An important article by economist Christopher Balding from back in May discusses the problems with China paying for its wildly ambitious (over-hyped?) One Belt, One Road infrastructure project:
Such doubts might seem spurious, given the numbers being tossed around. China claims nearly $900 billion worth of deals are already underway, with estimates of future spending ranging from $4 trillion to $8 trillion, depending on which Chinese government agency is doing the talking. At the conference itself, Chinese President Xi Jinping pledged another $78 billion for the effort, which envisions building infrastructure to link China to Europe through Asia, the Middle East and Africa.
From no other country in the world would such pledges be remotely plausible. Yet even for China, they’ll be difficult to fulfill without clashing with the country’s other objectives.
Comrade Balding, as he styles himself, crunches the number in a bit more detail on his blog:
- Let’s use the $5 trillion over 5 years number reported by Nataxis (which I would highly recommend reading their research report on financing OBOR which is a link in the BV piece) but also note that other outlets like The Economist have reported similar numbers (theirs was $4 trillion). Use simple numbers for our purposes and assume it is all equally divided into equal blocks so every year sees $800b-$1t per year in overseas lending by China. That is an enormous, enormous, enormous jump in overseas lending. For thought experiment purposes, we have even extend this to 10 years. To put this in perspective, ODI from China to the ROW in 2016 after an enormous surge was $170 billion. Then ODI is down 49% YTD from 2016.
- Assume that all OBOR lending is done in USD, this means that either a) China is going to tap PBOC USD or b) they are going to do tap the USD bond market to fund these lendings. If China taps PBOC FX reserves to pay for this, with the numbers reported, they will have no USD left in the reserves. None. Zero. Zilch. In fact, not only will they have nothing left, they will have to begin borrowing on international USD to fund investments in such credit worthy places as Uzbekistan. For simplicity sake, assume they plan to invest $5 trillion, they use up all $3t in PBOC FX reserves and then they have to go borrow $2t on international markets. Frankly, this is a crazy financial risk by China.
- However, it isn’t fundamentally any better if China opts for option B to raise all the funding on international USD bond markets. If China raises the entire amount, as Nataxis noted, this raises Chinese external debt levels by about 40% of GDP and more importantly makes China exceedingly risky to any type of devaluation. Even small devaluations of the RMB would then become important. All of a sudden China becomes a very risky borrower with high levels of external debt and an increasingly risky tie to the USD. What is so crazy about this situation is that China has tied itself and its stability to the USD to Pakistani bridge repayment. Stop and wrap your mind around that for one second.
More at the link.
Balding’s conclusion in the Bloomberg article seems exactly right: “But it’s almost certain that the amount of money that makes its way into Belt-and-Road projects will be significantly lower than advertised. Grand in ambition but short on details, Xi’s sweeping initiative may be better thought of as a “philosophy” or “party line,” rather than a fixed commitment.”
China will almost certainly spend/loan a LOT of money to build the B&R, but it won’t be $5 trillion over five years (I mean, seriously). But over the long term, it will still be a lot.
Notably, the B&R doesn’t have a timeframe, which could mean either that the project is more of a marketing gimmick than a reality — or that China is simply in this for the long haul:
The only internal instructions that have come so far, have been from Zhongnanhai [China’s top leadership], and are about banning words like “project” (because the word connotes a goal and timeline, Beijing prefers the looser term “initiative”) as well as banning the publication of official maps purporting to show the scope of OBOR [One Belt, One Road].