For centuries churches across the West have celebrated the arrival of three wise men in Bethlehem to present the newborn Jesus with treasures from afar: gold, frankincense, and myrrh. Though the Bible doesn’t identify them by name, the Roman Catholic Church honored the Magi as saints: Balthasar of Arabia, Melchior of Persia, and Gaspar of India.
Scholars note that the gifts brought by the Magi were part of a global trading network that existed centuries before the birth of Christ. Those goods may have moved roughly from Chang’an, the capital of the Chinese Empire, through the Middle East and finally to Rome along the caravan-packed routes known as the Silk Road. Gold was the currency of kings and Chinese silk the preferred fabric for aristocratic women, with spices, incense, and ceramics making up the bulk of merchandise flowing between the two empires that then controlled the Eurasian land mass.
The Silk Road presented such a powerful narrative that 12 centuries after the biblical events in Bethlehem, Venetian merchant Marco Polo wrote about his journey across Central Asia and his life as an official in the capital of the Mongol Empire, Dadu (now Beijing). Polo’s tale inspired Christopher Columbus to seek a maritime shortcut to China and the kingdoms of India and the East Indies, as the spice islands of Indonesia, Malaysia, and the Philippines were once known. Columbus, of course, accidentally traveled to the Americas, which eventually eclipsed the Far East in importance in terms of global trade.
Today the romance of the Silk Road is alive again, this time in modern China. The historical narrative remains so inspiring that China has advanced a plan to rebuild the ancient trade route in an era of air travel, container ships, and near-instantaneous communication.
Though this may sound like a joke, it isn’t: Chinese President Xi Jinping has staked his foreign policy legacy on a grand strategy known as “One Belt, One Road,” or, more simply, “Belt and Road” — with “road” referring to an overland route across Central Asia and “belt” to maritime routes through Southeast Asia, South Asia, and East Africa.
Rebuilding the Silk Road is “a massive and transformative undertaking by China,” the largest the world has seen since the post–World War II Marshall Plan in Europe, says Patrick Mendis, a former American diplomat who is now a research associate at Harvard University’s Fairbank Center for Chinese Studies. “The Silk Road has both geoeconomic and geostrategic components to promote the new sphere of Beijing influence beyond the Chinese borders,” adds Mendis, who was born in Sri Lanka (itself once an ancient island kingdom) and is a commissioner of the State Department’s U.S. National Commission for UNESCO.
China’s New Silk Road strategy comes at a time when the West is flirting with retreating from the globalization it initiated and led for decades. At the recent World Economic Forum in Davos, Switzerland, Xi announced that China is willing to take up leadership of the pro-globalization camp. His message is particularly significant given the anti–free trade rhetoric of new U.S. President Donald Trump, who appears to be leading his nation toward a new isolationism. In fact, China’s New Silk Road strategy is good for that country’s business and economics, extending connectivity to frontier markets throughout Central Asia and stimulating demand for trade at a time when commerce with the West may be in decline. China’s economy still depends heavily on exports to propel its growth.
Xi’s strategy is being implemented by three new multilateral institutions based in China: the Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund, and the New Development Bank. Most of the $240 billion in committed capital is coming from China and the rest from dozens of trading nations. The big exceptions: Japan, which so far has refused to join, and the U.S. The three institutions will work together to finance infrastructure projects such as power stations, superhighways, ports, and bullet-train lines across Central Asia, the Middle East, the Caucasus, and the Balkans in an attempt to reunite Eurasia in a network of transport links.
China’s new multilateral lenders, along with their private sector partners, can mobilize as much as $1.5 trillion of new capital in the coming decade for Asia infrastructure, estimates Peter Burnett, Hong Kong–based regional head of corporate finance for Greater China and North Asia at Standard Chartered, which is partnering with Chinese lenders to cofinance frontier market deals. However, the funds, though substantial, are not enough to meet the region’s infrastructure needs, which according to Burnett and others (including the Manila-based Asian Development Bank [ADB]) amount to $8 trillion just for 2010–’20.
China fueled much of its own explosive growth by investing in modern infrastructure, spending an average of more than 20 percent of gross domestic product annually over 25 years. Though that investment fell to 8 percent last year, the country’s infrastructure now is among the most modern in the emerging markets. For instance, China is investing $503 billion to build a national bullet-train network that spans almost 19,000 miles — more than 15 times the length of Japan’s Shinkansen. The trains can reach top speeds of more than 180 miles per hour, and China has ambitions to extend its lines to Europe. The Chinese Academy of Engineering in Beijing has drawn up plans to build a nearly 5,000-mile network spanning 17 nations; it would take passengers from Beijing to London in only 40 hours.
To facilitate these ambitions, China has begun to play a powerful role in the region as a financier, says Laurence Brahm, a Beijing-based American lawyer, entrepreneur, and adviser to the Chinese government. “China, together with other key developing nations, is forging an alternative global financial and economic development architecture, different from that of the Washington Consensus and post–Bretton Woods order,” he says. Brahm is working with John Naisbitt, author of the best-selling Megatrends, on a book examining Xi’s efforts to revive the Silk Road. According to Brahm, if Xi’s vision is carried out successfully, China will surpass the U.S. as the largest economy in the world.
“In 2001, I wrote that the 19th century was Britain’s, the 20th America’s, and the 21st China’s,” says Brahm. He was hardly alone in making that prediction, but the 2001 book he coauthored, China’s Century, predicted that China, then the No. 6 economy, with a GDP of $1.3 trillion, would become No. 1 in the 21st century. China surpassed Japan as the world’s second-largest economy in 2010 and has since grown its GDP to $11.3 trillion — more than twice Japan’s $4.7 trillion and behind only the U.S.’s $18.5 trillion. Though China’s growth rate has slowed from a remarkable average of 9.9 percent a year, the Middle Kingdom posted 6.7 percent growth in 2016 and according to many economists should be able to grow between 3 and 6 percent annually over the next few decades.
Though only a year old, Beijing-based AIIB has already hit the road running. Since early last year the bank has lent more than $1.7 billion to nine transportation, energy, and urban development projects in seven nations: Azerbaijan, Bangladesh, Indonesia, Myanmar, Oman, Pakistan, and Tajikistan. “We are off to a quick start — people see it is a bank operating to the highest international standards,” says AIIB vice president Danny Alexander. Not long ago Alexander was serving as chief secretary to the U.K. Treasury under then–chancellor of the Exchequer George Osborne; he lost reelection to his parliamentary seat in Scotland in September 2015.
Alexander was a key player in the U.K.’s decision to support China’s formation of AIIB. In fact, prime minister David Cameron’s government persuaded three other European nations — Germany, France, and Italy — to become founding members of the bank, much to the chagrin of the Obama administration, which viewed AIIB as a threat to U.S. hegemony. After Alexander’s parliamentary defeat, Beijing asked him to join AIIB.
Today the 43-year-old is based in Beijing and secretary to the AIIB board; he helps broker financing for infrastructure projects across Eurasia. The Chinese maintain that the new multilaterals do not replace or compete with Washington-led institutions and in fact complement existing multilaterals. AIIB is analogous to the Japan- and U.S.-led Asian Development Bank but focuses only on infrastructure finance in Asia. A primary difference: Whereas ADB’s goal is to alleviate poverty, AIIB focuses on deepening regional connectivity. The Silk Road Fund tends to take equity stakes in projects, while the New Development Bank finances and buys stakes across all emerging markets, including Africa and Latin America.
Alexander notes that most of the nine projects AIIB financed in the past year were in conjunction with the World Bank and other multilaterals, including ADB, the European Bank for Reconstruction and Development, and the European Investment Bank. “Of course, the Chinese government has taken the initiative to establish this institution, but we are not here to deliver Chinese government policy or British government policy or Indian government policy,” he explains. “AIIB is answerable to all 57 founding members.”
Still, Alexander’s role at AIIB is a sign of the times as the world finds itself in an increasingly multipolar financial system.
“Clearly, the U.K. sees the picture of a bigger world that is multipolar and diverse in approaches to economic development,” says Brahm, adding that London became a major yuan offshore clearing center in 2012, with many British banks offering yuan-denominated services; U.S. banks in New York only began offering yuan trading recently. And then there is Britain’s Brexit vote, another symptom of increasing fragmentation. “The rise of a new financial architecture that will parallel the old Washington-dominated one is apparent,” Brahm says. “The British not only want to have a foot in the door but to actually be a key stakeholder in the evolution of that new system. They see Beijing as an alternative power center to Washington and are allying with both.”
Although Washington has not endorsed Beijing’s geopolitical strategy — and may not under President Trump — some major U.S. banks are participating. “The Belt and Road initiative is without a doubt the most ambitious, strategic, interconnected infrastructure initiative devised in recent memory,” says Mark Slaughter, Citigroup’s head of corporate and investment banking in the Asia-Pacific region. “It presents a number of opportunities for a global bank like Citi that has a presence across the various trade routes.” Global trade is part of Citi’s DNA, he explains, noting that the bank is now working with Chinese clients to find opportunities that fit with Beijing’s geopolitical strategy. Citigroup is the world’s No. 13 bank, as measured by assets, and its Asia operations — of which China and Hong Kong account for a substantial portion — are the company’s second-largest single business unit.
In the wake of the West’s drift toward populist isolationism, China is seeking stronger trade and investment links with its economic partners, says Peter Wong, Hong Kong–based chief executive for Asia at HSBC Holdings, the world’s 14th-biggest bank.
“China’s One Belt, One Road is a prime example of this reaching-out policy,” says Wong, adding that the country aims to spur demand for materials and goods at home by investing in strategic infrastructure projects abroad and developing economic ties along the way. The plan is to enhance global supply chains, primarily through debt-financed infrastructure projects across more than 60 countries, Wong says. China expects annual trade with these nations to be worth $2.5 trillion within a decade — up from $1 trillion in 2015.
The success of China’s ambitions, however, is far from guaranteed. Trump has threatened to impose tariffs on Chinese imports, disagrees with the One China policy on Taiwan, and may challenge China’s geopolitical aims. Rising nationalism in many emerging markets also makes investment in massive infrastructure projects difficult. “In many ways, China’s rapid development and integration with the world economy has been very positive,” says Guy de Jonquières, a senior fellow at the Brussels-based European Center for International Political Economy. However, China’s neighbors, notes de Jonquières, a former Financial Times reporter, have grown increasingly wary of its aggressive island-building campaign in the South China Sea.
Pessimism about the Silk Road project is rising even among some Chinese bankers, says Andrew Collier, a Hong Kong–based independent research analyst who from 2009 to 2011 was president of Bank of China International in the U.S. “Some bankers are skeptical about One Belt, One Road because it is difficult to find profitable projects,” he explains. “The due diligence of investigating good companies in far-flung countries outside of their usual lending areas is too time-consuming, so they are generally looking for quick fixes. These may not produce good returns.”
There is a need for infrastructure in emerging markets throughout Asia, Collier notes, but he wonders if it makes sense for China to create it virtually on its own. “No, unless you assume that President Xi Jinping is looking as much for security gains as he is for expanding Chinese trade routes,” he says. “The security goals may include excluding Russia and the United States from participating in the growth of One Belt, One Road countries, but my belief is China will make only modest progress. There is too much entrenched nationalism in these countries to allow for significant gains by China.”
Guan Anping, an adviser to the Chinese government, points out that Central Asia is mostly made up of former Soviet satellite states where the rule of law is lacking. “It’s much easier to do business with partners in the West or Japan, or elsewhere in developed markets,” says Guan, a former legal counsel at China’s Ministry of Commerce. “The ‘stans,’ as many nations in Central Asia are known, are troublesome places to do business. Many business people there don’t honor their contracts.”
Still, Guan says most governments getting Chinese funds for infrastructure stand to benefit from the tax revenues the projects will generate. “So in the end, most governments will welcome Chinese money and will do their best to make sure their companies honor their loans,” he says.
Official China remains upbeat. In the longer term the Silk Road strategy will succeed because the Chinese government designed it to benefit all participating nations, insists Zhu Lei, who oversees ties with members of the Association of Southeast Asian Nations at Guangxi province’s Department of Commerce, on the border with Vietnam. Many Southeast Asia nations have already benefited from the project, Zhu says: A rail link completed last year that runs through Vietnam, Laos, Cambodia, Thailand, Malaysia, and Singapore means that products made in Southeast Asia can now be transported as far away as Germany in under 20 days. “Goods shipped by sea from Asia to Europe take twice as long — as much as 45 days,” says Zhu, who is based in Guangxi’s capital, Nanning. “At the end of the day, China’s Silk Road strategy isn’t about only benefiting China. It’s about connecting all of Asia to Europe and the rest of the world through transport networks, bringing everyone closer together.”
At one Nanning company, organic-vegetable and free-range chicken producer Wanshougu Group, vice president Peng Changcai echoes Zhu’s point. “Trade is about peaceful coexistence,” says Peng, who until three years ago was a major general in the People’s Liberation Army in Guangxi. “Trade is good. War is not.”
Now retired from the PLA, Peng at age 17 was one of 10,000 Chinese troops who fought the Vietnamese in May 1981 at the battle of Fakashan, one of many border skirmishes that occurred between China and Vietnam from 1979 to 1990. “We in China are now focused on promoting trade — and foremost peace,” Peng says. “Yes, there are going to be political differences, and at times we rattle our sabers, but let’s all focus on trade and rebuilding the Silk Road together. Peace and prosperity through interconnectivity and trade — at the end of the day, that is what the China dream is all about.”
