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China is attempting to reshape global trade through massive development projects across the old Silk Road of central Asia. But some fear it will bring economic disaster. By Hamish McDonald.

China’s ‘One Belt One Road’ project a new journey to the West

At the Ruyi Garments Company factory, manager Zhang Qingkuan shows off an exciting new gizmo: a chamber with 72 cameras arrayed around its interior. Stripped to your undies, you can step in and the cameras size you up for a made-to-measure suit.

His computerised production could theoretically make you a suit in a couple of days, or several thousand suits, in a high-tech version of the 24-hour tailors who used to fit you out in Singapore and Hong Kong in more leisurely days of travel. The only difficulty would be that the factory is in the middle of China, close to the Tengger and Gobi deserts. The nearest airport, at Yinchuan, is not a popular stop on the way to anywhere.

Asked why Ruyi would locate a factory capable of turning out one million business suits a year for international brands such as D’Urban so far from the nearest big seaport – Tianjin, 1300 kilometres away – Zhang has a succinct answer. “Because the local government gives us many advantages,” he says, adding that these shave several percentage points off production costs.

Ruyi is the showpiece factory in a new city called Binhe being hastily developed close to Yinchuan, the sleepy capital of one of China’s smallest and poorest provinces, the Ningxia Autonomous Region. Its fragile grasslands and stony mountains, cut by the sinuous Yellow River, were once the sheep-grazing ground of ethnic-Han Muslims known as the Hui, who still make up 36 per cent of its 6.7 million people. 

Mutton still figures in local banquets, but industry and agribusiness including a massive wine industry and halal food processing are top priority. This drive started several years ago, but has since intensified as Ningxia finds itself ideally placed to benefit from Beijing’s latest development craze, the “One Belt One Road” or OBOR initiative of Chinese president and Communist Party chief Xi Jinping.

Xi, who took command in late 2012, introduced the idea in late 2013 on trips to Kazakhstan and Indonesia. A “Silk Road Economic Belt” would spread from China’s western provinces through central Asia and the Middle East to Europe. The second component, a “21st Century Maritime Silk Road”, would see ships plying from China’s eastern ports through South-East Asia and the Bay of Bengal before crossing the Indian Ocean to East Africa and looping up through the Suez Canal.

Party officials now mention it with a touch of the enthusiasm with which their forebears upheld Mao Zedong’s Great Leap Forward – perhaps in part because Xi, in nominating himself as China’s “leadership core” is now ranking himself with Mao and Chinese communism’s other great leader, Deng Xiaoping, as well as restoring full Leninist control, even to the point of reclaiming the term “comrade” back from the side of China that is pink rather than red.

“All levels of the Chinese government, from the national economic planning agency to provincial universities, are scrambling to get involved in OBOR,” notes the Lowy Institute’s Peter Cai in a recent study. China’s three big state banks have earmarked a staggering $1.56 trillion for hundreds of OBOR projects.

But what exactly is it? The plan involves industry springing up along the roads and railways of the central Asian “belt” and at ports on the maritime route. Some 70 nations say they will participate, the latest being New Zealand − wherever you are, you will be fitted in – and Xi will be gathering their leaders in Beijing next month.

To demonstrate, a train named the “East Wind” pulled into Barking, East London, on January 18 after a 16-day journey that trundled 12,000 kilometres through Kazakhstan, Russia, Belarus, Poland, Germany, Belgium and France with a load of household goods from China’s east city of Yiwu, the supplier of humble products to the Kmarts of the world. The economics of shipping this humble stuff by expensive rail rather than cheap shipping were not explained.

Analysts such as Cai list several purposes, among them helping to soak up the vast overcapacity left by China’s 4 trillion yuan ($770 billion) domestic stimulus to counter the global financial crisis. That boosted steelmaking capacity from 512 million tonnes in 2008 to 803 million tonnes in 2015, an increase equal to the entire steel output of the United States and the European Union.

But all the OBOR projects together are likely to use at best 25 million tonnes of steel a year, so the idea is to dismantle and ship out entire blast furnaces and factories for steel, cement, glass and other products in surplus. Thus China can help grateful member countries industrialise, while getting rid of some of its own most polluting factories.

In China itself, it’s hoped to lessen income disparity between the east coast and the far inland. On average, people in Shanghai are five times wealthier than those in regions such as Ningxia.

In addition, it’s seen as enhancing Chinese security, lessening dependence on the Malacca Strait choke point for its trade, showing off China’s new alternatives to the World Bank and Asian Development Bank − the Asia Infrastructure Investment Bank and the New Silk Road Fund – and creating a more benign periphery. At the time it was conceived, Xi’s initiative was a counter to Barack Obama’s “pivot” to Asia, now abandoned by Donald Trump.

Infusing the scheme is a strain of romanticism. As one Communist Party veteran explained it to me: “Marxism is important only inside the party. For the other people, it’s Chinese culture.” Xi hails from Xi’an, the ancient capital where the Silk Road terminated. It was the starting point of the 7th century Buddhist monk Xuanzang’s pilgrimage from central Asia to India to bring back sutras to enlighten his compatriots. His story, fancifully enhanced in the 16th-century novel Journey to the West, is beloved of Chinese readers to this day. The Japanese TV serial Monkey told it to the world’s children in the late 1970s.

Some of China’s bankers and economists are less than thrilled by the OBOR, though they have to express doubts cautiously. The post-GFC stimulus left banks with loans to government, businesses and households equivalent in total to 300 per cent of gross domestic product, many of them dud. Possibly in addition, local governments have uncharted liabilities from their borrowings.

To fund it all, the People’s Bank of China printed currency, raising money supply 30 per cent in one year and then keeping it growing at about double the 6.5 per cent rate of annual GDP growth. This has put downward pressure on the yuan, so Beijing is blowing China’s foreign reserves to defend the currency and stave off trade sanctions from President Trump. Already reserves have dipped below $US3 trillion from the peak of $US4 trillion in June 2014.  

Without this stimulus, economists say, China’s growth rate would be 3 to 4 per cent, thanks to slowing productivity growth and an ageing population. But with Xi heading into the next five-yearly party congress in November − when he gets a new term, his own team in the politburo and perhaps clearance to stay longer than the recent norm of 10 years − he feels the need to keep the foot on the economic pedal. Australia’s treasurer, Scott Morrison, will be grateful, as this is reflected in higher coal and iron ore prices.

A lot of economists are hoping that, once Xi feels secure, the People’s Bank will be allowed to stop the lending spree a year or so from now and lower the risk of a financial crash.

But replacing bad domestic lending with largesse on the Silk Road might make things worse. Few of the partner countries have investment-grade credit ratings. Some governments will pocket Chinese loans with no intention of paying them back. The belt and road also transits many dangerous places: one of the first projects, the $US46 billion “economic corridor” from Kashgar to Gwadar on the Arabian Sea requires 12,000 dedicated Pakistani troops for its protection. People in China’s west already resent relocation of polluting industry and power plants to keep the skies clear in Beijing.

In Ningxia’s Binhe new town, it’s all go, however. Empty new freeways and rows of empty high-rise apartments await the expected 20,000 residents. A decommissioned navy destroyer sits in a theme-park lake, having been cut into sections, brought up by road, and welded back together. In a “virtual sandbox” the size of a squash court, a 3D video of a verdant garden city depicts inhabitants working on “high-end” businesses such as cloud computing.

This all started before Xi’s vision, says Zhang Leqing, a Hui who is deputy president of the Chinese people’s political consultative committee in Ningxia. “Since the start of the One Belt One Road initiative, Ningxia can benefit a lot,” she said.

Others see it as a gravy train and an opening for capital flight that will further expend China’s savings. As the respected magazine Caixin asked in a daring analysis last July: “Will One Belt One Road become the overseas version of the wasted four trillion stimulus?”

This article was first published in the print edition of The Saturday Paper on Apr 15, 2017 as "A new journey to the West". Subscribe here.

Hamish McDonald
is The Saturday Paper’s world editor.  

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