THE BELT AND ROAD

INITIATIVE AGAINST THE

SLOWDOWN

Raúl Vicente Martín

18G9105
Abstract

During the last years the Chinese growth rate has surprised the whole world. However,
the past experience tells us there is no country in the world that has maintained through
the time such a good performance. The question arises even more important when the
stability of the most populated country on the world relies on it.

In this scenario, the Belt and road Initiative because of its size and important to the
world’s economics has the ability to change the trend, making the Chinese economy
overcoming its difficulties.

Key Words:

-Slowdown

-Steady state

- Belt and Road

-Chinese Economics.
Introduction

The People´s Republic of China accounts for almost one fifth of the population of the
world. Since the 1980’s a great part of this population has developed from poverty to a
middle income. All of this has taken place at a growth rate that made a lot of people
consider it, even nowadays, as an economic miracle.

However, no country ever in the history has maintained those high growth rates during
such a long time. As some scholars argue, an economy sooner or later will suffer a
slowdown on its growth rate.

Usually, countries overcome this situation or just adapt to the new growth rate. This
change highlights the fact that the economy has entered on a new phase of its
development. Yet, in the case of China, due to its size and characteristics, the issue can
be more problematic.

As political theory has stated, democracies have the advantage that just by holding
again elections, during or after a crisis, the new president will gain legitimacy. But for
China, as a country which doesn’t hold elections, the key for the government in order to
maintain its position is to provide both economic growth and security.

Also, as we have mentioned before, as the world’s most populated country, it would
have an effect over the world’s growth rate causing, most likely, an economic crisis.
Furthermore, providing the great participation of China in the international trade, it
would also deteriorate most country’s economies.

Since the possible implications are that huge, it becomes really important to examine all
those politics that can change what seems to be stablished by the fate. Here is where
appears the Belt and Road Initiative.

Therefore, the aim of this paper is, first, do a review of the factors that contribute to the
slowdown and other risks for Chinese economy, for secondly, examine if BAR can
help to avoid the decrease of the growth rate.

The structure that we are going to follow is the following: first we will make a literature
review from which we will get to know the risks of the Chinese Economy. Second, we
will present the major effects of Belt and Road Initiative and discuss if they are useful
to overcome those risk. Finally, in our conclusions we will wrap up everything to judge
if this new proposal can bring economical advantage
Methodology

The aim of this paper is to consider the possible causes of a future slowdown of the
Chinese economy to, immediately, judge if the belt and road initiative can help to solve
those.

For our purpose we will start by making a review of the literature regarding the
possibilities of a slowdown of the Chinese economy. This way, we will by using
deduction, extract the main economic problems and, considering, the main effects of
Belt and Road discuss if those can reduce the likelihood of the Chinese economy of
suffering a major slowdown on the growth rate.

However, due to the length of this paper we won’t be able to provide and empirical
study. Nevertheless, in the future as data availability improves this possibility can
become even easier. This way we would have a complete study.
Literature Review

Inside de economic literature we find very diverse studies regarding the slowdown of a
country. Usually, due to the path that the Economics Science followed this last years,
the main studies on this topic not just seek to provide a explanation of the causes but to
make some forecasts.

For those reasons that we have already exposed, China has been a usually studied
country. For example, Jane Haltmaier made some previsions of growth for the Chinese
economy in the future years.

Under some baselines assumptions, for this scholar, the growth rate in the year 2030
would be around the 6%. Yet, if we add other likely conditions as could be a reduction
of the share of the investment on the GDP, the a smaller effect of the labor-capital ratio
or a reduction of the share of manufacturing as a result of the bigger demand for
services, the growth rate will drop to 4%1.

Also, the economist Robert Barro using his famous convergence model estimate that for
the future the per capita growth rate will fall close to the 4-5% yearly. As is well known
from the point of view of this approach the main reason of the slowdown is the
decreasing returns to scale of capital.2

However, if we want to find a more complete explanation on the causes and the factors
that can influence a country as China to suffer a significant drop in the growth rate, we
should pay attention to the famous article wrote by Barry Eichengreen.

Here, the famous economist not just provides estimations on diverse countries, but also
studies in deep the Chinese case and, using a provit model, highlights those variables
that are more add likelihood to the slowdown.

According to his research, the main reason that affect every country for the drop of
growth rate is that once an economy arrives to a point, the chance of shifting employees
from less productive sectors, as agriculture, to most productive ones disappears. The

1
Haltmaier J. (2013), “Challenges for the Future of Chinese Economic Growth”,
International Finance Discussion Papers Number 1072
2
Barro, R. (2019). Economic Growth and Convergence, Applied Especially to China.
[online] NBER.
consequence would be that it becomes smaller the possibility of keep on increasing the
productivity without further policies.

Additionally, according to the author China, besides the general risk factors, present
other specific ones. The most relevant would be the low consumption rate, the aging
population and the rely on an undervalued currency.3

Low consumption rate would mainly hurt economies as local enterprises rely too much
on foreign markets. This means that the exposure to economic fluctuations in the major
trading partners creates a dependence on the state of the global economy, even though,
the local one doesn’t show other reasons for an economic crisis.

Secondly, the fact that Chinese population becomes older also comes to influence the
shifting of labor to more productive sectors since the stock of young workers keeps on
reducing.

Finally, the reason why we say an undervalued currency is a risk factor is the same than
a low internal consumption rate, that is the exposure to external shocks. This that may
works good in the early stages of industrialization becomes dangerous for the
maintenance of a high growth rate ones the country is close to the middle income.

Other problems that the author doesn’t mention could be the regional inequality, the
income inequality, the reform of the SOE’s, the danger of inflation and the trade
disputes.

What can BAR do to solve China’s economic problems?

Now, once we have stated the risks, the question we should address is whether The Belt
and Road initiative can solve some of those.

Speaking in general terms, the project has two sides: one based in the financing of the
new planed infrastructure and another that consist in coordination of policies of those
countries taking part. All of this pursues the target of building stronger links that can
boost the trade and development on the region.

3
Eichengreen, B., Park, D. and Shin, K. (2011). When Fast Growing Economies Slow
Down: International Evidence and Implications for the People’s Republic of
China. SSRN Electronic Journal.
According to some authors, this will be translated in four major effects for Chinese
economy: the increase of trade volume, a internationalization of the SOE’s, the
internationalization of the renminbi (RMB) and, finally, a better supply of raw
materials, mainly those dedicated for energy generation, to China.4

Therefore, taking this in account we can examine if they can solve any of the risk
related to the steady state.

Firstly, it is well known that China followed an imbalanced development since the
reform and opening up focusing on the coastal provinces and forgetting the
development of the western part.

Those provinces not only are less developed, but also were not that well connected to
the rest of the world as can be the eastern part. Furthermore, social conflicts are also
present.

However, as for this new initiative the countries of central Asia play a determinant role
in the development, regions as Xinjian will enjoy the benefits brought by the new
investments improving, very likely, the cross-border trade with its neighbor countries.5

Furthermore, the construction of the connection of China with Pakistan and the new
port of Gwadar will enhance connectivity with the rest of the world, attracting foreign
companies to do investments on the processing sector as the coastal part experimented
years ago.6

As those provinces make use of those new opportunities, the gap of development can
shorten as a result of higher growth rate they can accomplish since they have a lower
starting point.

Yet, the effect of a better facilities for trade doesn’t only affect the exports but the
imports. As Chinese economy has improved the demand for imported goods has grown.

4
PIIE. (2019). China's Belt and Road Initiative: Motives, Scope, and Challenges.
[online] Available at: https://piie.com/publications/piie-briefings/chinas-belt-and-road-
initiative-motives-scope-and-challenges
5
Lall, S. V., & Lebrand, M. S. (2019). Who Wins, Who Loses? Understanding the
Spatially Differentiated Effects of the Belt and Road Initiative. Policy Research
Working Papers. doi:10.1596/1813-9450-8806
6
Pakistan's Gwadar Port: A New Naval Base in China's String of Pearls in the Indo-
Pacific. (n.d.). Retrieved from https://www.csis.org/analysis/pakistans-gwadar-port-
new-naval-base-chinas-string-pearls-indo-pacific
Better links with the rest of the world can make imports improve even more. This
according to some authors can also make the consumption rate boost.

Secondly, the SOE’s will have opportunities to go out as the construction and operation
of the new infrastructures and facilities outside of the country will require of the
Chinese participation.

Nevertheless, for those SOE’s that are used to act in a local market where the
government grants protection and the accountability is not really important, the going
out policy will suppose some serious challenges.

If those enterprises, as they do business abroad gain enough managerial experience and
knowledge about foreign market at the same time than, as a result of the demand for
accountability of local governments, they improve this aspect, the BAR can works as a
proxy of the reform of the SOE’s.

The logic of this can be to achieve changes but without changing the political pillars of
the country just by using the foreign markets.

Thirdly, as any project of this size the requirement of financing is rather big. The main
effort will come mainly of the Chinese part via the new investment banks created and
the already existing financial institutions.

The great amount of outflows of capital will shift the trend on the balance of capitals
from surplus to deficit. Yet, a great part of those investments, no matter if denominated
in bonds, credits or direct investment, will be denominated in Renminbi. This will give
space to the internationalization of RMB to become a reality.

By using Renminbi the Chinese enterprises will eliminate the bottlenecks hitting
companies in exchange rates, financing and debts,7

Finally, we will also see changes and opportunities in the sector of energy. Right now,
China is funding the construction of coal-fueled power plants in various countries, but
the implications go further.

7
Belt and Road boosts RMB internationalization. (n.d.). Retrieved from
http://www.china.org.cn/opinion/2018-01/12/content_50220034.htm
The main goal is to advance in the interconnectivity of the networks. This means
building networks within China as well as integrating with the existing ones generating
a grid that covers central Asia.

The result will be a better access of China to resources as gas reducing the dependence
on national coal and creating the necessary capacity to adapt to the future increase of the
demand as the society gets richer.

Furthermore, regarding electricity transmission this links will bring great advantages.
China, due to the huge investment on clean energy that has been already done, will
emerge as a supplier for the region. 8

8
Forbes.com. (2019). The China Belt And Road Initiative Could Help - Or Hurt - Clean
Energy In Emerging Economies. [online] Available at:
https://www.forbes.com/sites/energyinnovation/2017/12/04/the-china-belt-and-road-
initiative-could-help-or-hurt-clean-energy-in-emerging-economies/#d5e6da8506e1
[Accessed 25 May 2019].
Conclusions

After having examined the main effects of the Belt and Road Initiative we can conclude
that those will have a big effect on Chinese economy. We can consider this proposal as
another step on the opening up process without giving up the state control over the
economy.

By this new project the feasibility of a slowdown will be reduce or at least the level of
income at which this will take place will be higher. This will mean that the development
will arrive to more people and those are not going to be unprotected when the economy
faces serious problems.

By building stronger links with the rest of the world China not only will strengthen its
manufacture that are still vital to the country’s economy, but it is expected to become a
service-based economy, specially, in those more developed areas.

The internationalization of the RMB can make the Chinese financial system stronger
becoming a big source of wealth like in developed countries as United Kingdom and the
United States.

Also, the project goes in line with the upgrading policy that is being pursued from the
central government. The engagement of the SOE’s in the construction of railways,
power plants and other facilities shows to the world that China is nowadays much more
than the whole world’s factory.

Those sectors as railway and energy require of an advanced stage of technology. By

providing national enterprises those kind of opportunities in foreign markets, they will
be forced to use as best all their knowledge and technological capacity.

Nevertheless, the first requirement for all of this to happen is not economic but political.
The countries taking part on the projects need to reduce the risks associated with
corruption, bad government and political instability,

We can never forget that some of those investments are being done in regions in
conflict, like Pakistan. Therefore, avoid security problems is also a key for the
realization of this project.
All along with this, we also have that China needs to involve local population and let
them be part of the projects. If not, the refusal of Chinese support and the hostility
towards Chinese business and employees can keep the project away from the success.
References

Barro, R. (2019). Economic Growth and Convergence, Applied Especially to China.

[online] NBER

Belt and Road boosts RMB internationalization. (n.d.). Retrieved from

http://www.china.org.cn/opinion/2018-01/12/content_50220034.htm

Eichengreen, B., Park, D. and Shin, K. (2011). When Fast Growing Economies Slow
Down: International Evidence and Implications for the People’s Republic of
China. SSRN Electronic Journal

Forbes.com. (2019). The China Belt And Road Initiative Could Help - Or Hurt - Clean
Energy In Emerging Economies. [online] Available at:
https://www.forbes.com/sites/energyinnovation/2017/12/04/the-china-belt-and-road-
initiative-could-help-or-hurt-clean-energy-in-emerging-economies/#d5e6da8506e1
[Accessed 25 May 2019].

Haltmaier J. (2013), “Challenges for the Future of Chinese Economic Growth”,

International Finance Discussion Papers Number 1072

Pakistan's Gwadar Port: A New Naval Base in China's String of Pearls in the Indo-
Pacific. (n.d.). Retrieved from https://www.csis.org/analysis/pakistans-gwadar-port-
new-naval-base-chinas-string-pearls-indo-pacific

PIIE. (2019). China's Belt and Road Initiative: Motives, Scope, and Challenges. [online]
Available at: https://piie.com/publications/piie-briefings/chinas-belt-and-road-initiative-
motives-scope-and-challenges

Lall, S. V., & Lebrand, M. S. (2019). Who Wins, Who Loses? Understanding the
Spatially Differentiated Effects of the Belt and Road Initiative. Policy Research
Working Papers. doi:10.1596/1813-9450-8806