“It’s the economy, stupid” was the mantra that guided Bill Clinton to victory in the US presidential elections in 1992 and the maxim is worth repeating a generation later as the Chinese gear up for Belt and Road.

Most of the analysis of the plan focuses on its economic motivations, especially as China’s economy shows signs of growing at a slower rate (from over 10% only a few years ago to 6.7% in the first three quarters of 2016).

As the world’s largest trading nation, the Chinese need to do more to boost global commerce by reducing the costs and complexities of transporting goods. Spending on the construction of Belt and Road projects is part of a long-term strategy to pave the way for more exports of China’s goods and services, supporting its domestic economy for years to come.

The spending on infrastructure projects and the trade that follows in their wake should be self-reinforcing, with the marketplaces along the Silk Road prompting a virtuous cycle of capital investment and commerce. The impact for Chinese firms is going to be multi-phased too. In the first stage the larger state-owned enterprises are winning most of the major contracts to build ports, tunnels and power plants. But as the host countries start to benefit from the investment, their markets will open to a fuller range of goods and services, and the gains shouldbroaden to smaller firms in China, more of which are privately-owned.

$2.5 trillion

China’s target for annual trade with Belt and Road countries by 2025

If China’s GDP growth rate is slowing, won’t some of the momentum for Belt and Road be lost as well? Probably not, says research from HSBC, which highlights how Chinese investment has been growing overseas even as its economy loses a little steam at home. China’s contribution to global growth is more significant now than ever before, and the Chinese are responsible for almost a third of global investment. The composition of some of that investment has been changing, however, with the share heading into metals, mining and commodities in Africa and Latin America getting smaller. Instead Asian countries, and especially Belt and Road ones, have been getting more focus. In fact more than half of China’s overseas contracts in the first five months of 2016 were signed with nations on the Silk Road – an unprecedented proportion – and Xi Jinping announced in June that Chinese trade with Belt and Road participants had surpassed $1 trillion last year, accounting for a quarter of the country’s total foreign trade.

Direct investment from Chinese enterprises in 49 Belt and Road countries was close to $15 billion, up 18% on the year before, and growing at twice the pace of China’s overall investment overseas.

This is the kind of activity that should bolster economic growth for years and Beijing’s forecast is that China’s annual trade with Belt and Road countries will surpass $2.5 trillion by 2025, growing more rapidly than its trade with the rest of the world.

 

Silk Road cynics

Amid the blizzard of predictions on Belt and Road’s potential, it’s worth mentioning the dissenting views, including the concerns that the plan is too ambitious and that the Chinese will struggle to deliver it.

Although China’s economy is huge in aggregate, its gross domestic product per capita trails many of its Belt and Road partners, ranking it behind countries like Malaysia, Russia, Turkey, Kazakhstan and Thailand. Part of the point of Belt and Road is that it will boost incomes in China. But there is a mismatch between the size of the country’s economy and the prosperity of many of its people – or as HSBC’s analysts put it earlier this year: “The world has never seen an economy as large but as poor as China”.

Almost $8,000

China’s GDP per capita is on a par with Bulgaria and Botswana, according to HSBC

That may mean that Belt and Road’s backers will have to temper their expectations. Simply put, the Chinese authorities still have to lift the living standards of millions of their poorest citizens. It may be too much to expect them to pull up a huge portion of the global economy by its bootstraps as well.

On the flipside, some wonder whether Belt and Road will even move the dial in economic terms because China is already such a gigantic economy ($11 trillion of GDP in 2015, or about 13% of the global total). As Ben Simpfendorfer, the head of advisory firm Silk Road Associates, pointed out to Bloomberg last year, most of the countries in the plan have much smaller economies than the largest Chinese provinces. Guangdong, Jiangsu, Shandong, Zhejiang and Henan already feature in the Belt and Road top 10, for instance, joining India, Indonesia, South Korea, Turkey and Saudi Arabia. And China is already the leading trade partner for about half the countries on the Belt and Road list, Simpfendorfer says, which may make it harder for it to benefit dramatically from an upswing in commercial activity.

His prediction is that the smaller economies like Pakistan, Georgia and Bangladesh look likely to get the biggest boost.

 

Some sectors will be winners

That’s not to say that Belt and Road won’t be positive for large parts of the Chinese economy, especially for companies that exploit its opportunities.

In their public discussions of Belt and Road, Chinese policymakers have talked about the prospects for sectors like infrastructure investment and construction, and for exporters of equipment and heavy machinery. It is already clear that Chinese firms are going to be favoured by the banks that are funding Belt and Road projects. A study of the loans of China’s largest policy banks by Grisons Peak, an advisory firm in London, suggests that 70% of the cross-border lending has been made on the condition that Chinese companies are employed to do the work.

When Xi Jinping visited Uzbekistan in June, some 600 Chinese firms were said to be working there on 70 joint ventures in infrastructure and energy, financed by $6.5 billion of direct investment and loans from Chinese sources. He cut the opening ribbon on a railway tunnel built by a Chinese contractor during his visit, but this was just the beginning, he told the Uzbek parliament.

“The Belt and Road Initiative’s primary planning and deployment has been completed and is now stepping onto the stage of taking root and intensifying cultivation for sustained development,” he promised.

 

Swallowing the surplus

Another factor in Belt and Road’s favour is that it will help the Chinese to deal with a pressing problem on the home front: overcapacity in industrial sectors like cement and steel.

Senior ministers have said openly that they want more of China’s surplus steel to be used for Belt and Road business, and another option is that Chinese firms move some of their production closer to Belt and Road markets, like Hebei Iron and Steel, which bought a lossmaking steel plant in Serbia in April.

This isn’t going to save Chinese jobs in the immediate term but other steelmakers may follow suit, especially if it helps to defuse anti-dumping tensions in foreign markets.

Whether Belt and Road projects can swallow up enough of China’s surplus steel to make a difference is more debatable. Bloomberg’s best guess is that contracts for new pipelines, railways and power stations across Asia might increase demand for Chinese steel by 5% a year, which isn’t enough to offset the surplus plaguing the sector.

The prospects may be better for cement, where the Asian Development Bank is forecasting that 580 million more tonnes are needed every year for infrastructure projects in Asia alone, an equivalent of a quarter of China’s output.

China’s firms are going to win a large share of Belt and Road business, but it may be more the case that it buys time for its industrial sector to address the worst of its woes, rather than solving the problem of surplus capacity altogether.

Back to a point made by Simpfendorfer at Silk Road Associates: “To put it another way, Guangdong has a GDP larger than 60 Silk Road economies. That’s a big difference in scale. Yet if Guangdong can’t solve China’s overcapacity problems, it’s tough to see how exporting the country’s excess supply to smaller economies such as Kazakhstan or Pakistan will as they simply can’t buy that much cement or steel.”

 

Matters of strategy

Other proponents of Belt and Road have looked at longer-term horizons, highlighting how the plan is going to reshape China’s position in the global economy.

The Chinese are now the world’s largest energy consumer, for instance, and import massive quantities of oil and gas by sea. The country’s strategists worry about its energy security, especially that sea-bound supplies could be restricted at choke points like the Straits of Malacca or disrupted by tensions in the South China Sea. Hence the investment in the Pakistani port of Gwadar and the pipelines and highways that will carry oil and gas overland from the Middle East, linking Gwadar with Kashgar in western China, and reducing the time and distance to travel.

Investment in new gas and oil fields in Russia and Central Asia – and the pipelines to carry the energy resources back into China – will further reduce the reliance on sea-bound supply. And importantly, much of the focus is on natural gas, reducing some of the country’s dependence on coal-fired power, which has been carpeting its cities with smog and grime.

It’s also true that Beijing wants the renminbi to become a global reserve currency and that new organisations like the Asian Infrastructure Investment Bank will give it more of a say in international finance. Of course, the Chinese have been careful to describe Belt and Road as a cross-border effort. “The Initiative is China’s idea, but the opportunities it has created belong to the world,” assured Chinese foreign minister Wang Yi.

All the same, Belt and Road is clearly a part of China’s ambitions for a more active role in global affairs and some of its activity has alarmed its neighbours. In Central Asia the Russians have been promoting the Eurasian Economic Union as a rival grouping, while the Indians have watched cautiously as the Chinese invest in Pakistan and Sri Lanka. But none of the attempts to establish alternatives have generated the same momentum because they lack Belt and Road’s financial and economic heft.

The same can be said of the New Silk Road Initiative, Washington’s counter bid for influence in the region, which aims to connect the resource-rich countries of Central Asia with South Asia’s 1.6 billion consumers. Analysts say that the plan is never going to get the same traction as China’s plan, because the Americans aren’t putting the same kind of investment behind it.

Belt and Road is the geopolitical bet that today looks most likely to succeed, and the rest of the world knows it.