Thu, May 18, 2017 page11

• ANALYSIS: Ambitious plan will require China to tighten its belt

  • By Christopher Balding / Bloomberg View
  • • 
    • 
    • 

  China’s recently completed conference touting its “One Belt, One Road” initiative certainly looked like a triumph, with Russian President Vladimir Putin playing the piano and Chinese leaders announcing a string of potential deals and massive financial pledges.

  However, underneath all the heady talk about China positioning itself at the heart of a new global order lies in uncomfortable question: Can it afford to do so?

  Such doubts might seem spurious, given the numbers being tossed around. China claims nearly US$900 billion worth of deals are already underway, with estimates of future spending ranging from US$4 trillion to US$8 trillion, depending on which Chinese government agency is doing the talking.

  

  Chinese President Xi Jinping speaks at a news conference at the Belt and Road Forum for International Cooperation at the Yanqi Lake International Convention & Exhibition Center in Beijing on Monday.

  Photo: AFP

  At the conference, Chinese President Xi Jinping (習近平) pledged another US$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 will be difficult to fulfill without clashing with the country’s other objectives.

  The first question is what currency to use for all this lending. Denominating loans in Chinese yuan would accelerate Beijing’s stated goal of internationalizing its currency. However, it would also force officials to tolerate higher levels of offshore yuan trading and international price-setting. So far, they have shown little appetite for either.

  Additionally, countries along the route would need to run trade surpluses with China in order to generate the currency needed to repay such loans.

  Bloomberg Intelligence economist Tom Orlik has said that China ran a US$250 billion surplus with such countries last year. It would be mathematically impossible for Sri Lanka and Pakistan to repay big yuan-denominated loans when they are running trade deficits with China close to US$2 billion and US$9 billion respectively.

  Financing projects in US dollars is no panacea either. Unless China conducts dollar bond offerings to fund these investments, it will have to tap its official foreign exchange reserves, which hover at about US$3 trillion.

  That sounds like a lot. However, outside estimates suggest anywhere from a few hundred billion to nearly US$1 trillion of that money is illiquid.

  China needs nearly US$900 billion to cover short-term external debt and another US$400 to US$800 billion to cover imports for three to six months. Pouring additional billions into Central Asian infrastructure projects would only tie up money China needs to defend the yuan.

  Borrowers would need to run significant dollar surpluses in order to repay dollar-denominated loans. Obviously, not every country can do so, or undervalue its currency to try and build up a surplus.

  Beyond the specific mechanisms, it is unclear whether China has the financial capacity to lend at these levels to borrowers of dubious creditworthiness.

  As French bank Natixis SA has said, in order to finance US$5 trillion in projects, China “would need to see growth rates of around 50 percent in cross-border lending.” This would wreak havoc on Chinese creditworthiness and raise external debt from a “very comfortable” level (about 12 percent of GDP) to “more than 50 percent” if China cannot bring in other lenders.

  There are a couple of ways around these difficulties. First, Beijing could use this as an opportunity to fully liberalize the yuan, allowing it to flow out of China into countries targeted for investment.

  However, given Chinese leaders’ worries about a plunge in the currency and the impact on a rickety domestic financial system, this seems unlikely.

  Second, China could opt to bring in other countries and multilateral institutions to share in the task of financing projects. Chinese leaders have said they support this (just as they favor internationalizing the yuan); Xi has even welcomed involvement by rival Japan.

  However, in the past they have refused to cofinance projects with international institutions such as the Asian Development Bank and have been prickly about working with other countries, even supposed friends such as Russia, on overlapping projects.

  European countries refused to sign the final statement of the conference after it omitted language on corruption and governance.

  The US, too, has been standoffish. Enticing Western countries and banks to finance projects that have not been suitably analyzed and vetted will be an uphill task.

  There are two more likely, if less appealing outcomes. China could stretch public finances even further to fund projects its leaders admit will likely lose money. For the moment, they seem willing to lend in dollars, even if it ties up hard currency.

  However, it is almost certain that the amount of money that makes its way into “One Belt, One Road” projects will be significantly lower than advertised.

  Grand in ambition, but short on details, Xi’s sweeping initiative might be better thought of as a “philosophy” or “party line,” rather than a fixed commitment. One thing is for sure: It os going to be a lot harder than putting on a conference.

  Christopher Balding is an associate professor of business and economics at the HSBC Business School in Shenzhen, China, and author of "Sovereign Wealth Funds: The New Intersection of Money and Power."
• Most Popular

  • 1

    Senegal stun Morocco to win AFCON

  • 2

    Sixers down Rockets in overtime

  • 3

    Chinese social media influencer’s residency revoked

  • 4

    Al-Attiyah and Benevides are winners in Dakar

  • 5

    Harris leads Pistons past Celtics in thriller