The true nature and purpose of China’s One Belt One Road (OBOR) initiative are subject to much speculation. The one certainty is that OBOR commands powerful high-level Chinese support and is backed by a large investment of political capital. It is no less than the personal signature initiative of President Xi, who has made clear that he regards it as central to his political legitimacy and as the tangible embodiment of his “China Dream” of rejuvenating the nation and its ruling Communist Party – which in his mind are probably the same thing.
However, the initiative faces formidable challenges. It remains unclear how much new investment OBOR has generated, how far it makes economic or geo-political sense or, indeed, how far China can afford to support it, given its current economic and financial difficulties. There has been fierce competition to win government support for OBOR projects but its political nature risks leading to serious misallocation of resources.
OBOR should not be expected to provide a financial bonanza for Europe or to re-energise the region’s flagging economic performance and loss of self-confidence. Nor does the EU need Chinese investment or other resources to achieve those objectives: the solutions to its problems lie mostly in its own hands. However, it should not turn its back on OBOR. It should, rather, view the initiative as one in a series of small steps aimed at fostering deeper mutual understanding and engagement – and possibly even greater trust – between the EU and China. Though that could cause strains in its relations with the US, realistically, the EU has little option. It also has little to lose by trying to build bridges and make common cause with China in areas of mutual benefit, even though they may not pay off politically and economically in the longer term. Setting its face against China would not insulate Europe from the aftershocks if China suffered serious economic setbacks or entered a period of political and social turbulence. Whatever happens, China’s economy is simply too big and too deeply integrated with the rest of the world, and the country’s global impact too great, to be ignored.
Nonetheless, strategic dilemmas lie at the heart of the grand plan. On the one hand, it is intended in part to stabilise troubled neighbours such as Pakistan and Afghanistan in the aftermath of US military withdrawal by promoting their economic and industrial development. However, similar western policies in far-flung and unstable places have repeatedly failed. If OBOR is no more successful, China could find itself drawn into political and military quagmires that it is ill-equipped to navigate, creating serious challenges to its vaunted – though inconsistently implemented – doctrine of non-intervention in other countries’ internal affairs.
If Beijing had a clearly articulated and overarching global geopolitical strategy, it might perhaps find such conundrums slightly less difficult to wrestle with. But, by the admission of its own senior policy makers, it does not. Indeed, Wang Jisi, a leading foreign policy expert who is often – though not entirely accurately – credited as OBOR’s intellectual architect, warned in 2010 that without one, OBOR could lead China into dangerous international territory. Like much of the country’s foreign policy, OBOR seems to be heavily influenced by a China-centric world view, driven chiefly by inward-looking impulses and intended first and foremost to meet pressing domestic priorities and needs.
Southeast Asia presents another challenge. For Beijing, OBOR is a way of strengthening and tightening regional relations. Yet it seems unlikely to dispel on its own the deep anxieties and ill-feeling generated across the region by China’s aggressive expansionism and land grabs in the South China Sea. Indeed, OBOR may backfire if other Asian countries come to view it less as a positive gesture of co-operation than as an attempt to promote and extend China’s supremacy in the region and to underpin other nations’ dependence on it.
Another big question is how far China can afford the substantial investments, including heavy associated spending to boost its overseas military presence, that OBOR calls for. Though no firm figures have been given for its overall cost, some estimates put it at at least $1 trillion. Most of that is expected to be financed by Chinese lenders, with the Asian Infrastructure Investment Bank and the $40bn Silk Road Fund chipping in relatively small proportions of the total. China’s policymakers expect that its investments will ultimately generate significant financial returns for the state and for corporate investors.
However, the initiative comes at a difficult and perilous moment for China’s economy. Former double-digit growth is giving way to what looks likely to be an extended slowdown, as the authorities struggle to staunch sizeable capital outflows and to contain a massive credit explosion that has raised debt to vertiginous levels. Meanwhile the far-reaching and painful structural reforms that policymakers acknowledge are essential in order to re-balance the economy and place it on a sustainable footing have ground almost to a halt.
Just as slower growth spells lower tax revenues, potential claims on fiscal resources are mounting, notably in the form of rapidly rising levels of bad debt. Some independent analysts estimate that Chinese banks’ non-performing loans are as much as 20 per cent of their total assets, far higher than the official figure of 1.67 per cent, and equivalent to around 60 per cent of Gross Domestic Product. Though all those assets might not have to be written off – some could probably be restructured or sold – the bill for cleaning up the mess could be large.
Indeed, much of the debate about China’s economy today centres on whether these problems are set to create a full-blown financial crisis, or whether it will manage somehow to muddle through, but at the cost of an extended and bumpy period of under-performance. Meanwhile, other costly burdens loom that will weigh on growth and the public finances: notably undertaking a huge environmental clean-up operation, dealing with acute water shortages and coping with a shrinking and fast-ageing population that will eliminate the “demographic dividend” that has helped power the economy’s rapid expansion since the early 1980s.
All this means that China is likely to have less scope in the future to deal with problems and promote initiatives simply by throwing money at them, as it has often done in the past. Whether OBOR will nonetheless prove to be the catalyst for a great national rejuvenation, as Mr Xi hopes, that will also help reinvigorate China’s stuttering economy – or whether it will turn out to be hubristic overstretch – remains uncertain.