Inside China’s Global Spending Spree
By Scott Cendrowski
Photograph by Teru Onishi for Fortune
December 12, 2016, 6:30 AM EST
The high-rise coastal city of Dubai plays host to all kinds of luxury oddities: indoor ski slopes, gold-bar vending machines, vast artificial archipelagoes shaped like palm trees. But six miles inland, something just as unusual, if far less gaudy, is taking shape—the
first coal-fired power plant in the Middle East.
The United Arab Emirates, to which Dubai belongs, need to diversify their energy mix. By 2030, Dubai hopes to balance natural gas and solar and get 7% of its energy from coal. Its first step: a massive “clean coal” project. Workers broke ground in early November for a plant expected to be finished in 2023.
In this petroleum-dominated region, there isn’t much coal-power expertise. But that won’t be a problem for Dubai, thanks to help from unusual sources.
The nearly $2 billion project is backed by $1.4 billion in funding from the Chinese government and banks and is being built by Chinese construction crews.
Why such largesse for an emirate swimming in oil wealth? Because Dubai is one of the nations China is targeting as part of
One Belt, One Road, an ambitious
foreign-investment project designed to boost China’s trade and diplomatic ties with more than 60 countries in the Middle East, Europe, and Africa. China is opening up its checkbook for this group of potential allies: It’s committing $1 trillion through the program in the next decade—and as much as
$3 trillion over the long term—to huge infrastructure investments, in locations that stretch from China’s coast through the deserts of Xinjiang province and the steppes of Central Asia as far west as Spain and Scandinavia.
Already, nearly
$900 billion worth of projects are underway or planned, according to the China Development Bank, and the first ones are almost finished. A $2.1 billion thermal-power plant in Karachi should be completed by the end of next year, just 40 months after construction started.
One Belt, One Road represents China’s biggest overseas spending effort ever, a project that, adjusted for inflation, is at least
12 times the size of the Marshall Plan, the history-changing U.S. program that helped rebuild Western Europe from rubble after World War II. The effort is already seeding power plants, railroads, and pipelines in emerging-market countries starving for such backbone investments.
Just as with the Marshall Plan, there’s far more than altruism in play. China’s huge
state-owned infrastructure companies, hampered by their own country’s gradual slowdown, need projects that will keep their foundries blazing and their workers paid while the nation makes the transition to a less industrial, more consumer-driven economy. And Belt and Road (as China’s government has rebranded it) helps China earn diplomatic goodwill at a time when the U.S. and Europe appear less willing to invest in economy-building abroad.
The New Silk Road
Belt and Road has a historical precedent: the ancient Silk Road that for hundreds of years connected Chinese traders with those in the Middle East and Europe via the Eurasian steppes, Palestine, and Turkey. In an era of wagon caravans and sailing ships, those trading ties did little to extend a then-insular China’s geopolitical clout. But Belt and Road is intended to forge far more binding ties today.
The program, which was formally announced in 2013, is the brainchild of Chinese President Xi Jinping. Xi has already amassed power in military and economic affairs faster than any other modern Chinese leader, says Willy Lam, an expert on Chinese politics and a professor at the Chinese University of Hong Kong. Expanding China’s influence abroad is Xi’s next priority, and Belt and Road is designed to do just that. “It projects Chinese hard and soft power to places as far as East Africa,” says Lam, “and it bonds China with countries … that may otherwise continue to remain dependent on the U.S.”
Joe Ngai, managing partner of McKinsey’s Hong Kong practice, says the need for infrastructure in emerging markets in central and southern Asia and into Africa amounts to $2 trillion to $3 trillion a year. The Belt is the land-based component of Xi’s strategy to meet that demand. It’s a network of railroads, oil pipelines, and other projects that runs northwest from China through Kazakhstan and Russia. The Belt hits multiple Asian countries before turning west through Belarus and Poland into Europe—where it’s bringing investment to countries where post-financial-crisis austerity has crimped infrastructure spending.
The Road (somewhat confusingly) is a maritime route of investments to improve ports along shipping lanes, extending from southern China to Indonesia and west to Africa, the Middle East, and southern Europe. Many of those areas have already attracted intensive Chinese investment in the past decade, and some experts say that “Belt and Road” is merely a slick label added to existing Chinese policy. But the money promised to the new project is anything but superficial.
The famed Silk Road trading routes once connected China with medieval Europe. Today, the One Belt, One Road initiative is strengthening China’s ties to countries along the same routes—and the economic and geopolitical stakes are far higher. According to the Mercator Institute, the 65 countries that could eventually be connected by Belt and Road account for around 30% of the global economy. About $900 billion worth of projects are now either underway or in detailed planning stages, according to the China Development Bank; this map highlights some of the signature projects.
(High-resolution map, click to enlarge)
The Decision Makers
Chinese spending abroad for Belt and Road is expected to reach $100 billion annually over the next decade, and China has earmarked as much as
$3 trillion for it. The money comes from Chinese-backed development banks, China’s state-owned enterprises, and even local Chinese governments. The funding process is convoluted, but one leading player is the recently formed
Asian Infrastructure Investment Bank (AIIB), China’s answer to the World Bank; AIIB is starting with $100 billion to lend. China will be responsible for one-third to one-half of the bank’s financing, but its members include almost 60 other countries.
AIIB’s board is searching for worthwhile endeavors—and so is China’s domestic bureaucracy. “Provinces and cities have been assigned Belt-and-Road quotas [by the central government], and are busy sending delegations abroad to find projects,” Arthur Kroeber of the Hong Kong-based research firm Gavekal Dragonomics wrote recently.
It is essentially up to Xi’s administration to choose the projects. China’s central government decides the countries it wants to work with, and those countries nominate projects for funding. China’s selections reflect both commercial and political interests, analysts say. If the host country is important for political reasons, China may be willing to take losses on construction; if not, China is more likely to invest in collaborations that could eventually offer a positive return. Belt and Road’s political elements were evident in late October when brash Philippine President
Rodrigo Duterte, who has disparaged both President Obama and Pope Francis in his bid to push the Philippines away from old alliances, visited China to get in Xi’s good graces. Duterte’s delegation came away with $24 billion worth of funding and pledges for ports, mines, and railways.
The Money Trail
Some Belt and Road projects are already underway.
- A $23 billion high-speed rail line could someday stretch from China through Thailand to Singapore.
- In southern Pakistan along the Arabian Sea, two large coal-fired power plants are going up.
- A gas pipeline running from Russia to China through Siberia is under construction, with a price tag of more than $55 billion.
- In Europe there’s a massive Czech Republic canal project linking river basins from Poland to Slovakia and Austria that China and the Czechs are each funding with $1 billion investments.
Of the $100 billion a year spent on Belt and Road, about
50% will be used for raw materials like concrete and steel, according to Strategy&, the consulting arm of PwC. For China that’s essentially domestic stimulus: Top Chinese officials have noted that Belt and Road projects can soak up excess steel and iron from Chinese companies hurt by the waning of their nation’s building frenzy.
Another 30% to 40% of total spending will go toward construction, engineering, and high-tech equipment. Those phases will be led by Chinese
engineering construction contractors (EPCs), which have a lock on winning the lead business from China’s lenders. China’s goal is eventually to attract private investors in projects that are economically viable. Qatar’s
sovereign wealth fund, for instance, took a 49% stake in a Pakistan power plant project, while the Chinese builder Power Construction took the other 51%.
Read the full story at http://fortune.com/china-belt-road-investment/
ecember 17, 2016
