The folly of investing in One Belt, One Road of China
Beijing seeks foreign money for an infrastructure-led growth model just as the initiative begins to fail
On May 13, 2017, Beijing will host a summit meeting of countries participating in its massive infrastructure initiative known as “One Belt, One Road”—a belt of overland corridors and a complementary road of sea routes linking China to Eurasia and Africa. Neighboring countries may benefit from Beijing’s investment, but investors have reason to be wary.
The summit follows President Xi Jinping’s January star turn at the Davos World Economic Forum where he touted OBOR as an investment opportunity: “Over three years ago, I put forward the ‘Belt and Road’ initiative. Since then, over 100 countries and international organizations have given warm responses and support to the initiative and our circle of friends along the ‘Belt and Road’ is growing bigger.”
OBOR and the associated Asian Infrastructure Investment Bank (AIIB) raise important geostrategic questions: What risks will OBOR recipients incur when all roads lead to Beijing? How will China extract its pound of flesh from developing nations who borrow but cannot repay? Will OBOR facilitate China’s overseas military basing?
Putting those concerns aside, some in the U.S. agree with Mr. Xi that OBOR offers investment opportunities. There are several problems with this view.
OBOR has a number of red flags that should give prospective backers pause. First, it was announced in 2013, meaning it was conceived using financial assumptions that are now unrealistic. The cash-flow projections were made at a time when China’s double-digit GDP growth seemed unstoppable.
The Communist Party, striding through the financial wreckage of 2008 unsullied, saw its decades of propaganda about Western decline seemingly coming true. Basking in boom times, OBOR’s architects certainly didn’t plan for a halving of growth.
Fast forward to 2017 and China is achieving a more modest 6.5 % GDP growth target, and then only through massive expansion in borrowing. We saw in 2008 what happens when people and businesses borrow recklessly on the assumption that prices and incomes will always rise.
China has spent trillions propping up its stock market and currency with questionable results, and its foreign-currency reserves have fallen by more than USD 1 trillion since their peak in June 2014.
China’s debt-to-GDP ratio has skyrocketed to 282 % from 150 % over the past decade. This year China’s capital outflows surged to a record USD 725 billion, suggesting the country’s own citizens are sceptical of its growth prospects.
Second, OBOR outlays are snowballing as other huge ventures with dubious returns take ever-bigger bites of China’s finances. The People’s Liberation Army is building armadas of advanced warplanes, warships and missiles, while China’s space program envisages a space station by 2022 and a man on the moon by 2036.
Meanwhile, China spent billions to encase disputed South China Sea coral reefs in concrete. That has no economic payoff. As well as antagonizing neighbouring countries, it destroyed an ecosystem that sustains millions of fishermen, many of whom are Chinese.
China’s politically directed investments in excess infrastructure, “zombie” firms, vanity projects and tens of billions in bad loans to Bolivia, Brazil, Libya, and Venezuela, among others, are notoriously unproductive. Stack China’s losses and obligations on top of slowing growth and it’s no wonder Beijing is eager to find new OBOR investors.
Third, the initiative is unlikely to deliver on its promises. A 2016 report from the Center for Strategic and International Studies states Chinese officials privately expect to lose 30 % of their investments in Central Asia, 50 % in Myanmar and 80 % in Pakistan.
That shouldn’t come as a surprise. A 2016 Oxford University study found costs exceeded benefits for a majority of infrastructure investments in China since 1986. It predicts that unless China shifts to fewer and higher-quality infrastructure investments, the country is headed for a financial crisis. The infrastructure-led growth China touts as a development model should be avoided.
In March Chinese state media quoted Zhang Tao, the International Monetary Fund’s deputy managing director, as he reassured the world that “China will remain a strong engine of global recovery with its ongoing economic reforms.” Even as Mr. Xi burnishes his globalist credentials, Beijing has been tightening decidedly non-globalist capital controls, trying to stem a torrent of capital flight.
These actions resemble the strategy of a property developer whose financing fell through while his condo tower is half-built: exude strength and confidence to attract desperately needed investors while obscuring imminent insolvency. If OBOR is so successful, why would the Communist Party ask foreigners for help?
At next month’s summit, Mr. Xi will no doubt reiterate the message that China is an unstoppable development juggernaut poised to seize the mantle of globalism from the U.S. Beijing will pressure financial institutions to buy the debt of the AIIB and OBOR-related entities, because it’s an USD 8 trillion “sure thing.” The smart money will stay far away.
The guest author of this feature is a federal employee at the U.S. Pacific Command. The views expressed here are his own.