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Can China's BRI be a blueprint for long-term economic benefit?

Time will tell if the impact of this bold initiative is as profound as the Marshall Plan's.

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Sri Lankan labourers working along a road in Colombo. Sri Lanka's central bank secured a US$1 billion Chinese loan as the island, a key link in Beijing's ambitious Belt and Road Initiative, develops closer relations with Asia's largest economy.

IT'S not uncommon for commentators to liken large-scale economic development programmes with the Marshall Plan instituted after World War II to rebuild Western Europe. This comparison has now been applied to China's Belt and Road Initiative (BRI), both in the benefits it promises and its risks over the longer term.

The Marshall Plan involved US$44.3 billion of grants from 1945 to 1953 and is credited with bringing America out of its pre-war isolationist mindset, helping to establish it as a dominant global economic force.

The aim of Chinese President Xi Jinping's BRI is to similarly stimulate development and growth, albeit from a different starting point. Its plan for cooperation and connectivity will drive huge infrastructure investment across a large swathe of the world, spurring investment growth in numerous sectors and profoundly altering the world's trade patterns.

It covers 65 countries (60 per cent of the world's population and 30 per cent of global GDP - some say it's nearer 78 countries), including China's immediate neighbours as well as countries in South Asia, the Middle East, Africa and Central and Eastern Europe

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But what could be the long-term impact of this bold initiative?

Through the BRI, China is already creating enormous opportunities outside its borders for its construction, energy, and infrastructure sectors. In target countries, improved connectivity and accelerated economic growth will create new markets for Chinese companies in sectors such as telecommunications, automobiles, chemicals, engineering machinery, metals and textiles. In turn, these countries also stand to reap potential opportunities brought by those investments, largely in infrastructure (transportation and energy).

The BRI has already delivered a number of significant projects around the world. These include the US$3.2 billion 470km Nairobi to Mombasa railway, opened in June 2017. Eventually it will extend to Uganda, Rwanda, South Sudan and Ethiopia, centring Kenya within an East African rail network.

China National Petroleum Corporation supported the first phase of the US$27 billion Yamal liquefied natural gas plant in Siberia, launched in December 2017. Further phases are to be launched in 2018 and 2019. The project will lower energy costs for BRI participant countries while providing new export markets for Russia.

Chinese banks are also helping to finance the US$3.4 billion 2.4 gigawatt Hassyan clean coal-fired power station plant in Dubai as part of the BRI.

For developing countries along the Belt and Road, accepting China's growing regional leadership is seen as a necessary price to pay for the opportunities on offer.

But other regional powers not in the project have a more defensive attitude to the BRI, expressing concerns about China's growing geopolitical influence in Asia, Central and Eastern Europe and Africa. The BRI will link participants' economies more closely with China, which has grown significantly faster than its traditional trade partners in Europe in recent decades.

INCREASING LEVERAGE

Much of this worry stems from the fact that Chinese banks and corporations are the main creditors for BRI projects, so participating countries will incur significant debt to China. The theory that the BRI will lead to growth for participating economies only stands true if infrastructure is required, and provided the projects are financed efficiently.

Over the longer term, perhaps 10 to 20 years out, if these countries are unable to service that debt, China's leverage over them could increase as the main creditor of BRI projects, and the benefit could diminish for these economies.

When nearly complete, the BRI could become China's international political powerbank through the projects it has developed, but also though conditions that could be imposed through the write-off of debt.

The BRI is now becoming more closely scrutinised because of the growing concern around debt associated with BRI projects. The International Monetary Fund has been vocal on this point to China, with its managing director Christine Lagarde recently stating, at a recent conference in Beijing, that Belt and Road should "travel only where it is needed" .

Even the Chinese government, which will make an estimated US$40 billion of equity investments through its Silk Road Fund, will be eager to see a return on this, and is now becoming markedly more careful where it invests.

The Asian Infrastructure Investment Bank (AIIB) will also be a major investor. AIIB has 56 member states and has robust corporate governance standards; as such, the creditworthiness of its investments will be thoroughly scrutinised.

China does not want to build a reputation as a political influencer in BRI countries at this early stage: if some projects don't pay off, Chinese lenders are likely either to extend more loans or roll them over at lower interest rates.

But there is a big question mark as to what will happen if more and more loans are extended over longer periods of time.

It's also worth noting that projects undertaken under the BRI must meet environmental and social standards and safeguards: as a result, investment in power generation, for example, will be focused on renewables, LNG and clean coal.

The hope is that more countries will be won over by the BRI's benefits and will participate. In December 2017, Japan announced financial support for BRI private-sector partnerships as part of an effort to improve ties with China. Cooperation will centre on the environmental sector, industrial modernisation and logistics.

Modern critics of the Marshall Plan suggest that it was less effective than intended, and even that it prevented development in some territories by propping up economically stagnant regimes. However, its success in establishing the US as a dominant influence in the post-war world is not disputed.

The BRI is still in its early stages; there is time to respond to its effects as they take hold, and the early developments are both encouraging and yet alarming. China clearly wants to broaden participation by lenders, and uphold high governance standards, but debt levels of BRI economies have piled up, and this could only build up China's soft power.

Time will tell if the BRI's impact is as profound as the Marshall Plan's. For now there are many reasons to hope so, but also many unknowns.

  • The writer is economist for Greater China at ING