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China’s Belt and Road at 5: ‘one-to-many’ or ‘many-to-many’?

China’s Belt and Road at 5: ‘one-to-many’ or ‘many-to-many’?

Dollar constraint may lead to more multilateral approach in Beijing’s initiative DAVID LUBIN

Add to myFT Taiwan’s Nanliao Port. China reportedly plans to build a rail tunnel under the Taiwan Strait as part of its Belt and Road Initiative

David Lubin OCTOBER 19, 2018

5 One could be forgiven for having missed the fifth birthday last month of China’s Belt and Road Initiative. Celebrations were notably mute, for two obvious reasons.

📌One is the increasingly audible grumbling among recipient countries about the effects of what Malaysian prime minister Mahathir Mohamad has called a “new colonialism” — a phrase that captures the idea that the BRI has led to the accumulation of debt on receiving countries’ balance sheets to pay for projects of uncertain value, built mostly by Chinese contractors on opaque terms, allowing China’s regional influence to grow in ways that are out of proportion to the benefits that countries can expect to enjoy. This kind of concern led to Malaysia’s suspension last month of the $20bn East Coast Rail Link, one of the biggest-ticket projects in the entire BRI. Even Pakistan, whose people and governments routinely express the world’s most amiable view of China, recently cut down the scale and cost of the Karachi-Peshawar railroad project.

📌A second reason for muted celebration is the growing sense that the US now aims to contain China’s extension of its influence abroad, a policy that was clearly articulated in vice-president Mike Pence’s speech at Hudson Institute this month. But there is another reason the BRI is not as healthy a five-year-old as the Chinese government would like it to be: China might be running out of resources to support it. beyondbrics Emerging markets guest forum beyondbrics is a forum on emerging markets for contributors from the worlds of business, finance, politics, academia and the third sector. All views expressed are those of the author(s) and should not be taken as reflecting the views of the Financial Times. Think of it this way. If the renminbi were a fully functioning, grown-up global currency, then China could print the stuff and use it to finance projects in the BRI. However, that is not the case at all: very few BRI projects are renminbi-financed, and the initiative as a whole is highly dependent on dollar-denominated funding. This creates what is best described as a “dollar constraint” for China in its ability to pursue its objectives in the BRI. Since it lacks an infinite supply of dollars, it therefore lacks an infinite capacity to get what it wants done. The dollar constraint persists because the renminbi has made remarkably little progress towards international currency status. By some measures, one could actually say it has declined. While the renminbi was used to settle about 30 per cent of China’s trade back in 2015, for example, it is now used to settle only half that amount. And the stock of renminbi deposits outside China, a reasonable measure of a currency’s international desirability, has fallen in recent years. Back in late 2014, Hong Kong banks held a trillion renminbi ($144bn) worth of deposits. Nowadays the stock of renminbi-denominated deposits is about Rmb600bn. The dollar constraint China faces in pursuing its goals in the BRI might become even more binding if the country starts to run a current account deficit in the coming years — not a crazy supposition given that the first half of this year saw China run its first current account deficit since 1998. The point is that if China needs dollars from the rest of the world to finance itself, then it will be marginally more difficult to generate the dollar resources that China needs to promote the BRI. China’s response to this dollar constraint seems partly to lie in an effort to open up the BRI by placing more emphasis on co-financing its projects with institutions such as the World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, European Investment Bank, European Bank for Reconstruction and Development and other multilateral development banks. That could fundamentally change the nature of the BRI, because these banks need to follow strict “open-content” rules that forbid them from preferring contractors from any particular country. What this means is that the days when China could show up in a country with a bunch of dollars to finance a project, alongside a handpicked state-owned enterprise to run it, might be over. A BRI that is characterised by co-financing will be a more even-handed, a more transparent and a less exclusively Chinese effort.  That will help China, but at a cost. It will help because a more multilateral BRI will make it tougher for countries to accuse Beijing of being a new imperial power in the developing world, and perhaps more inclined to deepen their participation in the initiative. But the cost is that Beijing will have to share decision making with its institutional partners. A charitable view is that this is what China wanted all along. Ever since the BRI’s birth five years ago, Beijing has been emphatic in its insistence that the initiative is not a bid for hegemony, but merely a benign mechanism for international co-operation. In the words of 📌one Chinese scholar, Wang Yiwei, the BRI should be considered as a “many-to-many” platform rather than a “one-to-many” effort to establish Chinese control, in the way that (for Wang, at least) the US used the Marshall Plan to establish hegemonic control over post-second world war Europe. If China’s dollar constraint continues to push it towards co-financing the BRI with multilateral lenders, this might be the best way to ensure that the rest of the world begins to see the initiative as having many-to-many characteristics. If so, the BRI’s 10th birthday might end up being a happier occasion than its fifth

David Lubin is head of emerging markets economics at Citi and the author of ‘Dance of the Trillions: Developing Countries and Global Finance’, recently published by Brookings Press/Chatham House. Get alerts on Belt and Road Initiative when a new story is published Get alerts Copyright The Financial Times Limited 2018. All rights reserved. Share this article Latest on Belt and Road Initiative FT Alphaville Pakistan's IMF bailout adds to Belt and Road woes beyondbrics Belt and Road is globalisation with Chinese characteristics John Redwood Why the US-China stand-off is bad for investors Special Report Future of Food and Agriculture Technology hope for African farmers UK Broadband US to make ‘counter offer’ to stop Huawei in Pacific  Chinese politics & policy Advantage India in struggle with China over Maldives Belt and Road Initiative Chinese schools explore Belt and Road Initiative Special Report China’s Belt & Road Initiative COMMENTS (5)   Submit Comment Please keep comments respectful. By commenting, you agree to abide by our community guidelines and these terms and conditions. We encourage you to report inappropriate comments. Newest | Oldest | Most recommended K. Progo 4 hours ago Western countries have "flooded" developing countries with aid for decades -- ever since the 1950s.  And as is well-known, much of this aid has had political conditions attached. It's hard to see why there is now such a fuss about China doing more or less the same thing.  The most important thing is that recipient countries be hard-nosed about the pros and cons of accepting the aid that is offered to them.  And fortunately, most recipient countries seem quite hard-nosed about offers of finance from China.  RecommendReply Marriner S. Eccles 5 hours ago "Beijing has been emphatic in its insistence that the initiative is not a bid for hegemony, but merely a benign mechanism for international co-operation." Really? I thought it was a sophisticated ruse to enrich top CCP members and their favorite crony capitalists with no-bid contracts, over-indebt  future client states, export their social control technology for friendly tyrants along the way...  RecommendReply ST 18 hours ago The pro-China comments here won't be long now. However, before they flood the section, I would like to ask them why China is so fearful of revealing the details of the BRI debts, especially in Pakistan. Don't the Pakistani citizens have a right to know what their army and corrupt politicians have committed on their behalf? After all, it is they who will have to foot the bill for employing Chinese state firms and labour for a project that provides China with a land route to the Arabian Sea. RecommendReply C.S.Ostergaard 1 day ago In an Oct 2 interview with South China Morning Post, Hong Kong,. Mahathir tries to set the record straight about his use of the concept of  'a new form of colonialism'. But obviously David Lubin did not get the memo. : "Asked again if he saw the belt and road plan as a new form of colonialism, Mahathir said “not at all” but he objected to Chinese money being used to build cities in foreign countries. That criticism appeared to be a reference to his repeated condemnation of the sprawling US$100 billion Forest City project being built in Malaysia by the Chinese developer Country Garden Holdings."


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