China's massive programme of infrastructure spending in other Asian countries risks repeating many of the environmentally harmful mistakes made at home, says this opinion piece from the Stockholm Environment Institute
In 2009, former deputy director of China’s State Administration of Taxation Xu Shanda submitted to the Ministry of Commerce a proposal titled the “Chinese Marshall Plan.” In the wake of the global financial crisis, slumping exports, and extensive internal discussions on how to “create demand,” Xu’s strategy concept suggested utilising China’s vast foreign reserves to offer loans to developing countries, which would then contract Chinese enterprises for major projects of infrastructure and construction.
In short, this so-called Marshall Plan would be a roundabout subsidy, keeping Chinese industry and production robust, employment in place, and GDP growth high. Such projects would literally and figuratively pave the roads for Chinese goods and services to enter new markets, as one of the explicit goals of Xu’s strategy was also to find outlets for China’s excess production capacity.
This vision, or an iteration of it, has largely been borne out under the Xi Jinping administration. Since it was first announced in 2013, China has pulled out all stops to bring its massive One Road One Belt initiative to fruition, committing money not only into the new Asian Infrastructure Investment Bank (AIIB), but also the New Silk Road Fund (NSRF) and the Shanghai Cooperation Organization (SCO), as well as bilateral arrangements with countries.
These investments, loans, and grants will be dispersed to create a network of infrastructure — including roads and rail lines, energy pipelines, power stations, and coastal ports — that is envisioned to extend west to Europe via the Silk Road Economic Belt, and downwards into Southeast Asia via the 21st Century Maritime Silk Road.
This large-scale outpouring of capital, enterprises, and projects to foreign lands has been hailed as China’s great coming-out: a historical tipping point in the geopolitical balance, as China finally turns its relatively muted economic clout into more grandiose global power and leadership. But while there are a multitude of factors driving China towards this path, at core a major issue remains the need to “create demand” to address overcapacity and structural weaknesses in the Chinese economy.
Prior to the global financial crisis, China was already facing the issue of overcapacity in many of its production sectors. But when threatened with negative spillovers of the West’s economic slump in 2008, China’s response at the time was to inject the equivalent of half a trillion dollars in a stimulus for public infrastructure, rail, urban housing, construction – boosting precisely those sectors where inefficiencies were high but demand was slumping.
As a short-term solution, the stimulus worked: China escaped the turbulent years relatively unscathed. However, in many cases this credit-fueled production was not commensurate with the organic demand to absorb it. Researchers from the National Development and Reform Commission (NDRC) have published a scathing review of the waste and inefficiencies that have resulted from these de facto subsidies.
Far from being market-based, these types of credit-based, supply-driven projects have so far only encouraged continued lack of accountability in addition to tremendously distorting China’s so-called capitalist economy. Today, China’s steel sector idle capacity alone is double that of America’s steel production, with iron, cement, aluminum, glass, coal, shipbuilding, solar panels, and other industries all facing similarly slumping demand and profit losses.
That OBOR is seen as a quick solution to the problem of overcapacity in China is no secret. Chinese analysts have been very openly discussing the OBOR in these terms. For example, He Yafei, currently vice minister for foreign affairs, penned an opinion article last year in which he explicitly mentioned the opportunity to use China’s excess steel and iron for OBOR infrastructure building.
For now, though, it is still not entirely clear to what degree domestic low-end industrial production will be used to support the initiative. Challenges in that regard include the difficulties and expenses of transporting bulky and heavy materials abroad.
Furthermore, the newly released Action Plan for the OBOR states that “efforts should be made to promote green and low-carbon infrastructure construction.” China’s war on pollution, if it is taken seriously, still commits the country to painful domestic readjustments no matter what companies operating overseas may be involved in.
However, a large part of the OBOR will in fact be internally focused. Major infrastructure projects are being planned to connect some of the China’s more remote regions to the wider national and international markets. And while positive in some respects, this again amounts to yet another massive stimulus package for hard industry, and which will only delay the shift to a balanced economy that still needs to take place.
Economic restructuring away from export-oriented production and manufacturing would (or will) be painful. Years of artificially supported and credit-fueled growth have entrenched local government interests, revenue channels, jobs, and industries in a way that could be very destabilising to remedy. Cutting down overcapacity would involve slashing jobs, shutting down plants, and closing factories.
And for a country renowned for its long-term thinking, social stability is always the foremost and immediate priority. Statements that slower growth (the “new normal”) is acceptable may largely be about managing expectations; to the extent that it impacts jobs, boosting growth is still of paramount concern to Chinese leaders.
And, to be clear, it does impact jobs: the China Labor Bulletin reported earlier this year that worker strikes and labor unrest increased significantly in 2014 compared to the previous year, with the increase linked to the economic slowdown.
Given the vast amount of people employed in export-related industries, as well as in hard industrial and infrastructural production (the construction sector alone accounts for over 30 million jobs), boosting export figures and/or buying crucial time for these jobs and livelihoods to be transferred is still of paramount concern to Chinese leaders.
In detailing the OBOR, China has in fact clearly stated that it is buying time for domestic consumption to increase at a natural pace. Consumer-led growth will be a long time coming; progress on that front remains “too little and too slow” for China’s economy to depend on it anytime soon. More than kicking the can down the road, though, the OBOR could make problems worse.
That is, while it may buy time, this would be at the cost of further subsidising inefficient (and energy-intensive, high-polluting) SOEs and companies that should have either shrunk or gone under long ago under normal market conditions.
Of course, even if one accepts that the OBOR is a Band-Aid or painkiller for a problem that will require full-scale surgery, the initiative does have an economic logic as well. The OBOR, insofar as it utilises China’s otherwise unproductive and restless capital, may be an easy gamble in terms of its financial risk to the Chinese economy a whole. And overseas demand does exist.
The Asian Development Bank estimates that there is an US$800 billion annual shortfall for infrastructure needs in Asia-Pacific countries, a need that China is clearly well placed to provide through the AIIB and other means. However, there are yet again risks to take into account in meeting that demand.
Low investment return
For one, many of the developing countries along the Belt and Road are politically volatile and economically vulnerable. While financial assistance will be provided to countries of the OBOR through AIIB and other mechanisms, capital cannot provide the stability or security necessary to see these projects through, nor guarantee that counterparts will hold on to their end of the bargain.
Moreover, it cannot control for public opinion: Chinese projects in some cases have even galvanised populations against more easily bought off governments. Chinese companies using Chinese labor are not always welcomed with open arms, and the flooding of Chinese goods and exports likewise can become a source of local disgruntlement and resentment.
Developing countries are littered with cases of failed, stalled, or at least troubled Chinese projects due to local opposition, corruption, regulatory issues, and legal problems.
Secondly, so far, upwards of 90% of China’s foreign investment has been done through state channels and state-owned enterprises (SOEs). Since SOEs answer to government shareholders and enjoy state financial support, there has been little incentive for these Chinese companies to carefully assess cost, benefits, and risks.
As a result, investment returns have been low. For instance, the head of China’s mining association in 2013 estimated that up to 80% of China’s mining ventures overseas had failed. China has stated that the OBOR will “give play to the decisive role of the market.”
In reality, it is more likely that projects will continue to go to big players and state-affiliated enterprises. OBOR may very well look in practice like China’s Going Out policy on steroids. So far there are no strong indications it will be a different animal, though the international stake in the new AIIB is in this regard a highly positive development.
Overall, overcapacity of course is just one among a plethora of economic and geopolitical motives for China, some of which include the internationalisation of the yuan, creating alternative options in international financial system in need of reform, shaping a more pliable regional security and political environment for itself, and finding alternatives shipping routes.
In these aims, the OBOR could very well prove to very successful in enhancing China’s regional and geopolitical clout. But as far as direct economic gains go, the benefits may be ironically both too shortsighted with regards to shedding capacity, and too long-sighted in terms of investment return.
The devil of course lies in the details, and the majority of the road ahead will be bumpy. The West, which has reacted with variations of support, alarm, and suspicion to China’s grand chess move, must take into account that it is motivated not only by certain geopolitical calculations, but also domestic economic vulnerabilities that are quite severe.
On the Chinese side, however, overly simplistic views of the OBOR as a solution to oversupply and overproduction glosses over the deeper reforms that still need to take place, as well as the tremendous risks that China will face in meeting (or creating) so-called “market” demand.
This article was originally published in thediplomat.com and can be accessed here
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