by Marlena Luhr
August 07, 2015
As China’s GDP growth slows, its proposed One Belt, One Road Initiative—part economic stimulus, part foreign policy strategy—has the potential to change the balance of Asia’s geopolitical and economic environment, with global implications.
Although a 7.4 percent gross domestic product (GDP) growth rate in 2014 would indicate a boom for most nations, it represents the most disappointing growth since 1990 for China, and falls short of the state’s lofty 7.5 percent growth target. The slowdown has prompted new strategies from the governing Chinese Communist Party (CCP), as China seeks to recalibrate both its model for economic growth and its model for regional and global engagement.
China’s economy grew at an unsustainably rapid pace during the past three decades, resulting from developments in technology lowering transaction and market entry costs (allowing China to take advantage of its labor resources) and high government investment. This growth strategy, however, has shown signs ofrunning its course, with the working-age population shrinking after its peak in 2012, government investment plateauing at 49 percent of GDP, and a narrowing technological gap between China and developed countries. This shifting environment has prompted a transition toward a more balanced economic approach—a slower, more sustainable “new normal”—with an increased focus on global integration. The Belt and Road Initiative (or One Belt, One Road; OBOR), composed of the land-based Silk Road Economic Belt and the sea-based 21st Century Maritime Silk Road, is a pillar of this change. OBOR aims to alleviate China’s domestic economic slowdown, build infrastructure to connect Asia for trading, and strengthen China’s regional influence.
In 2014, Chinese President Xi Jinping announced an initial $40 billion “Silk Road Fund” to invest in regional infrastructure and promote industrial and financial cooperation, seeking to “break the connectivity bottleneck” in Asia. Xi discussed this pledge for investment when he met with leaders of Kazakhstan, Bangladesh, Cambodia, Laos, Mongolia, Myanmar, Pakistan and Tajikistan. The Chinese government subsequently pledged earlier this year to invest nearly $900 billion (£586 billion) in roads, rail, and maritime trade by creating economic corridors through countries across Asia and extending into Europe: a modern-day Silk Road.
The proposed infrastructure spending is diversified across a range of sectors. The China Development Bank promised to invest in more than 900 projects—including projects covering coal and gas, mining, electricity, telecommunications, infrastructure and agriculture—involving 60 countries. This development could simultaneously narrow the annual $800 billion gap between the supply and demand for infrastructure spending in Asia while helping to offset the effects of falling investment and rising overcapacity within China. Domestically, OBOR’s road projects will promote growth in underdeveloped central and western regions such as Xinjiang, Gansu Province, Ningxia, Guangxi, and Yunnan Province. Such investment could boost overall GDP while reducing regional economic inequality, and could thus mitigate some social tension in those provinces.
Infrastructure spending is only one element of the One Belt, One Road Initiative. At a Eurasian political and business forum in May, Vice-Premier Zhang Gaoli emphasized how “connectivity” encompasses physical infrastructure as well as interpersonal exchanges, policy coordination, trade, and capital flow. China’s growing resources provide a paramount “financial carrot” incentivizing regional governments to bolster connections with Beijing. One Belt, One Road offers a means of reinforcing these connections and deepening China’s integration with the rest of Asia and Europe. This economic intermingling includes the creation of new regional economic architecture: more than 30 countries have already joined the Asian Infrastructure Investment Bank. Overall, this increased connectivity creates the opportunity for regional economic growth while giving China a privileged role at the center of the system.
Key participants in the One Belt, One Road Initiative (Image: postwesternworld.com)
Yet there are potential pitfalls for the countries involved. Although the One Belt, One Road Initiative seems benevolent in theory—promising constructive collaboration and economic development for all—there are no binding state-to-state agreements and no measureable compliance requirements. China simply promises to utilize its economic resources and diplomatic skills to boost infrastructure investment and economic development. There are already numerous examples of China’s less than stellar compliance with local laws during foreign investment projects in Africa as well as reports of Chinese companies paying bribes during projects abroad. Given China’s significant economic weight compared to many of its neighbors, OBOR could prove more coercive than collaborative for the smaller countries involved.
There is also risk that One Belt, One Road could increase geopolitical regional tensions instead of fostering cooperation. One emerging concern among China’s neighbors is over the potential for ports to be dually utilized for both commercial and military activity. For example, Indian officials have already expressed alarm that Pakistan’s recent transfer of the seaport of Gwadar to a Chinese state-run enterprise management could lead to Chinese naval presence at the port. If regional rivals see Maritime Silk Road sections of One Belt, One Road as a strategy that will lead to increased international bases for the Chinese Navy, it could escalate tension in the region.
Given China’s significant economic weight—representing 11.3 percent of the global GDP in 2014—its slowed growth will have effects that reach far beyond China’s borders. Yet the Chinese government’s rebalancing in response to this “new normal,” especially its One Belt, One Road initiative, could have an even greater long-term impact on China’s neighbors as well as the rest of the world. Although the increased infrastructure development will help China lessen some structural domestic GDP concerns, the One Belt One Road Initiative also has the potential to build stronger ties in the region and provide new leadership opportunities for Beijing. In the future—if regional tensions are wisely managed—this could lead to a more united Asia on international issues and strengthen the region’s collective leverage and geopolitical power.
Marlena Luhr is the Business Development Manager for Young Professionals in Foreign Policy and specializes in the practical applications of policy on the U.S.-Chinese relationship and its broader global interactions.
The opinions expressed in this article are the author's own and do not reflect the views of their employer or Young Professionals in Foreign Policy.
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