, given the vast network of new and upgraded deepwater ports. Fourth, it may help to improve the international stature of the renminbi, since project loans will use the Chinese currency.

There are also diplomatic and security dimensions to BRI, argues Xiaoyu Pu of the University of Nevada, Reno. By binding the region’s economies more closely to China, BRI has the potential to extend China’s diplomatic influence—or “soft power”—with participating countries. Pu notes that the Belt and Road could also “potentially consolidate the status and influence of the Shanghai Cooperation Organization, as well as improve China’s cooperation with Russia, Central Asia, and Europe.”

How has the United States responded to BRI?

With caution. In 2015, President Obama insisted that his administration was not opposed to the idea in principle, acknowledging that if China’s efforts “lead to good infrastructure and benefit the borrowing countries, then we’re all for it.” But he offered the caveat that “if it’s not run well, then it could be negative thing…and what we don’t want to do is just be participating in something and providing cover for an institution that does not end up doing right by its people.”

More recently, the Trump Administration gave the initiative a nod of support by sending a small delegation led by National Security Council Senior Director for Asia Matt Pottinger to the Belt and Road Forum for International Cooperation in Beijing. Pottinger delivered the following statement: “The United States recognizes the importance of improving economic connectivity through high-quality infrastructure development, and hence, welcomes efforts from all countries, including China, in achieving this.”

How is BRI being funded?

The Belt and Road Initiative will require an enormously ambitious financing scheme. According to PwC, total infrastructure investment for the initiative will require around $5 trillion over the next 30-40 years. Already, there has been some $890 billion in announced deals, according to the Financial Times.

Most of this financing will come from Chinese, rather than multilateral banks. Reuters reports that China’s policy banks have already dispersed $200 billion into BRI projects. China has also earmarked $40 billion for its “Silk Road Fund,” which will comes directly from the national foreign exchange reserve.

Multilateral banks will also play an important role. The China-led Asia Infrastructure and Investment Bank (AIIB) plans to gradually invest some $3-5 billion in 2017 and $10 billion in 2018. The New Development Bank (formerly BRICS bank) plans to lend between $2.5-3 billion in 2017.

What are some of the challenges facing companies involved in the BRI?

Put broadly, there are at least three major challenges facing companies participating in the Belt and Road.

The first is security risk—terrorism, political conflict, and criminal activities—in many of the countries involved. As Shivshankar Menon of the Brookings Insitution notes, some of BRI’s projects are to “traverse some of the most lawless and insecure parts of the world.” In addition, the U.N. office of Drugs and Crime has warned that a “law enforcement protection agenda was lacking to prevent cross-border criminal activity.”

Second is political risk. As Liu Mingkang, former chairman of the China Banking Regulatory Commission, notes, “there are the complex and varied laws, rules, and regulations shaping the business environment in each country.” Any violation of these rules, he adds, could “put a company’s entire operation and investment at risk.”

Third is macroeconomic risk. Liu lists “exchange-rate volatility, large debt burdens, and non-diversified, unsustainable economic structures” as some of the problems associated with facing number of BRI countries.

By Andy Morimoto (Last updated 10/4/2017)