After China held a huge summit to promote its Belt and Road Initiative this week, it is worth taking a moment to consider quite how much the policy — and the country — has achieved.
There is little doubt that China is changing the face of the global economy. The country has long been a magnet for foreign direct investment, attracting more than $100 billion of FDI in each of the last seven years. But it has now become an exporter of capital.
In 2016, overseas direct investment by Chinese companies exceeded foreign investment for the first time in at least a decade. Chinese ODI was $170 billion in 2016, dwarfing the $126 billion of FDI the country attracted, according to a CLSA report citing data from China’s Ministry of Commerce.
Chinese offshore M&A is also booming. The $224 billion of deals closed last year was a whopping 130% increase on 2015. This included Shanghai Electric Power’s acquisition of Karachi’s electricity provider, a signature deal that one investor told FinanceAsia was proof Belt and Road was transforming “from a conceptual story to a reality”.
But just how significant is that reality?
China’s President Xi Jinping extolled the virtues of Belt and Road — once known as One Belt, One Road (Obor) — in his opening speech at the summit, reeling off a series of numbers to wow the crowds.
He pointed to the more than $3 trillion of trade between China and other Belt and Road countries over the last three years, and the $50 billion of Chinese investments in these countries during the same period. He said the Asian Infrastructure Investment Bank (AIIB) had provided $1.7 billion of loans for nine projects in the region, and the Silk Road Fund had made $4 billion of investments.
These certainly make for impressive-sounding talking points, but a close look at the numbers should curb the enthusiasm.
China’s $3 trillion of trade with other countries in the bloc should be left aside; the Belt and Road Initiative is far too nascent to get the credit for that. That leaves us with the $50 billion of Chinese investments in Belt and Road countries, the $1.7 billion provided by the AIIB, and the $4 billion invested by the Silk Road Fund.
The $50 billion investment is surely welcome, but it represents only 39.6% of total Chinese overseas direct investment for 2016 alone. Nor is it growing rapidly. Bank of America Merill Lynch analysts, who think the figure is a little higher — closer to $55 billion between 2013 and 2016 — say Chinese investment in the Belt and Road region was actually down 2% in 2016 compared to 2015.
The AIIB has also disappointed with its loans. Its lending has covered a wide variety of projects, from waste management in Indonesia to hydropower in Pakistan. But the AIIB’s $1.7 billion of lending is just a fraction of its $100 billion capital base — and so far, the fund is largely investing alongside other multilateral institutions, such as the World Bank and the Asian Development Bank.
What about the $4 billion invested by the Silk Road Fund? That’s just 10% of the amount Xi pledged to the fund when it was set up in December 2014.
At this point, then, the Belt and Road Initiative is far from an unqualified success. This is not to say it is unworthy of at least some of the attention it gets, but for those policy makers, corporate executives and bankers hoping the policy will be a panacea, it is worth taking a second look.
A major problem is that the policy is so ill-defined.
Bank of America Merrill Lynch analysts David Cui, Tracy Tian and Katherine Tai released a sceptical note on the Belt and Road initiative on May 15, the day the summit came to a close. In particular, they pointed out that one of the strengths of Belt and Road — its commercial, rather than simply political, nature — could limit its effectiveness.
The Belt and Road policy is not a way for China to give aid to developing countries, they noted; it is primarily a way to make loans on commercial terms. There is no guarantee those loans will come at levels that make sense for both lenders and borrowers.
“Many recipient countries are reluctant to participate, unless the terms are very favorable to them,” the analysts wrote. “In addition, China doesn’t seem willing to provide the full funding; instead, it hopes that some ‘seed’ lending or capital may jump-start investment in the host countries or attract enough investment/loans from international organisations such as the World Bank and the Asian Development Bank. At this stage, there is no strong sign that the strategy will work.”
China has already run into problems in some countries. In Sri Lanka, for instance, one banker interviewed by FinanceAsia criticised “hidden fees and over-invoicing”. Perhaps more telling were the protests in the country, driven by false rumours about just how much the government was willing to hand over to Chinese backers in exchange for funding.
Chinese institutions also face serious competition from other international lenders. As much as Chinese government officials might try to emphasise international cooperation, few doubt that these banks and funds are primarily tools of the Chinese government, in the same way that the IMF is a dominated by European governments and the World Bank by the United States.
This is not a problem in itself. But it does mean other developed economies are unlikely to use China’s Belt and Road-inspired institutions for the bulk of their lending. Japanese policy banks, perhaps the biggest source of competition given their desperate need to escape negative interest rates at home, continue to lend on their own — scarcely believable — terms.
Take the Japan International Cooperation Agency’s $1.25 billion loan to fund Sri Lanka’s light rapid transit system. The policy bank charged 0.1% for a 40-year loan, adding in a 10-year grace period for good measure. How can Chinese lenders compete with that without abandoning any notion of economic self-interest?
Most analysts have been effusive about the Belt and Road. A huge team of Credit Suisse analysts put out their own report on Belt and Road in early May, saying China could make investments worth as much as $502 billion in the 62 Belt and Road countries over the next five years.
But just as illuminating was a noun they used to describe the policy. “The Obor is a brand that could include more countries if they show interest,” the analysts wrote.
It was only time in the 49-page report they used the term ‘brand’ to refer to Belt and Road, and it may have been a slip. But it fairly accurately describes the current state of the initiative. 'Belt and Road' is a catch-all term for a mix of government policies, commercial incentives, and multilateral jockeying. It attempts to combine commercial acumen with long-run policy objectives, when in fact it would make more sense for the Chinese government to pick one or the other.
If China wants a Marshall Plan, it will be spoiled for choice as Asian governments come begging. But that is resolutely not what Belt and Road is about. China wants attractive returns, juicy construction contracts, and the chance to relieve domestic over-capacity in sectors perfect for an infrastructure push — cement, coal and steel. This is all going to happen much more slowly than is implied by the hyperbole Belt and Road attracts.
The Chinese government should not be blamed for its steady, economically-minded, approach. It is eminently sensible. But it does make endless discussion about the Belt and Road Initiative seem more like the result of an effective branding exercise rather than a seismic policy shift.