Dollar Constraints May Lead to More Multilateral Approach for China's Belt and Road

A BRI that is characterized by co-financing would be a more even-handed, a more transparent and a less exclusively Chinese effort.

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People walk past the 'Belt and Road' ecological wall in Beijing during the Belt and Road Forum for International Cooperation in May. Photo: Getty Images.

People walk past the ‘Belt and Road’ ecological wall in Beijing during the Belt and Road Forum for International Cooperation in May. Photo: Getty Images.

One could be forgiven for having missed the fifth birthday last month of China’s Belt and Road Initiative (BRI).

Celebrations were notably mute, for two obvious reasons. One is the increasingly audible grumbling among recipient countries about the effects of what Malaysian prime minister Mahathir Mohamad has called a ‘new colonialism’ — a phrase that captures the idea that the BRI has led to the accumulation of debt on receiving countries’ balance sheets to pay for projects of uncertain value, built mostly by Chinese contractors on opaque terms, allowing China’s regional influence to grow in ways that are out of proportion to the benefits that countries can expect to enjoy.

This kind of concern led to Malaysia’s suspension last month of the $20 billion East Coast Rail Link, one of the biggest-ticket projects in the entire BRI. Even Pakistan, whose people and governments routinely express the world’s most amiable view of China, recently cut down the scale and cost of the Karachi-Peshawar railroad project.

A second reason for muted celebration is the growing sense that the US now aims to contain China’s extension of its influence abroad, a policy that was clearly articulated in Vice President Mike Pence’s speech at the Hudson Institute this month.

But there is another reason the BRI is not as healthy a five-year-old as the Chinese government would like it to be: China might be running out of resources to support it.

Think of it this way. If the renminbi were a fully functioning, grown-up global currency, then China could print the stuff and use it to finance projects in the BRI. However, that is not the case at all: very few BRI projects are renminbi-financed, and the initiative as a whole is highly dependent on dollar-denominated funding.

This creates what is best described as a ‘dollar constraint’ for China in its ability to pursue its objectives in the BRI. Since it lacks an infinite supply of dollars, it therefore lacks an infinite capacity to get what it wants done.

The dollar constraint persists because the renminbi has made remarkably little progress towards international currency status. By some measures, one could actually say it has declined.

While the renminbi was used to settle about 30 per cent of China’s trade back in 2015, for example, it is now used to settle only half that amount. And the stock of renminbi deposits outside China, a reasonable measure of a currency’s international desirability, has fallen in recent years. Back in late 2014, Hong Kong banks held a trillion renminbi ($144 billion) worth of deposits. Nowadays the stock of renminbi-denominated deposits is about RMB 600 billion.

The dollar constraint China faces in pursuing its goals in the BRI might become even more binding if the country starts to run a current account deficit in the coming years — not a crazy supposition given that the first half of this year saw China run its first current account deficit since 1998. The point is that if China needs dollars from the rest of the world to finance itself, then it will be marginally more difficult to generate the dollar resources that China needs to promote the BRI.

China’s response to this dollar constraint seems partly to lie in an effort to open up the BRI by placing more emphasis on co-financing its projects with institutions such as the World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, European Investment Bank, European Bank for Reconstruction and Development and other multilateral development banks. That could fundamentally change the nature of the BRI, because these banks need to follow strict ‘open-content’ rules that forbid them from preferring contractors from any particular country.

What this means is that the days when China could show up in a country with a bunch of dollars to finance a project, alongside a handpicked state-owned enterprise to run it, might be over. A BRI that is characterised by co-financing will be a more even-handed, a more transparent and a less exclusively Chinese effort.

That will help China, but at a cost. It will help because a more multilateral BRI will make it tougher for countries to accuse Beijing of being a new imperial power in the developing world, and perhaps more inclined to deepen their participation in the initiative. But the cost is that Beijing will have to share decision making with its institutional partners.

A charitable view is that this is what China wanted all along. Ever since the BRI’s birth five years ago, Beijing has been emphatic in its insistence that the initiative is not a bid for hegemony, but merely a benign mechanism for international cooperation. In the words of one Chinese scholar, Wang Yiwei, the BRI should be considered as a ‘many-to-many’ platform rather than a ‘one-to-many’ effort to establish Chinese control, in the way that (for Wang, at least) the US used the Marshall Plan to establish hegemonic control over post-second world war Europe.

If China’s dollar constraint continues to push it towards co-financing the BRI with multilateral lenders, this might be the best way to ensure that the rest of the world begins to see the initiative as having many-to-many characteristics. If so, the BRI’s 10th birthday might end up being a happier occasion than its fifth.

This article was originally published in the Financial Times.