The Belt and Road Illusion

Chinese president Xi Jinping (Marko Djurica/Reuters)
China’s international-development project reflects its global ambitions but masks problems at home.

The president is a man who often makes aspirational statements and presents them as fact. He has a grandiose sense of what he is accomplishing, causing allies and adversaries to parse his every comment to separate reality from illusion. Through his pronouncements, the president touts his country’s strength, security, and its determination to make its own way unencumbered by entangling alliances and agreements. It is an effective technique, forcing other countries to rethink their policies and reconsider their relationships. Still, he has a firm grip on his party after having dispatched numerous potential rivals or challengers through his sheer audacity. The party has fallen in line behind him, its stalwarts reasserting the president’s positions as their own.

But enough about China’s Xi Jinping.

In fact, President Donald Trump is one foreign leader who’s not buying it. In the ways that his administration is applying pressure on China — by highlighting the U.S.’s commitment to Taiwan, challenging China’s military adventurism in the region, blocking investments in sensitive U.S. sectors, and even pursuing a unilateral tariff policy — it seems clear that Trump and his team are comfortable pushing against the illusions that Xi wants the world to believe about China.

Xi is the master — okay, there’s at least one other leader in his league — of making people respond to his utterances and declarations as though they were fact, distracting his observers to obscure the reality in the background. In the foreground, the world sees China’s conspicuous urban wealth, global companies dominating its sectors, the largest banks in the world, military expansion, and diplomatic energy. This obscures runaway public and private debt, an aging population with no social-support system after decades of the disastrous one-child policy, and rural poverty that approaches the worst found anywhere else in the world.

The latest example of this policy of distraction is the so-called Belt and Road Initiative (BRI), which is feeding the latest source of anxiety about China’s pretensions to great-power status. The Economist recently devoted its cover to “Planet China,” with a focus on the BRI. The unclassified synopsis of National Defense Strategy of the U.S. for 2018 does not mention the BRI by name, but the implication is clear in its statement that “China is leveraging . . . predatory economics to coerce neighboring countries to reorder the Indo-Pacific region to their advantagewith the long-term goal of displacing the United States, first in the region and, ultimately, globally. On August 7, in a dinner meeting in New Jersey with several CEOs of American companies, even President Trump referenced the BRI, calling it “insulting” while addressing his broader priority of stopping China’s unfair trade practices.

If one can believe the more fantastic accounts of the BRI offered by the Chinese government and by foreign governments eager for Chinese investment, the BRI will bind vast tracts of the earth with China through a series of infrastructure projects across the Eurasian landmass. Not content to leave it at that, typically sycophantic PRC propagandists and some of the ever-swooning China analysts outside the country have constructed BRI variants that presage maritime, polar, and even space dominance.

Xi first referenced the concept in a speech in Kazakhstan in September 2013, where he proposed a “silk road economic belt” to connect China and Central Asia through improved infrastructure. Since then, the project has taken on more importance, at least in the rhetoric of Chinese officials who have created an illusion of a coherent, centrally planned strategic initiative, which it is not. The Economist rightly asks about the BRI: “Master-plan or marketing?” The answer is the latter: The BRI is a framework into which overseas Chinese-investment opportunities can be shoehorned to create the illusion of an overarching Chinese strategy of regional hegemony.

The BRI is a framework into which overseas Chinese-investment opportunities can be shoehorned to create the illusion of an overarching Chinese strategy of regional hegemony.

Certainly, the BRI is not to be ignored as an expression of Chinese intent; there has been some concrete progress. The PRC has stepped up its investment overseas in the years since Xi articulated his vision in 2013. According to data compiled by Derek Scissors for the Chinese Overseas Investment Tracker, China’s investment in East Asia alone in the eight years before 2013 was about $11 billion per year. In the five years since, it’s up to about $30 billion per year.

One need not look only to infrastructure projects to find indications that China wants the world to keep buying its propaganda as a confident power capable of counterbalancing U.S. influence and dominance. Outside the region, Beijing is focusing on areas where the U.S. has shown disinterest, including across Africa; and where there already exists a tendency among some countries to seek an alternative power with which to align, including parts of Asia and Latin America. The PRC is using diplomatic engagement, infrastructure investment, and outright financial leverage to achieve these goals. Beijing’s 2016 Asia Infrastructure Investment Bank launch should be seen in that context, and it produced the desired rhetorical result: At the time, Luxembourg’s finance minister, Pierre Gramegna, summarized the sentiment of many by calling the AIIB “further proof of the rebalancing of the world economy.”

Still, as will be discussed, China’s extravagant declaratory policies around its regional and global aspirations fall short of the the grand vision. This mirrors Beijing’s mastery of illusion over reality regarding China’s domestic economic progress. We see purported evidence of a country on the move: seemingly endless construction projects in Beijing, Shanghai, and other megacities; technology companies that seem to be on the cusp of dominating their industries globally, including Alibaba, WeChat, TenCent, Huawei; and economic growth that fluctuates around 6 percent to 7 percent annually.

But behind the illusion of China’s economic miracle is a reality that is becoming hard to deny, and there may be whiffs of frustration and disillusionment starting to swirl around Xi as a result. The drivers are many and interrelated, but a quick recap of some of the most compelling is in order. First, China’s debt as a percentage of GDP has nearly doubled in ten years. Every actor in the economy, from the central government to local governments, companies, and households, is dangerously over-leveraged. Second, China faces bubbles of overcapacity in several asset classes, most notably real estate, contributing to cities featuring empty malls and condo developments (about which much has been written of late). Third, China has too many older people and too few young people, a result of terrible social policies. The country faces a decline in the number of workers to retirees: from 5–1 to 2–1 in the next 15 years. Even now, only about a quarter of Chinese workers contribute to the pension system. Finally, China is a country in which massive rural poverty is already the reality. This creates several negative pathologies of its own, including the possibility of widespread cognitive handicaps among the poor.

Given these realities, the BRI should be viewed with skepticism, not feared as a master plan for global dominance. Much of the growth in Chinese overseas investment, for instance, is a way to channel excess capacity by state-owned enterprises that have grown too large, have too much debt, and are chasing too few opportunities inside China. There are only so many Chinese ghost cities that can be built.

Some believe the BRI is a way for China to export debt deliberately: “Debt-trap diplomacy” by which the PRC can use its leverage and onerous lending terms to take control of strategic infrastructure projects under the guise of economic partnership. In Sri Lanka last year, the government ceded control to Beijing of the debt-laden but strategically located Hambantota port facility on the southern end of the island nation,  roughly halfway between the strait of Malacca and the strait of Hormuz. Hambantota had been a ballyhooed example of a BRI “partnership,” but in the end only one “partner” benefited.

Whether the PRC’s intent in this case was predatory or just bad economics is almost beside the point. The fact remains that there is a lot of unfavorable economics behind China’s impetus to be seen as an expansionist power, given its pressing domestic realities.

There are problems with China’s goal to be seen as an expansionist power, given its pressing domestic realities.

Since the initiative began in 2013, the world is taking notice. That isn’t going to make things any easier for the PRC. Trump’s trade policies are putting pressure on the regime and placing further strains on the Chinese domestic economy. Congress, too, is taking a harder line toward China’s ambitions. There is bipartisan support for enhanced due diligence of Chinese investments in the U.S., for instance. Congress recently passed the Foreign Investment Risk Review Modernization Act of 2018, which will give the government great scrutiny over foreign direct investment by China into the United States when it is signed into law.

Sixteen U.S. senators, meanwhile, penned a letter to the administration on August 3 expressing concern about the BRI. Sri Lanka had to accept an IMF bailout of more than $1 billion due to onerous debt terms with the PRC. Unlike excess leverage by the Chinese government in its local municipalities, which is a problem for Beijing to solve, the senators are rightly concerned that the U.S., as the largest funder of the IMF, will find itself on the hook for guaranteeing other future failures of China’s excess overseas leverage.

The U.S. is taking affirmative measures to counter China’s regional and global investment ambitions, too. In remarks at the U.S. Chamber of Commerce in Washington in late July, Secretary of State Mike Pompeo laid out a comprehensive “Indo-Pacific Economic Vision.” Perhaps the most beneficial aspect of the remarks and the underlying vision is the confidence it shows to the region and the world that the U.S. is paying attention to economic development and security issues in the area that Pompeo defined as stretching “from the United States west coast to the west coast of India.” Pompeo connected prosperity in the region directly to American prosperity and, while he didn’t mention the BRI, he did announce a $113 million “down payment” for “initiatives to support foundational areas of the future,” including the digital economy, the energy sector, and infrastructure. Though the secretary barely mentioned China, he left little room for doubt about American intentions not to let any other country have a free hand to shape an alternative future.

The PRC will continue to highlight the BRI as a mainstay of its policy and will continue to market its overseas investment commitments as consistent with the effectiveness of the initiative. But aside from the propaganda value, the reality won’t be much different from the reality of China’s domestic economic circumstances. There are simply too many contradictions, too much dependence on circumstances beyond the government’s control, and a growing awareness in the region and the rest of the world that Beijing’s intentions are not benign. President Xi’s mastery of illusion has peaked; reality is here. 

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Therese Shaheen is a businesswoman and CEO of US Asia International. She was the chairman of the State Department’s American Institute in Taiwan from 2002 to 2004.


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