What causes empires to fall?
According to one influential view, it’s ultimately a question of investment. Great powers are the nations that best harness their economic potential to build up military strength. When they become over-extended, the splurge of spending to sustain a strategic edge leaves more productive parts of the economy starved of capital, leading to inevitable decline.
That should be a worrying prospect for China, a would-be great power whose current phase of growth is associated with an increasingly aggressive military posture and a tsunami of capital spending in its strategic neighbourhood.
Like the Soviet Union in the 1970s, China is coming to the end of a long labour-force boom, and hoping that an orgy of investment will keep the old magic going while stabilising its fraying frontiers. The success or failure of its Belt and Road projects – and the still greater sums it’s spending domestically – will determine whether the nation achieves its dream of prosperity or succumbs to the same forces that doomed the USSR.
The conventional worry about the Belt and Road initiative – an open-ended framework for an estimated $1.5 trillion of infrastructure projects over the next decade across Southeast Asia, South Asia and Central Asia – is that it will doom the recipients of its largess to a future as indebted clients of Beijing.
Failed projects like Sri Lanka’s Hambantota port may indeed be a way for China to quietly extend its strategic power around the world.1 But defaults on investments cause problems for creditors as well as debtors. The risk for President Xi Jinping is that the toll of all that misdirected spending gradually undermines the productivity growth on which China’s current might was built.
Consider some of the projects still on the drawing board. Think the $1.6 billion price tag Nomura Holdings Inc has put on Hambantota looks excessive? Then check out Kyaukpyu in Myanmar, where Citic Group Corp is leading the construction of a $9.6 billion deep-sea port and industrial zone to hook up with oil and gas pipelines built by China National Petroleum Corp.
There’s certainly a strategic logic here. China’s links to the western markets that consume its goods and the Middle Eastern countries it depends on for petroleum pass through a choke point in the straits of Singapore and Malacca, a worry for the country’s military planners. Building railways and pipelines to the Indian Ocean provides an alternative route west.
On the economics, however, the idea falls down. The gas pipeline to Kyaukpyu has barely run at one-third of capacity since it was inaugurated in 2013, and the parallel oil tube sat dry for years before the first cargo was loaded up last year – not a great return on the $2.5 billion spent building them. A 260,000 barrels-a-day processing plant at the end of the pipe in Kunming that’s about the size of the UK’s biggest oil refinery will be similarly underutilised unless more crude deliveries arrive at Kyaukpyu.
Or take the web of touted rail projects through central Asia which form a centrepiece of most maps of Belt and Road projects. Such plans misunderstand both the long history and basic economics of east-west trade, which has almost always been far more dependent on maritime transport via Southeast Asia, India and the Arabian Peninsula than on overland Silk Roads through the Eurasian steppe.
The disadvantages of land transport are compounded these days by the existence of giant container ships capable of carrying almost $1 billion of cargo at a time, and the variety of different track gauges across Asia which require costly and time-consuming transfers.
The value of freight between Europe and Yiwu, a much-touted overland rail hub near Shanghai, came to 2.27 billion yuan ($330 million) in the first four months of this year, according to China Railway Express Co. That’s about one third of what you’d get on a single mega-container ship, and there are hundreds of somewhat smaller vessels plying east-west routes. China’s top four ports alone process about the same value of cargo every three hours.
Western China accounted for about 19.5 percent of the country’s fixed capital formation in 2016, compared to 15.4 percent in its dynamic Tier One cities and Guangdong province. Less developed parts of central, northern and western China have swallowed up the bulk of fixed capital ever since 2007, according to official data.
That’s matched the end of China’s productivity miracle, too. Unit labour costs have outpaced productivity growth since 2008, meaning the economy has been growing less and less competitive over time, according to a report last month by the Conference Board, a research group. About 90 percent of China’s advantage over the US in terms of unit labour costs in 2016 was explained by currency effects alone, economist Siqi Zhou wrote.
China’s anxiety about its western fringes has many troubling effects. Compared with the hundreds of thousands of Uighurs who’ve been sent to re-education camps and the millions more under constant surveillance in Xinjiang province, wasted capital on transport mega-projects may seem like a minor problem.
It’s not, though. In a country where reliable economic data is thin on the ground and the number of people in work is now in absolute decline, the toll of ill-conceived investments risks eating away at the foundations of growth.
China’s rise this century was driven by its embrace of world trade and the coastal provinces most exposed to it. In this retreat inland, it’s sowing the seeds of decline.