Matthews Asia Perspectives


The Promise of 'Belt and Road'

21 August 2019

China's ambitious infrastructure initiative points to the potential of global cooperation.

Read the article, The Promise of 'Belt and Road'


China's Belt and Road Initiative is a repackaging and acceleration of a policy that has been in place for some time. Officially announced in 2013, it simply gave a name to a pattern of development that had been evident since the turn of the century.1 But this repackaging comes as other parts of the world are turning in on themselves—the United States is going down a protectionist route; Europe is splitting apart as the lack of a real fiscal union exacerbates the divisions between rich and poor parts of the European Union. China, with its economic outreach across central Europe and its embrace of international trade and economic cooperation, increasingly is the standard bearer of globalization. In doing so, China is putting Asia at the center of global economic activity and putting itself at the center of Asia. History suggests that, often, the country at the center of global trade enjoys a period of economic prosperity and cultural enlightenment. It may also be the case for China. However, it is a case that few in the West embrace; it is almost as if they are jealous of China's new role.

In 2017, at Davos, China's President Xi Jinping ended his speech with a call for greater economic cooperation:2

    “We Chinese know only too well what it takes to achieve prosperity, so we applaud the achievements made by others and wish them a better future. We are not jealous of others' success; and we will not complain about others who have benefited so much from the great opportunities presented by China's development. We will open our arms to the people of other countries and welcome them aboard the express train of China's development.”
But this did not persuade many people in the Western intelligentsia. I remember being at a conference where the speaker before me gave a view on the state of the global political economy. Never once was China mentioned during the hourlong presentation, until the last sentence—and then, only to pour cold water on the idea that China was serious about globalization. I had to follow with my own presentation on China and globalization. I think the ensuing years have been more kind to my view. I would like to share why the Belt and Road Initiative is key to China's development and why China is serious about global economic cooperation.

Let me first point out, however, what the initiative is not. It is not an attempt to become a global policeman, like the role played by the U.S. China has neither the resources nor the will to take on such a role. It is not about British-style imperialism of the 19th century. China has suffered at the hands of such an aggressive approach and is sensitive to the backlash it can cause. Nor is China embracing the tenets of democratic liberalism—and I think it is this part of the ethos of globalization that the intellectual West finds hard to stomach. They fear that China is not serious about the West's notions of democracy—and they are surely correct in that. But their fear that China seeks to spread dictatorship is wrongheaded and a misunderstanding of what China really seeks. What China seeks is secure borders and friendly neighbors. It seeks to offset an aging population by investing in young labor. It seeks to pursue a knowledge and services-based growth and to find a cheaper way to manufacture goods. It seeks to increase wages and demand outside its borders as a way to increase the wealth and prosperity of all, including its own citizens. China is following a well-trodden path to prosperity that it has created within its own borders: build the infrastructure, open the markets, learn how to mechanize, create a manufacturing base and watch productivity grow. These are the building blocks of China's own growth and the platform upon which it stands ready to create a modern, services-led domestic economy.

The Economics — Youth, Manufacturing and Ascending the Value Chain

China's population has an average age of 37.4 years. That of Vietnam is 30.5 years; Indonesia is 30.2 years; Malaysia is 28.5 years; Pakistan is 23.8 years.3

 

These younger countries also have economic living standards that vary from the equivalent of 19th century U.S. to perhaps the 1950s. Many of these economies suffer from a low ratio of manufacturing to GDP. With a global average of 15.6% of GDP in manufacturing, China stands at 29%—a manufacturing powerhouse. Vietnam is at 16%; Indonesia at 20%; Malaysia at 22%; and Pakistan at 12%.So, China, by allowing its companies to move their labor-intensive operations into these regions of Southeast Asia and Central Asia and the subcontinent, can at one fell swoop mitigate the effects on productivity of an aging workforce, allow its own workers to move up the value-added chain into knowledge-intensive industries, and create increases in productivity and real wages in neighboring countries that will increase both the demand for Chinese goods and services and the supply of goods to China itself.
 
China is well-placed to partner with these countries in their development. Not just because of its geographic proximity but also because of the Chinese advantage of economies of scale. Building infrastructure at low cost and selling high-quality capital goods at low cost offers exactly the capital stock these countries need to develop at the price points they can afford. It is exactly what economic cooperation should deliver—prosperity for all based on the relative advantages and weakness of each country's inhabitants. Its very essence is the kind of economic cooperation that is lauded elsewhere in the world for the political stability it has created along with the wealth it has generated.

2019 will be the eighth-consecutive year in which the services sector is the largest part of the domestic economy in China. Leisure, media and entertainment spending, particularly online, continues to outpace growth in GDP.5 China is changing as it gets richer—the lives of its citizens are changing. Chinese today have more intellectual and spiritual freedom than they dared imagine when I was a student in Beijing in the late 1980s. Chinese now want quality of life—and what that means for environmental, social and artistic advancement. Yes, all of this has to take place under a single-party regime that is anathema to the Western idea of justice, but we cannot deny China's achievements in offering many other freedoms to its people. The Belt and Road Initiative is helpful to expanding these economic freedoms across China's population and ensuring the popularity of the regime by offshoring some of the more menial and less-skillful jobs in China's economy.

Politics, the Stabilizing Influence of Global Trade



China's domestic growth story is one of the greatest humanitarian achievements in history. In 1981, 835 million people lived in poverty in China, out of a total population of 1 billion people. Today, 30 million Chinese live in poverty, out of a population of 1.4 billion.6 This stunning reversal has taken China from developing-nation status to a middle-class nation in one generation. Among the regions around the world that can be pulled upward to join this global middle-class normality, four stand out: Latin America, Africa, Southeast Asia and Central Europe. Whereas Latin America may be forced to rely on a change of heart in the protectionist-leaning U.S. to kickstart its growth, Southeast Asia, Central Europe and the east coast of Africa are precisely those areas targeted by the Belt and Road Initiative. The potential humanitarian implications are huge as the areas within the embrace of the Belt and Road infrastructure initiative account for perhaps two-thirds of the world's population.

The map above shows the arm of relative poverty reaching out westward from China's borders toward Europe. Chinese investment, not European or American, is forging a bridge between the global rich and poor. And Chinese investment is now reaching into Europe itself. For ever since the Global Financial Crisis of 2008, parts of Europe have struggled to perform economically, given the straightjacket of European fiscal policy. Where the EU won't spend, China will. In March of this year, Italy signed a memorandum of understanding that will give China the ability to develop the ports of Genoa and Trieste, more closely linking Europe to Central Europe. Greece, too, has signed onto the initiative as China has transformed Piraeus, a defunct port outside Athens, into Europe's sixth-largest container port.7 In a global economy that is stuck with low interest rates (negative through much of Europe) and central bankers who are reluctant to improvise too much with monetary policy, China's fiscal power can sustain demand in parts of Europe that would otherwise keep falling behind.

The Complaints

There has been a lot of pushback to China's Belt and Road Initiative. Much of it is from Western governments and the media, who fear the rise of China. I suspect they fear that China is trying to use infrastructure development to influence countries politically. This may be true in the sense that China wants to achieve détente with these nations; but there is no sense, to my mind, that China is looking to interfere in the political and legal systems of these countries. Perhaps Western fears go even further—that China will not seek to spread the values of Western liberalism as part of its massive globalization initiative. Here, the concerns are surely right. We are seeing the globalization of the so-called Washington Consensus8 being replaced with a globalization that seems much more pragmatic, or non-prescriptive, and non-interventionist. This may result in hurt pride but it is not necessarily a step backward. Even the most ardent supporters of free-market economics and liberal democracy must admit that there is a trade-off between achieving these worthy goals and having enough calories to consume and enjoying a sense of hope for the future.

Non-interventionism has a cost, though. With so much public spending, the risk of corruption is high. Many of the participating countries are lower-income countries with weak institutions and governments with little incentive to investigate or expose their own elites to transparency. China's disinclination to hold local elites accountable risks higher-than-usual rates of corruption in the infrastructure spend—an activity known for its susceptibility to wastage and theft. These practices could well detract from the overall mission and efficacy of China's efforts, in addition to potentially shoring up some regimes that might otherwise not be tolerated. The world is trying to put pressure on the Chinese to improve governance, but I suspect China will move slowly to meet their concerns.9

Governments have also pushed back against some of the Belt and Road projects. They have legitimate concerns about the amount and terms of the debt accrued to make the investments. In this case, however, the Chinese have time and again renegotiated. Since 2010, 24 countries have been able to renegotiate loans with China as part of the initiative, including write-offs, deferrals and extensions. In addition, Malaysia renegotiated the terms of a deal to build part of its railway system.10 Recipient countries are able to borrow from international markets and institutions such as the IMF; China's economic clout is constrained by this competition. Also, a sense of China's own history prevents it from seeking punitive lending. It is seeking to build relationships over the long term, not to destroy them.

Misrepresentation of the debt issue is common. The Sri Lankan port of Hambantota, for instance, is often cited as a sign that the Chinese are trying to seize assets. The story falls apart under scrutiny, however, as the Sri Lankan government was actually under pressure to repay IMF loans. The failure of the port after Chinese investment can be explained partly by sluggish world trade since the Global Financial Crisis. It is hoped that a new investment by China, in the form of a 99-year lease, will turn around the port's fortunes. This is hardly a tale of overbearing Chinese debt burdens and aggressive asset seizures that the Western media would like to present.11

The Investment Case

For investors like us, what does this mean? Well, in many senses the investment case for the Belt and Road Initiative is very strong. If you think of all that the Chinese government can achieve through these investments, in terms of economic diplomacy, secure borders, maintenance of high living standards at home and the continuing development of modern lifestyles, then the initiative has high returns indeed. But these are not the kind of returns that interest private investors. This does not speak of a return on invested capital measured in dollars. No, the opportunities to profit from the infrastructure development are not likely to lie in direct participation in the project itself. For here, one is likely serving the interests of one government or another. Returns are measured in political stability and national pride.

As the Belt and Road Initiative continues, however, it will cut shipment times and potentially lower transport costs. Taking the railway from East China to Europe is much faster than using the container shipping routes.12 This will draw many more people into global markets, increasing efficiencies and driving up productivity and wages. Investors might profit by owning shares of private businesses, in China and other countries, that make use of these productivity improvements to lower costs. Investors might also look at companies that sell directly to local consumers across the various Asian parts of the Belt and Road Initiative. As wages rise, demand for their products and services will rise, too. Private businesses that use the new infrastructure to transport and market goods may also profit. All sorts of businesses may arise that meet the desires of newly globalized populations for a better life. The investment case and the humanitarian case are intertwined at this degree—a degree once removed from the initial investments. But the opportunities for profit and human advancement both are real; they just require a little patience.

China as a Standard Bearer of Globalization

China is no paragon of virtue. And perhaps up to now, no country has done more to shape the lives of the 20th century global population than the U.S. But the U.S. has done so partly because of its influence on China itself. And it is somewhat ironic that it is now China that is the driving force for extending many of these values of globalization into areas of the world that have perhaps lagged a little behind. China's rejection of liberal democratic principles and some of the West's political institutions perhaps blinds us to the great potential for humanitarian good and economic advancement that the Belt and Road Initiative offers. No, it is not perfect—nor was the Washington Consensus. However, China, in the eyes of the participating countries at least, which have voted with their labor and their capital, today represents one of the best hopes for economic advancement through global collaboration.


Robert Horrocks, PhD
Chief Investment Officer
Matthews Asia 


1 The World Bank
2 CGTN America
3 World Population Review
4 The World Bank
5 Statista
6 Gapminder
7 PortEconomics, data as of 2018
8 Wikipedia
9 The World Bank
10 Rhodium Group
11 Hellenic Shipping News Worldwide
12 BBC


The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.