What China’s Belt and Road has to learn from 1920s America

Perceptive China-watchers have observed that President Xi Jinping ( 習近平 ) has modelled his political mission on Deng Xiaoping ( 鄧小平 ) – even if his methods bear a whiff of Maoism.

Deng put an end to the turmoil of the Cultural Revolution and engineered China’s transformation towards socialist modernisation. Xi’s sweeping reforms and anti-corruption crackdown aim to engineer an analogous transformation that will deliver China to the cusp of a “moderately prosperous” society by the time of the Chinese Communist Party’s centennial founding in 2021.

In one notable respect though, Xi has broken with the Paramount Leader. Deng had counselled a 24-character strategy on his countrymen: “observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.” By contrast, Xi has not been shy to employ assertive diplomacy in support of an ambitious, long-term and strategic foreign policy.

No single political project personifies this more than the “Belt and Road Initiative”, which aims to resurrect the ancient Silk Road through infrastructure projects that will link Eurasian economies into a China-centred trading network. When two dozen or so heads of state assemble in Beijing for the Belt and Road Summit on Sunday and Monday, the magnitude of the imposing soft-power dimension of this “win-win” project that aspires to embed Xi’s “China Dream” within a “neighbourhood community of common destiny” will be on ample display. The BRICS Summit in Xiamen (廈門) this September will be a sideshow by comparison.

A variety of malignant motives, mainly economic, have been ascribed to the Belt and Road plan. It aims to channel Beijing’s allegedly manipulated reserve surpluses abroad, prop up the internationalisation of the yuan, unload China’s industrial overcapacity on neighbours, ensnare the recipient country in a cycle of debt, exploit the host country’s strategic resources and purchase their political affiliation along the way.

While these claims contain merit, the redeeming arguments are more compelling. China’s hard currency reserves are better put to use in hard infrastructure projects in developing countries than deposited passively in New York’s financial market. At a time of volatility in liquidity provision in the international monetary system, yuan internationalisation and the rise of another issuer of safe, short-term and liquid instruments is to be welcomed. Moreover, the bilateral yuan swap lines and dedicated trade payments and securities settlement infrastructure that Beijing has rolled out over the past half-decade will enable recipient countries to denominate their borrowings in local currency, thereby limiting costs and exposures.

Transferring industrial capacity, improving infrastructure and reducing transaction costs on the other hand will enable developing countries to jump-start a dynamic upward spiral of growth and development in sectors where they enjoy latent comparative advantages – on lines similar to China’s own industrial jump-start in the 1980s. A comparison of China’s and the US’ Eximbank (Export-Import bank) loans to Africa, meanwhile, belie the oft-repeated claim that the former is directed solely at natural resources. China Eximbank has contributed to almost all 54 countries in Africa – resource rich or poor – and displays no perceptible pattern of favoured client state lending. US Eximbank loans, by contrast, are concentrated in energy and mining and confined to a favoured few.

Finally, with developing and emerging economies forecast to account for 59 per cent of world GDP in 2018 (neatly reversing the average 59 per cent accounted for by advanced economies from 1980 to 2007), as per the IMF, the rise of an alternate model of development financing that is leaner, cheaper, quicker and more flexibly attuned to host country systems and requirements should be welcomed, not stigmatised.

Development economics aside, the most consequential effects of the Belt and Road will be in international relations.

The Belt and Road’s storied predecessor, the Silk Road, two thousand years ago ushered in an age of commerce and civilizational exchange and afforded a set of loose principles of order and self-restraint. The Belt and Road’s ‘open regionalism’, likewise, will showcase Xi’s determination to practice a “new type of international relations” that binds China’s extended periphery as far out as Africa in a win-win embrace. Purposeful translation of his optimistic assessment for peace and development will realise the long-delayed promise of south-south cooperation in the post-colonial age. With luck, it will also confine the fascination with Great Power transition ‘traps’ – particularly the ‘Thucydides Trap’ (in which an established power’s fear of a rising power leads them into a vicious cycle of competition and eventually war) – to the armchairs of zero-sum-minded historians and think tank specialists.

China’s re-emergence at the turn of, and the first few decades of, the 21st century bears remarkable parallels to America’s rise a century ago. Between 1890 and the early-1900s, the proportion of US manufacturers engaged in exports rose from less than a quarter to more than two-thirds, as the burgeoning surpluses of farms and factories were absorbed overseas. By the late-1910s and through the 1920s, the US became a prodigious exporter of capital as more than US $1 billion a year in loans surged out of New York. Nearly one-third as many foreign bonds floated on Wall Street as bonds of US companies.

As the Belt and Road becomes a conduit for the export of Chinese capital on as prodigious a scale as the US a century ago, its design and roll-out must also be informed by the cautionary lessons of that era. When boom had periodically turned to bust in the US economy and subjected many of her poorer hemispheric trade partners and raw material suppliers to simultaneous capital and commodity market shocks, Washington failed to provide the public goods (international development financing; recycling of capital flight; inter-governmental institutionalisation, and stabilisation loans, and so on) that could have placed a floor under the crash – and misery – overseas. China’s capital exports must avoid such boom-bust patterns and instead marry hard physical capital with soft technical know-how, managerial skills and local project ownership with purpose and patience.

During the next decade, China will replace the US as the world’s largest economic power. As it grows richer, it must assume the mantle of collaborative leadership and provider of global public goods. The Belt and Road is an appetising start but the proof of the pudding will be in its eating, as well as its ability to draw sceptical bystanders in the West and in Asia to the banquet.

A version of this article appeared in the South China Morning Post.