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Saturday, April 25, 2020
The Origin and Alienation of the Belt and Road Initiative
ANBOUND

As the most important geo-strategic plan in contemporary China, the introduction of the Belt and Road Initiative (BRI) has so far been nearly seven years old. During the course of seven years of development, while making considerable achievements in infrastructural development, the advancement of the BRI has begun to feel more and more resistance. Therefore, as one of the participants in the early policy formation process of the BRI, ANBOUND believes that at this critical juncture, it is necessary for us to make a comprehensive review of the development happened over the past seven years.

The first thing that needs to be clarified is that the most fundamental and strong background reason for the introduction of the BRI lies in promoting the optimization of China’s domestic economic development model, its economic structure, the industrial sector, the society, as well as solving the historical problems left over after the rapid development of the Chinese economy in 2000-2010. On top of this, the goal of the BRI is to avoid further confrontation between China and the United States and its allies through adjustments in the geo-strategic direction. It also tries to improve China's geopolitical environment and strive for development space. Specifically, since China's admission into the WTO in 2001, foreign trade has been one of the most important factors driving China's economic development.

With the rise in labor costs and the outbreak of the financial crisis in 2008, the growth model that is highly dependent on foreign trade has begun to show its potential problems. In addition, in terms of geographical environment, with the rapid rise of China's economic and military strength, the "China threat narratives" have become very popular in the West since 2009. Under such background, U.S. President Barack Obama announced in 2011 that the United States will "return to Asia-Pacific". Although "Asia-Pacific Rebalancing" is not a standard containment policy, it is an indisputable fact that China's surrounding environment is changing during this period of time. Under such circumstances, the BRI is a great attempt for China to use international economic cooperation to solve both domestic economic and geo-environmental problems. The fundamental purpose of the strategy is to improve China's geographical environment and optimize the domestic economic development structure by building "three communities (community of interest, community of responsibility, community of destiny)".

However, after seven years of development, the continued advancement of the BRI is facing increasing resistance. The development of the entire initiative actually deviates from the original strategic goal. ANBOUND defines this phenomenon as “the alienation of the Belt and Road”. The most typical manifestation of this alienation lies in two points. First, resource investment between the "Silk Road Economic Belt" (“Belt”) and the "Maritime Silk Road" (“Road”) is too unbalanced. In other words, the Maritime Silk Road involved too many policies and material resources. Second, the implementation of the BRI overemphasizes on “infrastructure connectivity”, making the original grand and all-encompassing national strategy degenerate into a simple superposition of “state-owned enterprises + infrastructure”. More important, the BRI alienation poses huge challenges to the development prospects of the entire project.

First, the unbalanced resources between the " Belt" and "Road" have caused the entire plan to lose its original geographical significance and brought unnecessary international pressure to China. As a traditional land power country, the development of the "Maritime Silk Road" is actually an attempt by China to integrate itself into the current "sea power" system. From the point of view of conforming to the flows of the world, this is understandable, yet this attempt will inevitably cause anxiety and attention from the United States, the world's largest sea power. At present, the United States and Europe are becoming increasingly concerned about the development of the Maritime Silk Road. In 2019, ANBOUND has observed that many “alternative solutions” from Europe and America for the BRI are in the pipeline. Once the United States and Europe reach a final consensus on China's future strategic intentions, China will likely fall into a passive situation of isolation in the international scene.

Second, the imbalance between the “Belt” and “Road” resource allocations prevents the northwest and southwest regions of China from fully participating in the BRI, which is not conducive to solving the regional development problems within the country. In fact, the problem of stability in southern Xinjiang in the past few years is related to this. What we need to realize is that the foundation of social stability lies in economic development. Due to the huge gap in development levels, western provinces in China must achieve a certain degree of policy support if they were to achieve leapfrog development and this policy support must go beyond the previous level. However, because the “Road” part of the BRI has not been fully developed, the impact of the BRI on these western provinces is still limited.

Third, the “state-owned enterprise + infrastructure” model makes the entire BRI less and less sustainable at the economic level and the risk of debt continues to increase. According to OECD data, as of the second quarter of 2018, China's non-performing assets in the BRI have reached USD 101.8 billion. Taking the Sri Lankan Hambantota Port as an example, although the existence of overseas ports does have certain strategic significance, from economic point of view, as of the end of 2016, the cumulative loss of the port has reached USD 340 million. In other words, the Chinese company actually took over a bad debt and still needs to find a way to solve the problem that the project itself is still not profitable. At the beginning of the project, there was indeed a problem in the market research for the project (such as demand has been saturated) and it is still unrealistic for Hambantota Port to turn a loss into profit in the short term. Similar cases are quite common in the current BRI.

Fourth, the current "state-owned enterprise + infrastructure" model does not provide much substantive help to solve China's domestic overcapacity, promote industrial upgrading and other economic legacy issues. This model also does not promote industrial upgrading and cannot provide much substantive help to other economic legacy issues. Taking the steel industry as an example, China's monthly steel production in June 2019 reached 87.54 million tons. Although it has fallen as compared with May, it is still at a historic high. In the same period, the steel output of the United States was only 7.514 million tons and that of the European Union was 13.641 million tons. That is to say, China's steel output was about 400% higher than the combined output of the U.S. and Europe. It is not difficult to see although China has consumed some of its surplus production capacity in the construction of the BRI, this consumption is mechanical and cannot provide sufficient power for the upgrading of industrial structure.

Combining the initial strategic background of the BRI and its current development, ANBOUND believes that the BRI is at a crucial point of decisive significance. The existence of "alienation" is an objective reality that cannot be ignored and it is possible to form a new set of international relations related to China, so that China's international relations are built completely on the basis of money. This is a very dangerous international relationship. It is very fragile, costly and also unbearable, unsustainable. Therefore, the central government of China has to address this problem squarely and make appropriate policy responses in a timely manner to make corrections and adjustments.

(The above content is excerpted from ANBOUND’s research report “The Origin, Development and Alienation of the Belt and Road Initiative”)

Final analysis conclusion:

In the past seven years of development, although China has achieved extraordinary results, the existence of "alienation" in the BRI is also a fact that cannot be ignored. This "alienation" may evolve into the "new normal" that China will face in international exchanges in the future, allowing its international relations to be built completely on the basis of money. This is a very dangerous international relationship. It is very fragile, costly and also unbearable, unsustainable. Therefore, the "alienation" of the BRI has to be given sufficient attention and correction.

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