China is resuscitating the old historic trade route, the silk road, through a widespread infrastructure construction in Southeast and West Asia. It is known as the One Belt and One Road Initiative. “One Belt” refers to the maritime trade route starting from Venice, branching to Kenya, and ending at East China. “One Road” refers to the inland trade route starting from Beijing and reaching western European cities such as Paris.
The magnitude of the project is unprecedented. Combining both maritime and inland trade route, the initiative crosses three continents, totaling over 20,000 miles. According to the State Council of the People’s People’s Republic of China, the initiative is estimated to cost a jaw-dropping $10.6 trillion between year 2016 and 2020. To put the price of this mega project into perspective, the Chinese GDP in 2016 is 10 trillion dollars and the US GDP in 2016 is 18 trillion dollars according to the World Bank.
How is China going to pay for the initiative?
The Chinese GDP grew 6.7% in 2016. Though the economy is robust, the growth rate is lowering after 2007. According to the World Bank, the GDP growth rate in 2007 was 14%, more than twice the growth rate in 2016. Because of rising wages, China has become less and less competitive in manufacturing. International Monetary Fund projects that the GDP growth rate will continue lowering from 2017 and onward.
Without robust economic growth, China has to finance the initiative, borrowing money from international banks, its citizens, and possibly other countries. However, China already carries an unusually large amount of debt. According to the Economist, the Chinese national debt soared from 150% to nearly 260% over the last decade. Considering weakening economic growth and debt, lenders around the world would doubt China’s ability to pay its fair shares back.
So far, the State Council of China announced that the initiative will be financed by China Development Bank, the Bank of China, and countries along the trade route. The funds seem far short from the cost of the initiative.