BEIJING — A centuries-old template for China’s economic influence may be the best idea the nation’s current-day leaders have for addressing a shortfall in growth.
China reported this week that the economy expanded the least since the 2009 global recession last quarter, at a 7% pace. Last time round, policymakers unleashed a record credit expansion that's left a legacy of unused properties and rising bad debts.
Now, President Xi Jinping and his colleagues are focused instead on restructuring initiatives, including steps to bolster the role of private enterprise. With overseas demand for Chinese products waning, Mr Xi's grand plan is to deepen ties with Asian countries along the Silk Road commerce and migration routes of the Middle Ages.
Through initiatives including a US$40 billion Silk Road Fund, and the $100 billion Asian Infrastructure Investment Bank now taking shape, Mr Xi aims to fund projects that will aid development in what's already some of the world's fastest-growing areas. The vision could produce benefits that match China's integration with the global economy when it joined the World Trade Organization in 2001, according to Australia & New Zealand Banking Group Ltd.
"China's scale means the country has the capacity to change the economic fortunes of the Silk Road region," said Ben Simpfendorfer, founder of research firm Silk Road Associates in Hong Kong, which advises multinational companies on expansion strategies in Asia and the Middle East. "We are watching the rebirth of the world's centre of economic gravity."
China's President Xi Jinping (centre) and former Sri Lankan President Mahinda Rajapakse (second left) inspect a Sri Lankan Army guard of honour during a welcoming ceremony in Colombo on Sept 16. New Prime Minister Maithripala Sirisena has suspended a $1.4 billion Chinese-funded plan to build a city on reclaimed land near Colombo’s port. (AFP photo)
Silk belts and roads
China calls the plan "One Belt, One Road," the "road" actually referring to the Maritime Silk Road linking China's east coast to Europe via the South China Sea and Indian Ocean. The "belt" refers to the land mass of China, Central Asia, Russia and Europe.
For Chinese manufacturers, fresh opportunities in countries from Indonesia to Kazakhstan would help counter the impact of a domestic property-market slump and sluggish demand for exports in Europe. Government data Wednesday showed that industrial output rose 5.6% in March from a year before -- weaker than all 40 forecasts in a Bloomberg News survey.
Boosting infrastructure investment overseas will also help China's industries with excess capacity including in steel, cement and construction to sell abroad, said Alicia Garcia- Herrero, chief economist for emerging markets at Banco Bilbao Vizcaya Argentaria SA in Hong Kong.
China's previous overseas investment forays have hit obstacles. Sri Lanka's Prime Minister Maithripala Sirisena has suspended a $1.4 billion Chinese-funded plan to build a city on reclaimed land near Colombo's port, pending a review into whether the project was being implemented with relevant approvals.
In Kazakhstan, through which Mr Xi envisages pipelines, roads and railways, China has struggled to gain influence. It has failed to reach a free-trade agreement mooted more than 20 years ago and in 2009, the Kazakh president rejected a plan to lease farmland to China after protests from a public wary of their neighbour's growing power.
China's direct investments overseas have thus far left "a catalogue of misallocation, waste, poor administration and weak commercial standards and returns," said George Magnus, a senior independent economic adviser to UBS Group AG in London.
Using multilateral institutions such as the AIIB could soothe concerns over China's political influence. The number of countries with the intention to join AIIB as founding members has climbed to 57, the Finance Ministry said in a statement.
Silk Road
The expertise gained at the AIIB may also help develop standards that could apply to loans and other assistance for infrastructure development from the Silk Road Fund. The US and Japan have declined so far to sign on to the AIIB because of question marks over governance.
The undertaking has the potential to boost a region that will contribute 80% of global economic growth and vault 3 billion more people into the middle class by 2050, according to advisory firm McKinsey & Co.
Cranes operate at a construction site at Semarang Port in Semarang, Central Java, Indonesia, on March 12. China is planning to help develop Indonesia’s ports as a leg in its Silk Road economic plan. (Bloomberg photo)
Deepening economic cooperation with dozens of countries along the routes may help China leap to the next level of globalisation, wrote ANZ Bank analysts led by Chief China economist Liu Li-Gang in Hong Kong in a March 30 note.
"The initiative will boost infrastructure investment especially railway, highway, shipping, port development and the resources sector," they wrote.
Maritime road
The plan will drive domestic demand for construction machinery used for infrastructure by an annual average of 11.9% and boost providers of railway and nuclear power equipment, China International Capital Corp's analysts Wu Huimin and Kong LingMr Xin wrote in a March 31 note.
The maritime "road" will be more successful than the land route across Central Asia "simply because there is vastly more economic activity" there, said David Dollar, a senior fellow at the Brookings Institution in Washington, who previously worked for the US Treasury in Beijing.
"Think of coastal China, the Philippines, Vietnam, Indonesia, continuing on to Bangladesh and India -- there is a huge amount of economic activity already and an insufficient degree of integration," said Mr Dollar, a former head of the World Bank in China. "Plus sea transport is less expensive than land transport."