China’s mighty Belt and Road amBitions

Two weekends ago, China put on a massive show when world leaders gathered in Beijing for the Belt and Road Forum to hear President Xi Jinping outline his plan for a grand project: the Belt and Road Initiative.

If you haven’t heard much about the project, also known as One Belt, One Road, expect to hear a lot more in the future. Basically, it’s about building massive things. It’s a long-term transcontinental plan to build infrastructure such as roads, bridges, railways, ports and gas pipelines in Asia and beyond. This idea was initiated by President Xi in 2013 and has been hailed by China as the project of the century.

Many of us feel that the world seems to have turned upside down lately, especially since Donald Trump became president of the United States and Mr Xi started to portray himself as a responsible leader dedicated to globalisation. The Belt and Road, in this context, fits well with Mr Xi’s narrative in which China sets the example for globalisation, filling the void left by the US under President Trump’s inward-looking policy.

The Belt and Road builds on the historical tradition of the ancient Silk Road. The “Belt” refers to the Silk Road Economic Belt that improves land transport between China, West and Central Asia, the Middle East, and South and Southeast Asia via six economic corridors. The “Road” refers to the 21st-century Maritime Silk Road that seeks to enhance sea transport to Europe and the Pacific. Together, they are meant to be a revival of the ancient Silk Road trading routes.

So far, 65 countries including China, as well as international organisations, have signed up for this huge infrastructure venture. Together they account for 62% of the world’s population, 40% of global trade and 30% of its economic output.

There is no doubt that the Belt and Road, with its unprecedented ambition and scale, will mean enormous complexities and challenges. The project is estimated to need around US$5 trillion in spending to make it happen.

At the forum, Mr Xi pledged at least $113 billion in monetary contributions for the initiative, and encouraged countries across the globe to collaborate with him in pursuit of globalisation. The key Belt and Road projects include a high-speed railway connecting China and Singapore, the China-Pakistan Economic Corridor (on which work is already well under way) and gas pipelines in central Asian countries.

Infrastructure development is a vehicle to promote social well-being, as it promotes inclusion in economic activity. We have seen how increasing income inequality and social polarisation pose a risk to the world economy. The gap between the rich and the poor was singled out as one of the reasons for the Brexit vote and Mr Trump’s election victory. With rising inequality and increasing urbanisation, infrastructure investment is more critical than ever for inclusive economic development.

The Asian Development Bank recently estimated that developing countries in Asia will have to invest around $26 trillion between 2016 and 2030, or $1.7 trillion a year, to keep pace with their economic growth. Infrastructure need in Asia is rapidly exceeding the capacity of countries to finance it. Although almost $900 billion is invested yearly on infrastructure in the region, that is still a lot less than the needed $1.7 trillion.

For infrastructure investment, although governments currently take most of the responsibility in the region, they have the capacity to finance just over half of the needed investment. This means that the private sector will have to step up its participation in infrastructure financing, probably three or four times more than its current contribution.

But infrastructure investment is risky and the financial returns can take years, or even decades, to materialise. Getting the private sector on board will require having projects that are more financially sound, along with deeper capital markets and better legal and regulatory frameworks in several countries.

Given the tremendous infrastructure needs in the region, the Belt and Road is a welcome development. The availability of feasible projects is as much a constraint as the supply of finance.

But there have been concerns and criticisms. Critics say the initiative may be about politics rather than real investment. Worries have arisen about the ability of Chinese banks to manage risks when funding these projects, potentially leading to new asset-quality problems for the Chinese banking industry.

Some also believe that the Belt and Road is a way for China to claim leadership in Asia. Beijing has already poured billions of dollars’ worth of infrastructure investment into South Asian countries, notably Sri Lanka and Pakistan, strengthening its trading and military influence in the region.

Despite several doubts and criticisms about China’s ambitions, I think this emerging infrastructure initiative has good potential to offer benefits not only for China, but also for many of the landlocked and least-developed countries of Asia that it plans to connect. By improving connectivity, the Belt and Road can greatly increase the contribution of these nations to global economic activity, offering huge opportunities for a more equitable and inclusive world.