The Belt and Road: some motivations and reasons, challenges and risks

_ Stephan Barisitz,  Senior Economist, Foreign Research Division, Austrian National Bank (OeNB); Alice Radzyner, International Relations Specialist, European Affairs and International Financial Organizations Division, Austrian National Bank (OeNB). Published in parts from their article “The New Silk Road, part I: a stocktaking and economic assessment” in the OeNB research journal “Focus on European Economic Integration” (Q3, 2017) with the kind permisson by the the authors. Vienna, 5 May 2018.

China’s OBOR initiative has been motivated and driven by a number of quite heterogeneous aims, which primarily include economic, but also geopolitical and even ecological issues:

Improvement of transportation links, reduction of trade costs to Europe and other parts of Eurasia

The basic idea of the OBOR initiative is to better link up the “vibrant East Asian economic circle at one end and the developed European economic circle at the other” (State Council, 2015, p. 2), following the example of the NSR’s predecessor, the traditional Silk Road, which lasted for about two millennia, witnessed many ups and downs, and linked the same two major traditional hubs of economic activity: the Middle Kingdom and Europe, or the Orient and the Occident (Barisitz, 2017). As, once again today, the world’s biggest trading nation, modern China’s interest is to reduce the costs of transporting goods (by land and sea) to other destinations. More efficient and secure and, if possible, shorter trade routes to Europe can further this goal.8

The fact that about three-quarters of Chinese imports from Russia and 60% of Chinese imports from Kazakhstan are reportedly carried out via the ports of St. Petersburg and Vladivostok, although both Russia and Kazakhstan are immediate neighbors of China and share more than 2000 km of common borders with China, points to the relatively modest level of logistical development of intra-Eurasian overland trade. This may indicate vast connective potential for infrastructural projects in this area.

Redirection of Chinese surplus savings, reutilization of domestic productive capacities and technical expertise for NSR investments

The NSR initiative can serve as a means of countering the recent marked downturn or weakened growth of the Chinese economy. The country probably has more savings than it can profitably invest at home. After many domestic infrastructure projects have been finished, Chinese infrastructure-related industrial and service sectors are saddled with overcapacities. OBOR’s economic dimension includes generating substantial foreign demand for reutilizing these domestic resources. This also relates to Chinese high-speed rail expertise: Chinese enterprises have gained great experience in high-speed rail construction within the country and are looking to apply their expertise in projects abroad now (Urban, 2016, p. 13). While such aims are quite understandable, they would also appear to constitute an extension or resuscitation of China’s traditional economic model of export-led growth or at least a slowdown or interruption of its intended transition to domestic consumption-led economic expansion.

Diversification of investments, markets and suppliers

One particular aim of the OBOR initiative is to hedge substantial existing Chinese placements in U.S. financial assets by investing in Eurasia. The NSR also promises to help diversify markets and suppliers through stimulating trade with landlocked or (so far) more difficult-to-access neighbors not yet trading that much with China. Infrastructure development in countries along the OBOR routes may raise growth in their economies and thus contribute to increasing demand for China’s goods and services (Djankov and Miner, 2016, p. 7).

Creation of “strategic propellers of hinterland development”

This OBOR objective with respect to China’s less-developed central and western provinces has been put forward by Premier Li Keqiang (see State Council, 2015, p. 1). While Chinese growth has in recent decades favored the country’s eastern and coastal provinces, the NSR is to transform the northwestern province of Xinjiang into China’s infrastructural gateway to Central and Western Asia, which will open up opportunities for investment and stepped-up economic activity in this remote, politically somewhat restive, province. Correspondingly, in the southwest, the province of Yunnan should become the modernized “open door” to South Asia and the Indian Ocean. Thus, the authorities hope to tackle the socioeconomic divide (gross income inequalities) between economically peripheral inland and “connected” coastal provinces. Since all OBOR corridors depart from central or western provinces, the intended geoeconomic rebalancing could mitigate these disparities (Grieger, 2016, p. 9).

Contribution to the internationalization of the Chinese renminbi-yuan

Alongside the development of closer trade and investment relations and deeper financial integration among OBOR countries, the Chinese authorities will promote the use of the renminbi-yuan in international transactions.9 The aim is i.a. to expand the scope and scale of bilateral currency swaps and settlements with other countries along the NSR. Efforts of governments of partner countries and their companies and financial institutions with good credit ratings to issue renminbi-yuan-denominated bonds in China will be encouraged (State Council, 2015, p. 5).

Hedge in case of possible trade war

Since U.S. President Trump withdrew the U.S.A. from the Transpacific Partnership (TPP) in late January 2017, the TPP has lost much of its importance. Prospects for the conclusion of the Transatlantic Trade and Investment Partnership (TTIP) have also diminished considerably. Thus, the OBOR appears to be less under pressure than in the past to counterbalance potential rival trade initiatives. However, if a trade war between China and the U.S.A. were to break out, Beijing may expect enhanced connectivity and cooperation with NSR countries, notably with European partners, to soften the impact somewhat.

Pragmatic infrastructural project cooperation as a possible way forward where trade integration areas have lost popularity

Pragmatic cooperation between one or more states and enterprises focusing on a particular infrastructural project (like a pipeline, a rail or highway link, a hydropower dam or electricity grid, a deep-sea port, etc.) provides task-oriented experience and may improve connectivity and intergovernmental relations. In a time of growing skepticism about trade and economic integration treaties such concrete, if limited, advances may promise greater success than traditional “deepening” efforts. At the same time, physical and nonphysical trade facilitation measures (the latter include the harmonization of customs, import, export and border crossing procedures) can arguably only be seen as complementary measures and not as alternatives.

Venue for addressing strategic energy and resource security issues

Approximately 75% of China’s oil imports and an even higher share of its total imports are seaborne and pass through the Strait of Malacca between the Indian Ocean and the South China Sea (Escobar, 2015, p. 7; Grieger, 2016, p. 8). This geopolitical bottleneck could be closed by a military adversary in the case of conflict, which makes China potentially strategically vulnerable. China’s energy security is also put at risk by piracy that is rife in and near the area. China’s dependence on shipments through the Strait of Malacca has already been partly reduced by the creation of alternate (overland) trade channels, including the construction of pipelines from Central Asia10 and of corridors linking China directly to the Indian Ocean (via Pakistan and via Myanmar, see subsections 3.1 and 3.2).

Ecological goal: reduction of China’s heavy reliance on polluting coal

China’s reliance on coal for about 40% of its heating and electricity has substantially contributed to pollution in its cities. The authorities have set ambitious goals for dealing with the pollution problem, including switching from coal to cleaner – but so far mostly imported – energy sources, e.g. natural gas from Central Asia and Russia (Havlik, 2015).

Needless to say, the OBOR initiative also faces a number of challenges and risks:

Weak local governance, sprawling bureaucracy and potential political instability

OBOR partner countries feature quite diverse political and economic conditions, with inherent risks ranging from possible legal and financial challenges to political or social instability and regional disparities. Given that many partner countries are not members of a political or economic integration area, border constraints (including possibly cumbersome clearance procedures and long waiting periods) may have to be coped with. The implementation of large infrastructure projects in the absence of well-performing and accountable government procurement systems may even add to local corruption and/or governance challenges.

Frequent Chinese dominance in projects and possibly limited regard for local conditions may give rise to concern

While the preeminent position that Chinese project partners often assume in OBOR projects as regards finance, management and the deployment of Chinese firms and their workers may help speeding up a project, it may not favor broad positive spillover effects for local economies. In some cases, there may be the risk that insensitive behavior of investors (e.g. as regards labor, health and safety standards, quality of inputs used, respect for traditional local communities and the environment) gives rise to irritation and even protests on the part of the local population.

Possible fallout from heightened geopolitical tensions or rivalry

A totally different risk is the possible negative (political) fallout from military tensions, e.g. in the South China Sea, which cannot be entirely discarded, either. Another risk is that projects may fall victim to a flare-up of geopolitical competition with other powers (Giret and Giret, 2016; see also subsection 3.3).

Notes:

8 The EU is China’s largest market abroad.

9 Meanwhile, in another measure favoring the Chinese currency’s global standing, the IMF included the renminbi-yuan in its basket of Special Drawing Rights (SDR) at end-September 2016. The OeNB had already purchased renminbi-yuan in 2011, and was one of the first central banks worldwide to have done so. In mid-June 2017, the ECB included renminbi-yuan reserves worth EUR 500 million in its foreign exchange reserves by reducing its U.S. dollar reserves by an equivalent amount.

10 Already about half of China’s natural gas imports arrive overland from Central Asia, which shows that the strategy to cut the country’s dependence on seaborne imports predates the launching of the NSR (Clover and Hornby, 2015).

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