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Election Watch

China’s domestic economy and the belt and road initiative

26 October 2015

By YC Yap, Research Executive 

The 'China Threat Theory’, as proposed by the US and its Western allies, has seen China reach this position through what is being termed in diplomatic circles as its ‘Peaceful Rise’. Since the economic reform era of President Deng Xiaoping (1981-1987), this has generally meant that China has kept a low, or passive profile in relation to foreign affairs, instead focusing more on its domestic economy and development.

This began to change in 2013 when President Xi Jinping gave clear signs that he wanted to chart a more assertive approach to China’s diplomatic relations. The most visible example of this has been the Silk Road Economic Belt and 21st Century Maritime Silk Road proposals - officially known as the Belt and Road Initiative (B&R).

The B&R initiative, currently supported by 57 nations, is perhaps the clearest indicator of China’s diplomatic change of course from what Professor Xueting Yan from Tsinghua University has termed ‘Keeping a Low Profile’ (KLP), toward ‘Striving for Achievement’ (SFA).

The B&R initiative represents two economic corridors, one inland and the other by sea that connect the Eurasian landmass with the waterways surrounding East, South-East and South Asia and the Middle East.

China’s B&R initiative is as much about a need to develop new trade corridors and markets, fuelled by her domestic economic overcapacity, as it is about a change in diplomatic approach.

China’s economy has transitioned from agriculture to heavy industry since the 1980s, and through structural reforms, now sits on the precipice of a consumption-led growth model. However, in achieving this, there needs to be a complete re-think on what has propped up this high-speed economic growth over the last 30 years.

The production of certain goods, such as steel and petrochemicals, has led to unhealthy levels of pollution and haze in many cities. However, as the prices of these goods continue to fall reflecting the decline in capital utilisation, a continuing overcapacity may lead to industry specific recessions.

Industries, such as those producing cement, crude steel, glass, as well as ship building facilities, have been facing an overcapacity crisis for over a decade. Yet, it was only in 2013 that Chinese leaders made it a government working priority to address this.

The B&R initiative only emerged into public consciousness in 2013. However, overcapacity is not just a cause of domestic demand saturation; there is also the issue of a lack of external demand. In the years since the Global Financial Crisis, widespread recession around the world has led to this lack of external demand in the world’s manufacturing hub.

Moving beyond the economic bottleneck

Here, the rationalisation behind the B&R initiative is that if major infrastructure development can be achieved throughout the connected areas, this will increase demand and create new markets for ‘Made in China’ exports. Though B&R is not only being used as a way to stabilise China’s international trade, it is also a way to assist structural industry reform to move beyond the economic bottleneck that China now finds itself in.

When once everyone wanted to enter China’s market, now China wants to enter more foreign markets. In the B&R initiative’s official document, Vision and actions on jointly building the Silk Road Economic Belt and 21st Century Maritime Silk Road, the framework consists of five main areas that promote connectivity in: policy, infrastructure, trade, finance and people.

Both the Chinese government and private companies have already started to sign memorandums with countries along the B&R route to begin the process of facilitating trade and infrastructure development.

Beyond these agreements and others that are sure to be signed, the B&R initiative relies on existing bilateral and multilateral mechanisms between countries to conduct multi-level interconnection and negotiations.

These platforms include the Asean 10+3 multilateral mechanism, the Regional Comprehensive Economic Partnership (RCEP), as well as the BOAO Forum for Asia and World Chinese Economic Summit, which allow stakeholders within the civil society to engage with government authorities. These multi-level collaboration platforms will help the B&R initiative to push forward through the implementation process.

There are serious concerns as to the standards and regulation that come with Chinese investment. The key worry that neighbouring countries have indicated here is in relation to pollution. Throughout China’s rapid industrialisation, environmental degradation in terms of ecology, as well as air, water and soil pollution have reached critical levels. For B&R to be a success, China will need to display a real commitment to domestic environmental governance.

Malaysia, along with the other Asean member states will be among the countries along the 21st Century Maritime Silk Road. Here, the will need to prepare various sectors for an influx of development and capital, while also paying close attention to China’s domestic economy in order to calculate risks and opportunities and maximise the potential benefit for themselves.

When all is said and done, the main reason for the creation of the B&R initiative is to boost and transition China’s domestic economy. Running parallel to this is promotional strategy that is advocating for peaceful diplomacy to enhance China’s soft power throughout Eurasia.

(This is a translated version. Its original was published in Chinese in Sin Chew Daily on Sept 29, 2015.)

View original article on Malaysiakini

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