The New Silk Road: The Global Ambitions of the Chinese Economy

In the month of May this year, in Beijing, before almost 30 heads of state and government and more than 1,000 delegates from 130 countries attending the Belt and Road Forum for International Cooperation, Chinese President Xi Jinping spoke to a meeting titled “The Belt and Road Forum for International Cooperation” to announce a major project that involves the construction of a “New Silk Road” through 65 countries. The intention is clear. By reviving the idea of the ancient “road” that joined East and West from the 2nd century B.C. to the 15th century A.D., China wants to be at the forefront of the future of globalization.

This project, “The Belt Road Initiative,” is also known by the acronym BRI. The idea is to develop infrastructure and thus economic and trade relations via two routes: over land, from China to Europe, passing through Central Asia and the Middle East; and by sea, from China to the Mediterranean, passing by South Asia and East Africa. The cost involved is enormous. Beijing plans to invest 1 trillion euros over the course of a decade.

Work has already begun. China is in fact building a rail line in Laos, introducing a high-speed train in Indonesia, and opening a “corridor” in Pakistan that will reach the Arabian Sea. In Europe, where the Chinese multinational company Cusco has multiplied container traffic at the Greek port of Piraeus, Beijing financed the rail line between Serbia and Hungary.

The pattern repeats itself. China provides assistance to countries with a serious lack of infrastructure and little liquidity. It finances roads, ports and railways built by Chinese enterprises that facilitate expansion of Chinese trade, and at the same time it spurs the growth of those economies. Without infrastructure, there is no development.

Zhang Yunling, director of International Studies at the Chinese Academy of Social Sciences, recently stated that it is a Chinese idea with Chinese characteristics that will promote cooperation between different countries and drive the progress of globalization and multilateralism, favoring the emergence of new economic powers. Yunling did not hide the fact that the plan will help channel abroad overproduction in Chinese sectors that have been damaged by the slowdown of the domestic economy, like steel, aluminum, construction and heavy industry. Lastly, he specified that China does not have colonial aims and does not seek to export its own model.

To finance these investments China will rely on its great economic power and enormous currency reserves. The government of Beijing has established a special fund and led the creation of the Asian Infrastructure Investment Bank (AIIB) that will allocate a significant part of its loans to BRI projects.

A new Chinese colonialism?

The New Silk Road initiative reflects the clear geopolitical and geoeconomic vision of President Xi Jinping that he had first aired in October 2014. It represents an alternative to the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) through the creation of a large Eurasian zone rivaling those two accords in the Pacific and the Atlantic where the United States has played the leading role for some time.

The project has positive points and negative aspects, as well as considerable uncertainties. The methods of managing these investments have been criticized, and the economic feasibility of some projects in Central Asia is far from clear. The criticism and suspicions that have recently arisen regarding Chinese investments are of a more general nature and include various factors: many of the large Chinese enterprises that invest abroad are run by the state, the fear of loss of control over strategic sectors of the economy, and so forth.

Many countries are wavering between contradictory views: they aim to attract Chinese investment but at the same time are wary of it. Added to this is the worsening of the business climate for foreign enterprises in China. They criticize the asymmetry implicit in the freedom of action Chinese companies have in Western countries compared to the growing restrictions Western companies must deal with in the Chinese market. There is even talk of a new “Chinese colonialism.”^[1]

Will China really succeed in sustaining all of these projects? Although the times allowed by Chinese development banks are fairly long, the interest on debt could suffocate unstable economies that could find themselves with brand-new highways, railways and ports built by Chinese workers and used by that country’s enterprises with limited benefits for the local communities. Such a situation has been seen with Chinese expansion in Africa and Latin America, leading to considerable conflicts in certain countries.

Skeptics cite the considerable differences that separate the participating countries: the low level of transparency and the absence of concrete measures aimed at guaranteeing environmental and labor protections. Despite all of this, though, many view the idea “optimistically” because it does in fact represent a return to past Chinese activity. In the course of their history they have always been committed to trade, and the project fits into the current process of internalization of their enterprises. In terms of economics, China is promoting what is called the “Beijing Consensus,” opposed to the neo-liberal “Washington Consensus.”

The eternal appeal of China

China is undoubtedly one of the most fascinating countries in Asia, and for the West it has taken on almost mythical connotations ever since Marco Polo wrote of it in his The Million (or Travels of Marco Polo). China dazzles: in the past, this involved its cultural and scientific splendor; today, this is due to innovative choices, “counter-revolutions,” and ultimately, its pragmatism. Its spectacular economic transformation and rapid rise to become a leading global power continue to arouse media attention. No well-informed person can doubt that the future goes through China.

Let us consider the following data that comes from the World Bank. England doubled its GDP over a period of 60 years. Japan took 35 years, and South Korea 11. China doubled its GDP in nine years and then doubled it again in another nine years. From 1978 to 2008 the Chinese economy grew by an average of 9 percent each year, unprecedented in history. Thus the per capita income of the most populous country in the world has been multiplied by five.

If we consider the poverty level established by the World Bank (one U.S. dollar per day), 60 percent of Chinese were poor in 1978; by 2001 the figure was down to 8 percent. This means that in a quarter of a century between 400 and 500 million people were lifted from absolute poverty. The rise from poverty of so many people in such a short time had never happened before. The World Bank concludes that China has done in one generation what for most countries took centuries.^[2]

Peter Woo, president of the Hong Kong Trade Development Council (HKTDC), has noted that China is often compared to Japan in the 1950s. The difference, however, lies in the fact that Beijing, Tianjin and the province of Shandong by themselves are as big as Japan. Shanghai and the surrounding provinces (Zheijang and Jiangsu) make up another Japan. And Hong Kong and the province on Guangdong, centered around the capital Guangzhou (on the Pearl River estuary), make up a third Japan. This means that China is equal to “three Japans from the 1950s, with more than one billion people.” Lee Kuan Yew, the man who established Singapore’s prosperity, predicted that China would have success not only like Taiwan, but 50 times more.

Zhu Rongji, when he was the premier of China, was credited with the country’s success in becoming the world’s factory. Today we get the feeling that most of what we buy is produced in China. Thus the Asian giant has accumulated trade surpluses reaching a record of 3.35 trillion yuan (approximately US$505 billion) in 2016.

All of this is happening in a country that for many centuries was the richest and most advanced in the world. We are in fact certain that China, for most of the first millennium and up to the 15th century, had the highest level of per capita production in the world. The country was the cradle of great discoveries, and as late as 1820 its production represented 30 percent of the total produced on the planet.

The fall of China essentially began in the 18th century, when it missed the train of the Industrial Revolution. The Second Opium War provide an exact image of what happened, of how China was left behind: the English ships made of steel sank the wooden Chinese ships. The experience was traumatic, and it took China a long time to recover. From that point on, it tried to make up for lost time, to return to the level of the most advanced countries.

There were three great attempts: the failed one of the last imperial dynasty (between the end of the 19th century and the start of the 20th); the Chinese Republic founded by Sun Yat-sen (1925-1949), which also was unsuccessful; and the attempt by Mao Zedong, who despite having declared when the Communist Party came to power on October 1, 1949, that he intended that China regain its national pride after the humiliation of colonialism, not only failed to spark progress, but failed spectacularly. It should be stressed that this failure translated in at least 30 million deaths, triggered by the Great Leap Forward at the end of the 1950s; a failure only in part “offset” by the health and education policies that may have provided a basis for subsequent growth.

The Chinese model of development

It was Deng Xiaoping who eventually found the formula for the modernization of China. He came to power in 1978 at the age of 73. This was only possible in China. The Chinese say that before 60 a man does not know what he wants. Since then we have seen the emergence of China as a great power, a process that can be compared only to that of the irresistible rise of the United States in the second half of the 19th century.

Deng Xiaoping decided to bet on the market economy, to reform the economy and open it up to the outside world. His thinking was very simple. He started from a question: what is communism? And an answer: communism must give to each according to his needs. Thus he said it was necessary for China to be a very rich country, to produce a very large pie. For him it was clear that with the system of planning borrowed from the Soviet Union, the Chinese would be able to produce only a very small pie, and would never be able to give to each according to his own needs.

The first thing to do to reach the communist ideal was thus the development of productive forces. This, and only this, is the necessary initial phase of socialism. As a consequence, anything that leads to economic development is acceptable. It is superfluous to ask if it is socialist or not. Furthermore, this phase should last at least 100 years. Thinking in terms of centuries reveals the typical concept of time of the Chinese. Once, Henry Kissinger asked then-Premier Zhou Enlai his opinion of the French Revolution. He responded that it was too early; he could not yet judge it.

Nevertheless, it does make sense for us to study recent history of China. The economic miracle of East Asia has left us two important lessons: the first is that economic development is possible; the second is the importance of the role that governments play in that process. Mainland China made great use of this second lesson.

It would be difficult to imagine the extraordinary undertaking of the Chinese economy if it had not taken place under our eyes from 1978 to today. In this period China was transformed from a practical autarky into the most feared competitor on international markets. The fact that this took place in a country where the right to private property was entirely absent, at least until recently, and that it was led by a Communist Party, heightens the enigma.

The Chinese road to the market economy: a “visible hand”

The experience of China offers irrefutable proof of the fact that globalization can be a true godsend for poor nations, but at the same time it represents the strongest argument against the ultra-liberal orthodoxy dominant today that extols financial globalization and deep integration through the World Trade Organization (WTO). Curiously, it was the ability of China to protect itself from the global economy that turned out to be decisive in capitalizing on its efforts to construct a modern industrial base that, facing the challenge of the global markets, has been successful.

We have already mentioned the great change that took place when Deng Xiaoping and the other post-Maoist leaders decided to turn their attention toward the virtues of the market. They did this gradually, systematically and carefully. They did not suddenly dismantle the planning system, and thus avoided a collapse of production, as had happened in the countries of Eastern Europe and the Soviet Union.

Their great insight was to understand that the institutions that would sustain the markets and that needed to be built would have to possess typically Chinese characteristics. They refused to follow the majority trend of European and American economic strategies – favorable to a liberalization of markets to free them from any restrictions – because they felt this was in open opposition to the principles of the Communist Party. Thus the Chinese leaders experimented pragmatically with some alternative institutional systems, able to overcome limits, adapting to local conditions.^[3] These innovations achieved considerable success and effectively transformed a weakness into a point of strength.

The reform of agricultural planning and local government enterprises

In 1978 the Chinese economy was essentially rural. One of the fundamental problems its leaders had to face was how to stimulate the farmers in a system in which the state set all prices and dictated the quantity of grains to be produced and delivered, as established in the five-year plan. Farmers were organized into communes and could not sell anything they produced on local markets. The government took the products and then distributed them to workers in urban areas.

This system had the advantage of ensuring supplies for the state without costs. The negative aspect was that in practice the farmers had no incentive to produce more and draw greater profit from the land. A Western-trained economist would have recommended the abolition of planning and the elimination of any price controls. But if deliveries did not meet quotas, urban workers would not have their rations at good prices, and the government would lose an important source of income.

The Chinese solution to this problem was to create a parallel market alongside the planned one: the communes were abolished and the control of agriculture returned to families, although the land remained the property of the state. Mandatory deliveries of grain at controlled prices were maintained but farmers were free to sell excess produce on the market.

This double system offered farmers the typical incentives of a market system without depriving the state of its proceeds and urban workers of good food at acceptable prices. Agricultural productivity grew considerably and this induced the first phase of growth in China starting in 1978. Having obtained this surplus, China had taken the first step on the path toward development. Abundant, adequately trained labor made a better future possible.

Another challenge was how to achieve coexistence between the property rights necessary in the market and the fact that the state remained the only owner of the means of production. Chinese ingenuity found a solution: enterprises could belong to local governments, those of cities and towns. They began to produce a series of consumer goods and capital goods, and became the cutting edge of Chinese economic growth from the mid-1980s to the mid-1990s. Local governments were enthusiastic because their shareholdings generated significant income.

At the same time – and this was decisive – the local authorities left private entrepreneurs and employees broad freedom, allowing them property rights, although their definition was vague.^[4] At the end of the 1990s, after the Chinese economy had quadrupled in size, most of those enterprises were privatized.

A heterodox liberalization

The strategy with which China opened its economy to the world did not follow traditional principles. The country did not eliminate the limits on quantities of imports, did not reduce customs duties, and did not allow the convertibility of its currency. In short, it chose to open up very gradually, and significant reforms were implemented only after economic growth was already consolidated.

Chinese leaders understood that the elimination of trade barriers would cause many state enterprises to go bankrupt and would not succeed in stimulating new investments. They found it convenient not to affect the conditions of growth and employment because this would have threatened social stability. They experimented with alternative mechanisms – in particular that of special economic zones – to generate exports and attract investments starting from those areas. The enterprises in the zones operated according to different rules to those applied in the rest of the country; they had access to better infrastructure and could import production factors exempt from any duties. This provided incentives for investments aimed at exports, without undermining the position of the state enterprises.

Then something crucial happened immediately: the extraordinary transformation of the productive capacity of the Chinese economy. Starting with its abundant, well-trained workforce, China produced technologically advanced products with high added value. Nobody would have expected this from a country that was very populous, but essentially poor. Nobody believed that China could do it. Yet at the end of the 1990s, Chinese exports resembled those of a country with per capita income three times its actual level.^[5]

However, this was not only the result of natural processes led by the market, but also of specific governmental actions. In sectors like consumer electronics and automobile parts the Chinese economy saw a very rapid and sensational growth of productivity, reaching the level of countries with higher incomes. In this way China was able to avoid the fate of a country only able to assemble components.

Foreign investors played an essential role in the evolution of industry. They were the ones who introduced new technology to China. They were always welcomed, but on the condition that their goal was to promote national capacity. The government adopted various policies to ensure that technology transfer actually took place and that strong national actors emerged. At the beginning, the government relied on the best state-owned enterprises, but then introduced a broad range of incentives and disincentives. The Chinese internal market was protected, to attract investors who sought a broad base of consumers, but at the same time it saved on costs.

Given the scant protection of intellectual property, domestic manufacturers were able to reproduce foreign technology through the process of apprenticeship, which entails recourse to “reverse engineering”^[6] without having to fear criminal penalties. The cities and provinces soon stimulated and supported the development of large industrial centers.

However, a considerable number of enterprises created due to government intervention went bankrupt in this process. There was always a problem of coordination between national departments and the various levels of government. This led to difficulties in Chinese policies, but without a doubt the final result was positive. Perhaps the best example we can cite is Lenovo. Founded by Liu Chuanzhi in Beijing in 1984, in 2005 it purchased the entire personal computer division of IBM. Would it have able to do that without financial help from the People’s Republic of China?

At the beginning of Chinese industrialization, many of these policies would have openly conflicted with the regulations of the WTO. Those regulations prohibited subsidies for exports and any discrimination in favor of national enterprises. The fact is that at the time, China was not part of that international organization. The Chinese were not bound by outside rules in the management of their commercial and industrial policies, and could act freely to promote industrialization.

China joined the WTO in 2001, only after having created a solid industrial base that by that time, for the most part, no longer required protectionist measures. As a consequence, it significantly reduced its customs duties: from levels over 40 percent in the 1990s down to single-digits. Many other industrial policies were then gradually eliminated.

But the story does not end here. China was not willing to allow the fluctuations of international markets to determine the fate of its industry. Thus the country began to rely heavily on competitive exchange rates to effectively subsidize industry. By intervening on the currency markets and remaining detached from short-term capital flows, the Chinese government avoided the revaluation of its currency, which would have been the natural consequence of its economic growth.

The explicit industrial policies gave way to an implicit industrial policy, conducted through a depreciation of the currency of approximately 25 percent in recent years. This represented a similarly effective aid for export-oriented industries and those that competed with important products. Once again, China adapted the rules of globalization to its specific needs when it recognized that the free floating of its currency and freedom of capital movements would not help its economic growth. The government merely adjusted its actions to its understanding of these factors.

The Chinese threat

The absence of most Western leaders at the Beijing event presenting the Belt Road Initiative highlighted the suspicion that this vast initiative arouses in the rest of the developed world. On the occasion, Chinese President Xi Jinping used a poetic image, saying that the opening to the markets is like a butterfly that leaves its cocoon: a phenomenon accompanied by pain, but for the purpose of creating new life. At the Annual World Economic Forum in Davos, Switzerland, in February 2017 he urged world leaders to say no to protectionism. He claimed that following the path of protectionism is like closing oneself in a dark room that keeps out the wind and rain, but also the light and air. He stressed that nobody would win a trade war, and promised that China will keep its doors open, not close them, expressing his hope that other countries would also keep their doors open to Chinese investors, with equilibrium in relations.

Today developed countries consider China a true threat. Yet they need to see the situation objectively. The Asian giant remains a poor country, with per capita income between one-seventh and one-eighth of that in North America, and is equal to current levels in Turkey or Colombia. China has grown frenetically: prosperity is abundant in the coastal regions and large cities, but the vast western areas are still awaiting growth and development. If China has already become such an important and threatening economic power with so much left to do, imagine what it will be in the future, once all of its vast regions have been developed!

The country does not lack problems, but is actually overflowing with them. State enterprises require reform; both the government and private sector are laden with debt; economists have estimated that growth must be kept at above 8 percent per year to avoid an increase in unemployment; imbalances between individuals and regions that continue to grow must be addressed; there is wide and deep corruption to combat; the long-lasting dispute with Taiwan requires resolution; and the country must take care of the considerably damaged environment.

At the same time, the policies of China are provoking strong reactions, like the sudden protectionist turn of the Trump administration in the U.S. To properly evaluate the situation that has been created with the economic rise of China we must first of all recognize one fact: great masses of consumers around the world have benefitted from all that China produces, because despite having low purchasing power they have succeeded in gaining access to desired goods at affordable prices. Many poor countries see the Chinese model as a hope for their situation, and reflect on their ability to reproduce it in their own way.

There is also more. The aggressiveness of China on trade has provoked a growing number of disputes. At the beginning they disregarded product safety, and then failed to respect patents and property rights. There are also state subsidies, currency manipulation and restrictions of access to its market. Chinese exports are considered the principal cause of middle-class salary stagnation in the United States. The enormous trade surplus of China led the 2008 Nobel Prize winner in economics, Paul Krugman, to peg the real cost for the North American economy at the loss of over 1 million jobs. In addition, China is universally charged with brutally violating human rights in its hunt for natural resources in Africa.

The question that seems to represent the worst threat in the immediate future regards the enormous trade surplus of China. The fact is that, by gaining an increasing market share for various products in the world, China increases the demand for their production, but at the same time blocks demand for production by others; and this has serious repercussions on the health of the manufacturing sectors of other countries.

The moral of the story is clear: trade imbalances have always been fertile ground for protectionist policies, and we are now seeing such a scenario. Thus the current model of globalization is called into doubt not only on a theoretical level but also on a political level.

Integrating the Chinese economy in a governed globalization

Is there a solution to this problem? If there is, it will not be easy, unless China begins to channel its production also within its own immense market. China’s exchange policy with a depreciated currency is undoubtedly a strong tool for trade. It is estimated that if the renminbi^[7] were to rise to its market value, Chinese growth would fall by two percentage points, going below that threshold of 8 percent that is the indispensable goal for its leaders.

The great task the global economy must face is to reconcile the considerable differences in the current Chinese model with the values and institutions of the West. Some believe in convergence, that economic growth would make Chinese society more Western, more liberal, more democratic. Yet the Chinese have entirely their own way of conceiving all aspects of life; and the more power they acquire, the more they will fight for a world order that better reflects their views.^[8]

Globalization undoubtedly must be managed, and China is an essential participant in this process. Deng Xiaoping said that once the country developed, the time would come for communism. Is this what the current leaders have in mind? Many think that due to their number, ability and patience, the Chinese will ultimately dominate the planet. The unstoppable development of what is still named the “People’s Republic,” with its peculiar combination of political authoritarianism and market economics, causes alarm. But there have always been Cassandras who warned of the Asian danger. Napoleon himself is said to have claimed that if danger has a color, that color is yellow. But is this not perhaps an exaggeration?

One thing is certain: if the relative position of the United States were lost, there would be consequences for global economic stability. The hope is that the Chinese economy can be integrated in a sensible way in a process of globalization that is truly managed well.

^[1].B. Larmer, “Is China the World’s New Colonial Power?” in The New York Times Magazine (https://www.nytimes.com/2017/05/02/magazine/is-china-the-worlds-new-colonial-power.html?), May 2, 2017.

^[2].cf. S. Chen – M. Ravillon, “China’s (uneven) Progress against Poverty,” in Journal of Development Economics 82 (2007) 1-42.

^[3].cf. Y. Qian, “How Reform Worked in China,” in D. Rodrik (ed.), In Search of Prosperity: Analytic Narratives of Economic Growth, Princeton (NJ), Princeton University Press, 2003, 297-333.

^[4].cf. M. Weitzman – C. Xu, “Chinese Township-Village Enterprises as Vaguely Defined Cooperatives,” in Journal of Comparative Economics 20 (1994) 121-145.

^[5].cf. D. Rodrik, “What’s So Special about China’s Exports?” in China & World Economy 14 (2006) 1-19.

^[6].“Reverse engineering” is the process of structural and functional analysis of an object or device for the purpose of producing a similar product.

^[7].The official name of the Chinese currency, the yuan.

^[8].8. cf. M. Jacques, When China Rules the World: The End of the Western World and the Birth of a New Global Order, New York, Penguin, 2009.