Abacus | Why China’s ‘One Belt, One Road’ plan is doomed to fail

Facing a deep slowdown after years of investment-fuelled growth that culminated in a huge property and stock market bubble, the leaders of Asia’s largest economy come up with a cunning plan. By launching an initiative to fund and construct infrastructure projects across Asia, they will kill four birds with one stone.

They will generate enough demand abroad to keep their excess steel mills, cement plants and construction companies in business, so preserving jobs at home. They will tie neighbouring countries more closely into their own economic orbit, so enhancing both their hard and soft power around the region. They will further their long term plan to promote their own currency as an international alternative to the US dollar. And to finance it all, they will set up a new multi-lateral infrastructure bank, which will undermine the influence of the existing Washington-based institutions, with all their tedious insistence on transparency and best practice, by making more “culturally sensitive” soft loans. The result will be the regional hegemony they regard as their right as Asia’s leading economic and political power.

Consistent political will is needed to ensure one belt, one road initiative succeeds

If you think you’ve seen this movie before, you probably have. That could be an outline of China’s “One Belt, One Road” initiative, launched last year to great fanfare, and relentlessly promoted by loyal officials ever since. But it’s actually a description of a strikingly similar plan rolled out by Japanese prime minister Keizo Obuchi in the 1990s. That too promised to provide work for Japan’s recession-hit construction sector by building Japanese-funded infrastructure projects around Asia. And it even included a proposal – never realised – to establish an Asian Monetary Fund to lend to regional governments on easier terms than either the IMF or World Bank.

Unfortunately for Beijing, the precedent is hardly encouraging. From the start the scheme was plagued by bickering over conditions and allegations of corruption. A handful of infrastructure projects did get built, but the reality fell woefully short of Tokyo’s grandiose dreams. Far from cementing Japan’s economic ascendancy across Asia, the project left a legacy of bad blood, and marked the beginning of a financial retreat from around the region that Japan has only recently begun to reverse.

All the signs are that China’s One Belt, One Road plan will similarly fail in its main objectives. First, the idea that infrastructure projects in Central and South East Asia could absorb a sizeable portion of China’s excess industrial capacity is simply unrealistic. Consider steel. Currently China’s steel mills can turn out some 1.1 billion tonnes of the metal annually. Yet even with economic stimulus efforts in full swing, no one expects domestic demand to exceed 700 million tonnes this year. It is hard to imagine China building enough roads, ports and pipelines across Asia to use up the extra 300 million tonnes of capacity, especially when you consider that the World Steel Association forecasts demand in the European Union, the world’s largest economy, to be just 150 million tonnes this year.