November 17, 2016
Will China's grand plan to transform the region and the world be a diplomatic gamechanger or end up as the world's most expensive boondoggle?
On November 13, a cargo ship carrying 60 containers left the dusty port of Gwadar in Balochistan, on the Arabian Sea, for the Gulf of Aden. This was no ordinary trade. Flagging off the vessel was Pakistan's Prime Minister Nawaz Sharif. A Chinese and Pakistani singing a duet bade the ship farewell, while an over-the-top propaganda video hailed the departure as a new dawn for the world.
The 60 containers had left Kashgar in China's western Xinjiang region on October 29, loaded on 125 trucks before making the perilous journey on the Karakoram Highway. The convoy crossed the Khunjerab Pass into Pakistan-occupied Kashmir, before travelling to Quetta. This marked the first-ever shipment through the China Pakistan Economic Corridor (CPEC), a key route of China's new Silk Road plan.
The first CPEC shipment followed another breakthrough in August, when a freight train with 41 containers carrying a range of 'Made in China' goods, from machinery, auto parts and construction material to toys and clothes, pulled out of a newly-built railway platform at the Xi'an logistics park in central China. Three days a week, the Chang'an train-meaning 'permanent peace', named after the imperial capital-travels 9,048 km over 14 days, traversing China, Kazakhstan, Russia and Belarus, to Warsaw and Hamburg.
REBUILDING THE SILK ROAD
These new trading routes are key pillars of President Xi Jinping's grand vision to revive the Silk Road. From Xi'an, a Silk Road Economic Belt will connect Central Asia and Europe. Other branches run to Pakistan (CPEC), Myanmar and India (the Bangladesh China India Myanmar corridor) and Southeast Asia (the Kunming-Thailand-Singapore rail link). Along with a Maritime Silk Road from the eastern coastal Fujian province to Southeast Asia and the Indian Ocean, 'One Belt, One Road' (OBOR) is the single defining foreign policy initiative of the Xi government.
OBOR, since renamed 'Belt and Road' in English to convey a more inclusive plan, was unveiled in October 2013, barely seven months after Xi took over as President. It was conceived by China's planners with two objectives: globally, to reframe the narrative on China's rise, which had in the past decade begun to evoke rising concerns in its neighbourhood, and domestically, to address a worsening overcapacity problem in infrastructure by allowing its companies to shift their capacities overseas.
GAMECHANGER OR GAMBLE?
OBOR has been billed as a 21st century Marshall Plan, one that will cement China's position as the new economic centre of the world. China's leaders have hundreds of billions of dollars riding on its success. Abroad, more than 60 countries have signed on, while in those that haven't, including India, there is a clamour among strategic experts to get on board.
The first China railway express rolls into warsaw. (Photo: Reuters)
Three years since its unveiling, there are growing questions on whether the plan will be a game-changer, or whether it is a risky gamble Beijing needs to revisit. Even as it awaits a detailed blueprint-a first draft in 2015 offered few specifics - OBOR has unleashed a rash of spending in China and overseas, provoking concern among some economists in Beijing. "Some think this plan is about acquiring energy resources, and some think it is about exporting excess capacity," Zhao Lei, a Party academic at the Central Party School's International Strategy Research Institute, warned in a recent paper. "Some think it is about challenging the US, and others think it is simply going to be the biggest unfinished project in international relations history."
The projects being unveiled across Xi'an today present a snapshot of China's OBOR ambitions. They also shed light on the steep challenges in Beijing's path, including growing economic headwinds at home. In Xi'an, Beijing is spending billions of dollars. In its suburbs, OBOR has unleashed a new wave of projects, centred around the newly expanded trade and logistics park located in a suburb an hour away from the city. There are office buildings, apartment blocks, even a massive newly constructed commodity market, which China hopes will become a new centre for regional trade.
The infrastructure has been put in place, but progress has been slow. On a recent visit to the gleaming new commodity market, the stock tickers were flashing non-stop, showing the rise and fall of commodity prices. There were, however, no traders at any of the pristine white desks. "We are now at maybe 50 percent occupancy," said one rather hopeful local representative, who said apartments were now being subsidised by the government for a fraction of the cost to bring in tenants. A Silk Road shopping mall built two years ago showed few signs of change from its opening in 2014, when shops were deserted. The deserted Xi'an suburbs are by no means unique. OBOR has unleashed perhaps the biggest wave of spending in projects since the 2008 financial crisis, when China unleashed a half-a-trillion stimulus. Qingdao, a port in the northeast, is building a multibillion yuan new district partly dedicated to the Silk Road, including a massive new 'expo park' that some locals see as a wasteful pride project.
Highway to prosperity: Chinese labourers at work on the Karakoram highway in Gulmit village of Hunza valley in northern Pakistan
These deserted new OBOR towns are not unique. Dozens of such 'ghost cities' dot China's landscape-sprawling and shiny new settlements built by local governments to boost growth. Cities such as Kangbashi, in Ordos in Inner Mongolia, and Chenggong in Yunnan have made global headlines. Ordos's newest district has eight-lane boulevards on which not a single car can be spotted. There is a gleaming financial district with no occupants, and hundreds of ostentatious villas with no residents. These aren't all necessarily failed projects. "A ghost town is a place that has become economically defunct; in other words, a place that has died. What China has is the opposite of ghost towns: it has new cities that have yet to come to life," writes Wade Shepard, in his book Ghost Cities of China. China is banking on rising urban migration to do just that, although the current mega investments far exceed the needs of the rural migrant population.
SPENDING SPLURGE OVERSEAS
Whether some of these projects end up as 'ghost towns' or future cities will also depend on OBOR's success overseas. The stakes are high for Beijing. Besides the spending at home, it has set up a $40 billion Silk Road Fund and the $100 billion Asian Infrastructure Investment Bank, in which it is the biggest shareholder contributing a little less than a third of the capital (India is the second, with $8 billion). In the past year, China's officials say, OBOR has accounted for around a sixth of China's total $146 billion Overseas Direct Investment, exceeding FDI for the first time.
The numbers have been cited as underlining the plan's success. At the same time, the future of these investments is far from clear. As Beijing-based economist Andrew Batson wrote in September, the average return on assets of state-owned enterprises (SoEs) in China on infrastructure sectors is around 2 percent, but interest repayment on debt is around 5 per cent. A similar rate of return likely applies to overseas OBOR projects, say Chinese economists, some of which, such as those in Gwadar, are going forward on even more preferential terms for host countries. "Many people don't have a positive view on the outlook of China's investments because currently the average rate of return on China's infrastructure investments is less than 3 percent. Similarly, infrastructure investment in other developing countries has a big risk, and you can't guarantee the rate of return," Xu Gao, chief macro analyst at Everbright Securities in Beijing, warned in a recent paper.
Moreover, OBOR spending comes amid growing concerns on high debt levels in China. Credit grew by 13 per cent last year, and a September 18 report by the Bank for International Settlements warned of a crisis being likely in three years. Total government, corporate and household debt reached 255 percent of GDP ($10,866 bn in December 2015) this year. Yet despite these fears, there appears to have been little due diligence in evaluating risks in the rush by government departments and SoEs to chalk up the highest number of OBOR projects. To correct that, Renmin University in September came up with a comprehensive three-year status report on OBOR that called for setting up a 'positive' and a 'negative' list that would provide some clear guidance.
Graphic by Tanmoy Chakraborty
There are already signs of tempered expectations from what was supposed to be the answer to China's overcapacity problem by shifting investment to profitable overseas projects at a time of domestic slowdown and decreasing returns. "It is a fact we won't be able to recover every single investment," Ding Yifan, the deputy director of the World Development Research Institute under the State Council Development Research Centre, one of the authors of the OBOR blueprint, has acknowledged. "We can't expect every single project to make money. It isn't practical."
UNCERTAIN FUTURE
One problem Beijing faces is that the lack of clarity has allowed all sorts of projects to be pushed in the name of OBOR. As one government official puts it, "this has been useful for local governments as they are pushing all sorts of programmes under OBOR, but no one is really clear about what are desirable projects". But enterprises are still hopeful that the plan will end up being the silver bullet the Chinese economy is looking for as it grapples with a transition at home. For it to succeed, the consensus among economists is that it certainly requires a course correction, starting with a closer monitoring of local and overseas projects, more careful due diligence, fleshing out a more concrete vision for the plan, including regional trade agreements, and more immediately, reining in runaway local government spending.
At the Xi'an logistics park on a recent afternoon, there is little activity at the customs clearance hall that abuts the China-Europe train platform. It is the calm before the storm when the next freight train arrives, says Li Pingwei, the deputy party secretary of the committee that oversees the park. There is rising concern about Chinese goods flooding the market. The train from Xi'an, it has been noted, goes with full containers and returns almost empty, but for 200 tonnes of sunflower seed oil that a local company is now importing from Kazakhstan. "The fact is," laments Li, "they are not giving us goods that China wants." There may be bumps along the way, but he is confident it's only a matter of time before the Chang'an train returns home full, and begins to transform the trading routes along China's new Silk Road. China's leaders are certainly hoping he is right. They have a lot riding on it.
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