By Michael Lelyveld
While China promotes its ambitious “Belt and Road” program for investment abroad, it faces increasing signs of economic pressure at home.
Since the country’s stronger-than-expected performance in the first quarter, government regulators have taken a series of steps to stave off economic weakening.
In April, the government launched the “harshest crackdown on financial risks in history,” according to the official Xinhua news agency.
The reaction to loose lending practices followed warnings on rising debt levels from the International Monetary Fund.
In May, the government struggled to contain damage from a downgrade of China’s sovereign debt by Moody’s Investors Service after the rating agency concluded that reforms would take a back seat to debt-driven growth.
In recent weeks, the People’s Bank of China (PBOC) said it would consider adding a mysterious “counter-cyclical factor” to its exchange rate formula in a move seen as artificially supporting the yuan.
Late last month, the China Securities Regulatory Commission (CSRC) also issued new rules against selling large blocks of shares to prevent sudden drops in the stock market.
Last week, the National Bureau of Statistics (NBS) released a mixed picture of the economy through May, with growth in industrial output for the month unchanged from April at 6.5 percent.
The service sector maintained relatively strong growth of 8.1 percent in May from a year before, but investment in the secondary industry, dominated by manufacturing, edged up only 3.6 percent in the first five months.
Foreign direct investment (FDI) in China fell 3.7 percent in May, marking the second monthly decline in a row.
Nonfinancial outbound direct investment (ODI) plunged 53 percent in the five-month period, according to the Ministry of Commerce (MOC), as regulators controlled outflows to keep capital from leaving the country.
Official and private Purchasing Managers’ Index (PMI) readings have straddled the line between expansion and contraction with a Caixin Media manufacturing survey falling below the equilibrium level of 50 to 49.6 in May.
Most signs suggest that the government expects a slowdown in the economy. On June 4, a Xinhua “economic watch” column admitted as much.
“Fresh data showed that despite an overall picture of stabilizing growth, signs of weakening momentum have emerged in the Chinese economy, stoking concerns that the rebound has lost steam and may slip into a hard landing,” it said.
The concern over a possible correction contrasts sharply with the expansionist message sent at China’s “Belt and Road Forum for International Cooperation” in mid-May, where President Xi Jinping called the initiative “a project of the century.”
The forum redoubled China’s commitment to its twin “Silk Road Economic Belt” and “21st Century Maritime Silk Road” plans, first announced in 2013.
Xi’s push to build infrastructure for trade routes from China to Europe and Africa, entails massive financial commitments of up to U.S. $1 trillion (6.8 trillion yuan) over the long term, according to estimates by Reuters and The New York Times.
“Chinese outbound investment is forecast to total [U.S.] $600 billion to $800 billion [4.1 trillion to 5.4 trillion yuan] over the next five years, a fairly large proportion of which will go into markets related to the Belt and Road Initiative,” said Ning Jizhe, vice minister of the National Development and Reform Commission (NDRC) planning agency in a summit preview.
Last year, China’s non-financial direct investment in the economies of countries on Belt and Road routes totaled U.S. $14.5 billion (98.6 billion yuan), accounting for 8.5 percent of ODI, the official English-language China Daily reported.
Totals depend on what kinds of investment and how many countries are included. The China Global Investment Tracker compiled by the Washington-based American Enterprise Institute (AEI) counted U.S. $86 billion (584.4 billion yuan) of investments in 64 Belt and Road countries from 2014 to 2016.
China invested U.S. $51.1 billion (347.5 billion yuan) in Belt and Road countries from autumn 2013 to July 2016, accounting for 12 percent of total ODI, according to another Xinhua report.
In the first four months of this year, China’s ODI in 45 countries related to the initiative reached U.S. $3.98 billion (27.0 billion yuan), the MOC said.
Yet, among the 29 heads of state and government leaders who attended the forum, there appeared to be little regard for the discrepancy between China’s foreign commitments and its economic concerns at home.
Although analysts say it is too soon to see an effect on China’s highly-publicized commitments to the initiative, known alternately as “One Belt, One Road” (OBOR), an impact could develop if economic troubles continue.
“If wealth does not start to expand again, China will face spending choices, perhaps impinging on OBOR,” said the China Global Investment Tracker.
Financed by private funds
AEI resident scholar Derek Scissors said the concern is not for commitments that China has already made, but rather for the expectation of massive investments to come.
“China will largely carry out the actual agreements it makes,” Scissors said in an email message. “It will simply not sign agreements in anything near the value being touted by some.”
Scott Kennedy, deputy director of China studies at the Center for Strategic and International Studies in Washington, said China has the capital to back up its commitments, despite the signs of weakening.
“Short of a financial crisis, China has the resources to pursue the Belt and Road and other external initiatives, such as acquiring advanced technology through corporate acquisitions,” he said.
“In any case, most of the Belt and Road projects will be financed by private funds from China and many other countries, not the Chinese fiscal budget or its state banks,” Kennedy said.
A book published this month by the Seattle-based National Bureau of Asian Research highlights the importance of Belt and Road as “Xi’s signature concept.”
It “can best be understood as an attempt to set the direction for China to achieve its ambitions as a preponderant regional power, in the context of mounting challenges in both the economic and strategic domains,” wrote senior fellow Nadège Rolland in China’s Eurasian Century? Political and Strategic Implications of the Belt and Road Initiative.
But AEI makes the case that OBOR relies heavily on construction contracts, most of which have been awarded to state-owned enterprises (SOEs). These, in turn, depend on bank loans, which may add to China’s debt problem.
China has won contracts for U.S. $135 billion (917.4 billion yuan) in construction projects under the initiative so far, according to AEI.
The MOC claims that China has signed contracts valued at U.S. $304.9 billion (2.1 trillion yuan) on Belt and Road routes between 2014 and 2016.
Either way, the overseas projects seem likely to spur SOE demands for finance.
“Of course, SOEs do not magically become efficient when they head overseas. In fact, operating overseas in developing countries is typically more challenging for SOEs,” AEI said.
So far, China’s new direct pledges made at the Belt and Road forum appear manageable. These consist largely of an additional 100-billion yuan (U.S. $14.7-billion) contribution announced by President Xi to the country’s Silk Road Fund.
But Xi said China will also “encourage” its financial institutions to conduct overseas fund business in the amount of “about 300 billion yuan (U.S. $44.1 billion),” Xinhua reported without specifying a time frame.
China Development Bank will set up a special lending facility valued at 250 billion yuan (U.S. $36.8 billion), while China Exim Bank will provide similar financing of 130 billion yuan (U.S. $19.1 billion), Xi said.
The mounting totals are impressive, but they are also reminiscent of world reactions to China’s previous “go out” initiative for overseas investment in the oil industry 20 years ago.
Then as now, China made huge bids for foreign projects with numbers that now seem small by today’s standards, promising to invest U.S. $9.5 billion (64.5 billion yuan) in oilfields and infrastructure in neighboring Kazakhstan.
The plans were withdrawn or delayed for years by the Asian currency crisis, but in the meantime, other investors were scared out of the market by China’s high bids.
China appears better prepared to pursue foreign ventures in the midst of an economic downturn this time. But if conditions worsen, China could again put its ambitions on hold.