A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’
China’s growth rate has slowed in recent years. Its sustainable growth rate has almost halved, to around 6.0% in a decade or so.
By Western standards this is an unattainably rapid growth rate. It would enable China’s economy to double in size every 12 years. China is still a fast-growing country, and one that exercises growing authority on the world stage. From technology to overseas investment and geopolitical influence China increasingly matters.
China’s BRI (Belt and Road Initiative) – dubbed by the authorities as “the Project of the Century” – illustrates the scale of the government’s ambitions. Launched in 2013 as a vast programme of overseas infrastructure, president Xi Jinping proclaimed it would restore the ancient Silk Road trading route that connected Asia and Europe.
In reality its aims are more nebulous, involving infrastructure investment in Asia, Europe, Africa, the Middle East and the Americas. There is no blueprint for the BRI. Indeed, it is, perhaps, better seen as set of aspirations, rather than a detailed plan.
The BRI is a reflection of China’s emergence as a global economic power. Like America in the twentieth century China sees overseas investment as bolstering trade and influence with the rest of the world.
Slowing activity at home has reinforced the search for new sources of growth. China is grappling with too much unproductive capacity, the consequence of a multi-decade investment boom that is now drawing to an end. China’s sizeable construction and infrastructure sectors needs new opportunities. And shifting some of China’s vast foreign exchange reserves from US Treasury bonds into overseas infrastructure offers the benefits of diversification and, and potentially, higher returns.
The BRI has faced a number of criticisms from outside China.
Some see it mainly as a vehicle for exporting excess capacity, especially, in construction, and of guaranteeing the raw materials China needs.
The choice of investment projects, and the absence of a commercial plan for the BRI, has prompted claims that the initiative is being used to extend political influence, particularly in neighbouring countries and around the South China Sea.
Since China is able to bring in most of the people, from engineers to cooks, needed to build infrastructure, projects do not always do much for local job creation.
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And by funding some projects other lenders have shunned as unviable, critics argue that China may saddle countries with unaffordable debt – making them beholden to China. (High levels of bad debts in China’s own banking system testifies to the problems China has faced in efficiently allocating capital at home).
Sri Lanka has been unable to service the debt it took to build a port in Hambantota. It handed the port over to state-owned China Merchants Port Holdings on a 99-year lease, a move which some saw as an erosion of Sri Lankan sovereignty.
It is because of such concerns about debt that a number of developing countries, including Pakistan, Malaysia, Myanmar and Bangladesh, have recently scaled back BRI commitments.
Few of the criticisms made of the BRI are entirely new. Similar claims might have been levelled against overseas investment by other countries in the past. All countries want to maximise their influence overseas, boost trade, secure raw materials and protect their wider interests.
In the aftermath of the Second World War, for instance, the US Marshall Plan helped fund the reconstruction of Western Europe. The aim was to tie Europe in to the US, and to secure it against communism. As often happens, economic and geopolitical objectives went hand in hand.
But the Marshall Plan differed from the BRI in execution. It had investment objectives and set deadlines. The objectives of BRI projects are relatively vague; various groups are involved in running it and the choice of projects seems opportunistic. Marshall Plan investment was largely concentrated in US-ally nations, where it did not compete with Soviet financial muscle. BRI investments necessarily occur where countries already have access to the US-dominated World Bank and International Monetary Fund system. This leaves scope for competition and even friction.
Most western European countries have been cautious about the BRI and mindful of its capacity to advance China’s wider interests. The countries of southern, central and eastern Europe see opportunity. Many, accounting for more than half of the EU’s 28 members, including Italy, Poland and Portugal, have signed bilateral endorsements of the Initiative. Italy’s decision to do so was a coup for the BRI and a source of concern in Brussels and Washington.
The promise of the BRI is alluring. Emerging economies need new, productive infrastructure to aid their development. Global trade could do with a boost. The test for the BRI is to deliver for the world as much as it does for China.
PS: Last week the chairman of the US Federal Reserve Jerome Powell said the Fed will “act as appropriate to sustain the expansion” of the economy as it monitors the impact of the trade war. This dovish shift, suggesting a cut in US interest rates might be needed, led to a further sharp downward adjustment in market expectations for interest. Financial markets now expect the Fed to make two 25 basis point cuts to the main interest rate by the end of the year. Three months ago the thinking in markets was that rates would stay on hold. The shift in rate expectations reflects concerns about a loss of momentum in the US economy and about growing trade tensions. Separately, European Central Bank president Mario Draghi followed Mr Powell’s dovish turn saying the Bank was ready to “use all the instruments that are in the toolbox” if the slowdown in the euro area’s manufacturing sector broadens to other parts of the economy. UK and euro area rate expectations have also drifted lower in recent months but not to the extent that would imply a rate cut this year.