China's plan to build economic links with its neighbors can only work if companies are left to make decisions based on what is profitable
President Xi Jinping has proposed the "one belt, one road" strategy to promote regional economic cooperation through developing the New Silk Road Economic Belt and the 21st Century Maritime Silk Road. Many people have embraced the strategy because it could be another way for the country to open up. It is also an attempt for China to shoulder its responsibilities to the international economic system.
There are, however, some concerns. Foreign analysts worry about the country exporting the so-called China Model and turning Asia into an affiliated economic zone. There is also a concern China will disturb the international economic order by investing overseas through the Asian Infrastructure Investment Bank (AIIB) and other institutions. Domestic experts say that China, as a middle-income country, still has many poor people and has to focus on developing its own economy. They urge the government to be careful when investing its resources overseas.
We argue that China, as an emerging power, is attempting to use the new strategy to supplement the international economic order. The core of the strategy is boosting regional economic cooperation and development through infrastructure construction, a field where China has had a lot of success in recent decades. However, when the country wants to take its domestic experience abroad, it must avoid certain mistakes. It should avoid using the new strategy as a tool of cold war. If China tries to compete with the United States as a military power, it might lose opportunities for economic development. Also, the new strategy is not the international version of the China Western Development policy to develop the western regions of the country. Financial returns will not be secured by only relying on government investment. Overseas investment should avoid the difficulties that Japan faced in its early years. Most companies in China do not have the ability to invest abroad. If the government pushes them to do so, the results would be less than ideal.
China developed its economy over the past three decades while keeping a low profile. Things have changed. The country now has a large economy. Its economic output ranks second in the world if calculated by exchange rates, and has the biggest economy in the world if purchasing power parity is used.
The view that things are expensive when China buys and cheap when it sells is evidence of its pivotal role in the international economy. It is impossible for the country to maintain a low profile while developing its economy now. U.S. President Barack Obama has called on China to shoulder more responsibilities and not to be a "free rider." A large country allows other countries to take a free ride. In fact, the central government promised not to depreciate the yuan during the Asian Financial Crisis and stimulated economic growth amid the global financial crisis, actions that people around the world appreciated.
The international economic system has some flaws. There is no stable and reliable international monetary system. Since the 1971 decision to suspend the convertibility of U.S. dollars into gold, the U.S. Federal Reserve, with its large influence on global financial stability, is only accountable for U.S. economic stability. The Washington Consensus that the International Monetary Fund and World Bank have pushed has no substantial achievements in promoting economic development. Developing countries have larger shares of global output, and they still have difficulties expressing their opinions on significant economic matters. The U.S. subprime mortgage crisis prompted calls for reform of the international economic system. China joined in reforming the IMF and the system for supervising the international financial order, as well as establishing the G20 summit mechanism. However, for various reasons this has accomplished little.
The "one belt, one road" strategy is China's first independent proposal regarding international economic cooperation. The IMF and other institutions have also recently advocated investment in infrastructure, but their proposals have not been carried out. China has important experience boosting its economic development through infrastructure building in recent decades. It is one of the areas where China has comparative advantages, and it is taking this experience elsewhere. The strategy matches what countries in central, southern, southeastern and western Asia urgently want. Moreover, when China pursues economic cooperation with regions to its west, it will not risk conflict with the United States in the Pacific region, and thus it can stick to its peaceful rise. This is good for China and the world.
China has to avoid some things in pushing ahead with this strategy. First, the strategy should not be used a tool of cold war. Some scholars of international relations have said that China and Russia and Japan and the United States have formed two power groups in Pacific, and will compete for the right to make new rules. These scholars say China must strive to be the boss in the military field to secure its right to make rules and gain economic interests. Such cold war thinking starting all over again is extremely harmful. Other scholars have suggested that China not join the Trans-Pacific Partnership treaty, and until now, it has been unable to join the negotiations for trade agreement. China does not have the strength to challenge the United States. Though it is the second-largest economy in the world, its development level is quite low. The Soviet Union set an example for us, showing that without a strong economic basis, military power is a mirage.
China should continue to develop its economy and continue on its path of a peaceful rise. It has benefited from the current economic order, and as it assumes the responsibilities of a larger country, it will work to actively reform the current system with other countries and supplement it, not challenge the current one or replace it with another. Zhang Yunling, director of the International Studies Division at the Chinese Academy of Social Sciences, has said that we must "revamp and build the temple, not dismantle it."
Since the "belt and road" strategy is an international initiative, China should keep an open mind while carrying it out. It should deal fairly with Asian countries in developing the AIIB and the Silk Road Fund, and at the proper time welcome Japan and the United States to provide capital and make rules.
Second, the new strategy is not the international edition of the China Western Development policy. The government invested a lot in infrastructure building in the late 1990s. After about 20 years, only some regions out west have become prosperous. In general, western regions have seen no significant improvement. In the same vein, the government-led revitalization of old industrial bases in northeastern China and the economic rise in the central part of the country have also failed to reach their expected goals. There are various reasons for these setbacks, and a common one is that financial returns were not the key investment concern. The new strategy should avoid this problem. The Chinese government should not be the only one providing capital. Countries should cooperate with each other to choose projects. If the central government controlled all aspects of projects, it would also arouse the antipathy of locals.
Third, China should avoid the problems Japan encountered in its overseas investment. Japan has many high-end manufacturers operating very well overseas. In the 1980s and 90s, Japanese companies saw capital outflows because labor costs increased and the yen appreciated. High-profile financial and property investments prompted concern that Japan would buy the world, but it didn't. Some investments even failed. China is facing a similar situation. Some experts have compared Anbang Insurance Group Co. Ltd.'s purchase of the Waldorf Astoria hotel with Mitsubishi Estate Co.'s acquisition of New York's landmark Rockefeller Center in 1989. The notion that China is buying the world has also gained steam.
Will Chinese companies run into trouble?
The British economist John Dunning said developing countries import capital and developed countries export it, and the economist Robert Lucas said low-income countries exporting capital is a paradox. Scholars have explained the two phenomena. When considering direct investment, Dunning's findings are still right because a country must have unique competitiveness to gain returns before it invests overseas. China has only two types of companies that are competitive: infrastructure builders and labor-intensive manufacturers. China has become the third-largest direct investing country, but more than half of its deals do not provide financial returns. In this situation, it would be worrisome for Chinese firms to follow this new strategy to invest overseas.
In general, the "one belt, one road" idea is a good international economic strategy, but in the current circumstances, it will have a difficult time succeeding. The government will play a leading role, but should not interfere too much in companies' decisions. It would be better for host countries to propose projects. Market mechanism should be introduced to secure returns for firms. The key to Chinese firms' overseas investments is solving problems in decision-making. Many state-owned enterprises did not have to shoulder any responsibilities when they failed in their overseas deals. Their blind spending was risky and had a hard time turning a profit, wasting foreign reserves. Private companies have also had some issues when making overseas investments, but they learn from their experience quickly because they use their own money. The government and society should work to provide information and services to help reduce corporate mistakes.
Huang Yiping is a professor at Peking University National School of Development