How Does China Know Its Belt And Road Initiative Will Work? Because It Tried It Out On Itself First.

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Op/Ed by Chris Devonshire-Ellis 

China’s Belt and Road Initiative has been a hugely controversial platform to develop infrastructure on a global scale, with accusations of debt burdens, exporting over-capacity and the creation of white elephants on a global scale. China has also stumped up an estimated US$1 trillion (OECD) in funding such projects – an estimated US$200 billion being spent on Pakistan’s creaking infrastructure alone.

But what has really driven China’s incredible spending levels? Some analysts have suggested it might even bankrupt the nation. However there are reasons to suggest Beijing knows exactly what it is doing – both in terms of securing China’s future and as a spin-off, creating global opportunities for other nations. We can divide these two aspects into different components as follows:

China’s Middle Class Needs Are The Government’s Unique Problem

China is of course a one-party state, itself born from a brutal civil war and hugely damaging revolution during which millions died. Large parts of the national infrastructure were destroyed in consecutive events; civil war, world war, and revolution. China only really began the process of recovery from this in the 1980’s, when Premier Deng Xiaoping began a process of economic reform, an on-going policy that is continuing today. What hasn’t been on the agenda is political reform – China remains a one-party state. That is a double edged sword for the ruling Communist Party, born from revolution they know first hand the perils of political upheaval and changes. In the eyes of the CPC, the only way to govern China is to do so without hinderance. Perhaps they are right, at the polar opposite we can look at the only other country approaching such a population – India, a democracy. I have spoken to many Indian politicians and Ministers over the years who privately cast envious eyes at the Chinese ability to get things done – unencumbered by democratic procedures and having to lobby or bribe for votes.

Yet this ability to act without having to manipulate through a democratic process has a downside – when things go wrong, there is only one way the fingers point, and that is at the Communist Party.  This means that Beijing has to deliver to the Chinese people – a huge task when there are 1.4 billion of them, increasingly demanding the latest technologies, consumer devises and freedoms. The Belt & Road Initiative is in part designed to fulfill these needs. China’s middle class population is set to reach 550 million by 2024 and Beijing needs to provide what they want. If not, there will be trouble ahead. China here is handicapped; with 20% of the global population, yet only 5% of the world’s arable land, there is not enough food. China is also energy and water poor. These basic needs can only be fulfilled by building massive supply chains to diminish this commodity gap, and at the same time satisfy the growing middle class. To do this, China is financing and building of massive amounts of infrastructure to support these needs, but China also needs to provide something in return – and that middle class is the key – China needs to buy both commodities and products. This is why it is crucial for the country to make a success of the Belt & Road Initiative. In this regard, Beijing has already tested the likely results – on itself.

“Build The Infrastructure And They Will Come”

Beijing got caught out in the global economic crisis of 2008, stepping up its infrastructure spending in the decade since to counter flagging global demand. That increased the country’s debt, with concerns at the time about the economic impact. What actually happened was it built the foundation to transform China’s economy into a productivity-led growth model.

High-quality basic infrastructure helps support a healthy labor force; advanced transportation systems increase efficiency through time and cost savings and network effects; cutting-edge computing technology can greatly increase innovation capacity.

The beneficial spillovers from China’s infrastructure boom over the past decade have had spectacular results. Between 2008 and 2019, China jumped from 66th to 28th out of 152 countries when ranked on overall infrastructure according to the World Economic Forum’s Global Competiveness Report.

Electricity availability reached full coverage for the country in 2013, putting it on par with high-income economies, and access to clean water and sanitation have continuously improved. That little known milestone was when China first introduced the Belt & Road Initiative, initially known as ‘One Belt One Road’.

The growth in transportation facilities since then has been exponential, especially in air and railways. In 2016, the Chinese government lowered the minimum population criteria for a city to start planning a metro system from 3 million to 1.5 million residents. The number of Chinese cities with metro services has risen from 10 to 35 since 2008 with their networks’ route coverage increasing more than five-fold to 4,657km over the past decade. Lahore, Pakistan’s second largest city with a population of 11 million, opened its first metro system last week. It was built by Chinese contractors as part of the CPEC project.

China has also added 1.1m km of highways over the past decade, taking its total road network to 4.8m km. The rail system has increased by 52,000 km to 132,000km. Another 5.9m km of air routes takes China’s total air-route network to 8.4m km and its air passenger volume is now the second largest in the world.

The investment in infrastructure is also evident in China’s high-speed rail system. The network began in 2008, in time for the Beijing Olympics, but is now the world’s largest, accounting for two-thirds of the global high-speed rail network.

China’s information and computer technology development has also been swift. Mobile-phone subscriptions now exceed one per person on average while broadband access is above that of upper-middle-income economies.

China was one of the first countries to develop and test commercial 5G networks. In October 2019, three of China’s largest mobile-phone carriers launched 5G services, making it the world’s largest 5G mobile network.

What Beijing has learned is that although the infrastructure investment requires large upfront investment, it provides productivity gains in the longer term. Time and cost savings for commuters, improved market access, healthier competition, increased exchange of ideas and enlarged innovation capacity are a springboard for economic development. This is exactly what happened in China – and became a type of case study for the BRI.

High-speed rail cuts journey times but also connects dense urban areas with less crowded cities, allowing for a more balanced distribution of labor and business development without sacrificing the benefits of an increasingly urbanized economy. Operational costs are low compared with the high fixed construction costs and economies of scale mean that productivity rises as rail usage increases.

Developments in advanced infrastructure, such as 5G, provide the backbone for next-generation technologies and encourage innovation and entrepreneurship. For example, China’s high level of mobile-device usage allowed for the growth of cashless payment systems. The high level of internet access also meant that e-commerce could flourish, and it now accounts for a quarter of all retail sales.

This combination of a strong infrastructure foundation and high-quality human capital has allowed China to transition into an innovation and productivity-led growth model, supporting its economic development in future years. This process, beginning in earnest in 2008, produced almost immediate results, and as many Chinese city mayors explained to me at the time “Build the infrastructure and they will come” – the ”they” meaning opportunities, wealth creation and customers.

Those results can be measured. In 2008, China’s middle class was about 90 million, with an average annual income of about RMB35,000 (US$5,000 at exchange rates at that time). In 2019, just over a decade later, that middle class has increased fivefold with an average annual income nearly tripling to RMB94,000 (S$14,000 today).

This is exactly what is now happening across the Belt & Road Initiative – wealth is being created and a consumer class is emerging for exactly the same reasons: infrastructure development.

This means that critics of the Belt & Road Initiative are largely missing the point. We can take a snapshot of the expected middle class growth rate for two of the major regions of the Belt & Road Initiative as follows:

Region Middle Class Today (millions) Growth Rate Per Annum
Africa 313 5%
South-East Asia 350 10%
Sources: African Development Bank, Bain

This compares with data from the European Union that states that the EU middle class is in decline, while according to Pew Research, so is that of the United States.

This would appear to indicate that China’s bet on the Belt & Road Initiative is likely to come off – it has been investing in infrastructure in economies that are developing an increasing middle class, and has helped bring that about sooner than otherwise would have been the case. These economies will help make the future products than Chinese consumers wish to buy, while at the same time produce the energy, food and related resources that China needs to maintain its own population security levels. In return, China will sell its high tech products to these new consumers, and provide customers in the form of future tourism, travel and business cooperation.

This also means that the opportunities and wealth creation are where the infrastructure build is. In 2008, China had issued 150 million credit cards to its population. In 2019, it was 746 million. The same wealth creation will emerge from the Belt & Road Initiative infrastructure projects: “If you build it, they will come.”

See also:

Europe:

Africa:

South-East Asia:

Pakistan:

Central America:

 

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About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at silkroad@dezshira.com or visit www.dezshira.com

 

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