China's Belt And Road Policy Is A Big Red Herring

Summary

• The Belt and Road Policy is a political, not an economic, program.
• The policy will disrupt 'New China' progress.
• The strategy is old China at its best — masquerading as something new.

China: The country that self-criticism forgot

One belt, one pair of pants - who wears them?

What is China’s one belt one road strategy anyway? What is its aim? Below I will argue that it is a policy aimed at the further development of old China and not a policy geared to expedite the development of New China. As such it is a distraction. It is a waste of money. It may be an example of how China is paying lip service to one strategy and the need to change (new China) while really acting to keep developing the old (old China) to keep growth rolling with the least disruption. The fact that the BRI (Belt Road Initiative) strategy has been so deeply codified I important Chinese institutions makes me suspicious that the intent is to completely stifle any opposition to it in the event that anyone figures out what a white elephant this policy really is.

One China, Two China, Old China, New China

China’s one belt and road policy has been enshrined in the Communist Party’s Constitution (here) along with the words of the China’s President, Xi Jinping. This policy is his prescription for China’s future. It is an ambitious program. However, this program calls for less progress than meets the eye and may have more bait and switch than actual progressive policy to it (here).

Before investing in China or in a project geared to profit from ‘one belt one road’ ask this: does it make sense? Is it forward looking? I think despite China’s focus on this program it is not going to be a success- at least not for anyone outside China. And, more importantly, it does not advance the case of stimulating a new China agenda; it is fodder for the factories of old China.

That is an interesting observation to make as we ponder China’s recent milestone as enshrined by a WSJ headline: China Reports Biggest-Ever Annual Trade Surplus With U.S. (here). That headline hardly sounds like the story of country making radical progress to develop its service sector and wean itself off of its past reliance on exports... does it? We are a decade past the recession that was supposed to trigger change.

One belt, one road: Build it and they will come

The idea behind this ambitious program is based on a modernized overland rebuild on overall silk-road route and development of ocean trade routes to connect many nations in trade in the way the old silk-road did (here).

And it is a catchy, if ambiguous, idea. There is lot of infrastructure to build and that is appealing to China (old China) on several grounds. First, hard wired infrastructure is a lasting conduit for trade and commerce. Arguably putting it in place will attract other such investment to connect to it broadening its appeal and usefulness. And capital projects will have staying power and employ the resources of ‘old China’. China has garnered interest from over 60 countries with combined GDP of $21 trillion (here) for this project.

It is not clear who will finance it or how it will be financed. But to the extent that China can attract partners to build out ‘the road’ in the respective participating countries they will acquire another entity with ‘skin in the game’ to sustain the use of the project. As the principle planner China will have great influence over the entire project as well as the finished product (here and here). Of course, China may also help to provide some financing, but to China it will be doing this to leverage other countries’ resources for its project. Many observers point out that this is no Marshall Plan: China is doing this for its own benefit.

I call this an ‘old China’ project since it will take a lot of cement and steel and man-power to build such transportation networks and that is what old China is about. Also it will facilitate physical trade which is not at all the objective of new China which is supposed to shift to ‘soft’ investments and to encourage more consumption and less saving. That’s why I call the BRI an ‘Old China’ policy (here). How does it advance the case of new China? It doesn’t.

BRI reminds me of ‘Field of Dreams’ when Kevin Costner has the dream in which he is told, “build it and they will come.” And so he built a baseball stadium in his corn field. Well, will they come for China? This is a route with a lot of capital projects (here). And it is not clear how countries along the way will embrace it. Nor is it clear that the development will be such that all will benefit. Does China have an integrated plan (here)? And the way the world is changing is it really wise to commit so many funds to a fixed overland route and one that goes to and through countries that are largely still struggling economically?

One belt, no pants

What if? What if… the future is one of localized 3-D printing where instead of sending an object you transmit its design and a local 3-D printer makes it so you never have to ship it? What if China’s great cheap labor advantage is undone by robotics and the US challenges China with its own robot factories so that the ‘Spice’ no longer flows out of China to the US with such vigor? We could call this one belt no pants. And it would be an expensive belt.

One belt, my road

China may have a good idea to build infrastructure and to encourage development to spring up along the route and for connecting projects to develop. But China has been a global exporting super power and it is not a surprise that it wants to put infrastructure in place to grease the skids for its exports, and to be in a position to control this system (here). Obviously this is a program that keeps ‘Old China’ rolling. How does this get passed off as ‘vision’ for the future?

No belt, holey pants

China was quick to try to jump in to ‘replace’ the US when it dropped out of TPP by spearheading the Trade Area of the Asia Pacific (a 21 country effort (here). The problem here is that old China is an exporting juggernaut. China does not fit in any hole left by the US departure from TPP. With China in a parallel trade agreement and the US out at TPP, the TPP is like the OEC, Organization of Exporting Countries. And China’s competing region is also made up of net exporters. The US gave TPP balance as a huge consumer nation among exporters- that is precisely why it opted out. China is supposed to transition to become more of a consumer but that ship has yet to sail. All TPP members seek to export and none are really importers. China symbolically wants to step up and replace the US where it can- even when it can’t and where it makes no sense at all. So much of what China does is simply for the PR of it.

China hilariously has embraced the Paris accord after the US abandoned it. China has been the world’s most voracious polluters and now in one symbolic gesture it wants to become the good guy wearing the white hat. And China has even gotten some good press in the process (here). Let’s hope that no one is really fooled by that- and that if China wears that white hat outside in Beijing let’s hope it gets it dry-cleaned often.

So the Great Road envisioned by China will become a modern day counterpart to the Great Wall. Instead, of blocking China off from the rest of the world it will embrace the rest of the world and bring them in... or speed the travel of Chinese goods out to export markets. While the road-project brings some development for all it has a real purpose for China: to extend the life of ‘old China.’

One road, too many potholes

However, building this road will take a lot of time, money and energy and China has launched this ambitious plan too late. It has already become burdened with debt. China is not in a position to carry the load although it has resources in its sovereign wealth fund or foreign exchange reserves it could deploy.

Indeed, old China is already debt burdened and it has major pollution problems to clean-up. Plus it is facing a demographic disaster in the wake of its long standing one child policy with an enormous imbalance of males to females in a population that is coming of age. Gender imbalance issues (here). Is this a time when China will have the energy and resources and focus and to pursue such a widespread multi-country project? And after all this talk and effort does it not take away and actually drain resources from the development of New China? Hello: remember new China? (Here it is.)

On the road to Morocco with Bob and Bing (and baggy pants)

The one belt one road (or the BRI initiative) seems to be a grand scheme to take attention away from modern China (new China). And modern China is the part that needs the most work. Modern economies will run more on information, technology, well-functioning markets and good regulation- all this requires what is sometimes called ‘soft investment.’ And China is weakest there. And it may be among the weakest globally because of repression, censorship, piracy and the lack of copyright and patent protection- as well as being dead set in its ways.

My way or the highway

The Chinese government controls information and blocks the internet and is repressive (here). This is hardly the way to success in the modern economy. China also has a poor record of protecting intellectual capital making it a dangerous place to develop and use high technology (here and here). That is strike one and two for New China. Strike three may well be government intrusion in the infusion of capital and the role of State-Owned Enterprises (SOEs) as well as the shielding of banks from real world and free market experience (here). China has stunted the health of Chinese banks and financial firms (here). Its own finances are becoming precarious because of all the debt it has amassed in propping up and directing the SOEs (here). China is not learning. At its 19^th Party Congress it backtracked on SOE reform (here – see section ‘economic changes not market reforms). It is depleting its resources (here: IMF warning). China is beating, not a dead horse, but a very tired one. The presence and prominence of SOEs also blunts the role of markets and the development of private firms. China pays lip service to the private sector but its recent communist manifesto (see XI speech page 10 here) makes it clear where the rubber meets what kind of road it really is (here).

One road, the wrong destination

It is far from clear to me how the BR initiative develops modern China at all. Actually it seems to marginalize it. BRI is a step into China’s past not its future; but it seems politically important. And then there is the recent China Congress affirmation that China is a Communist country and will adhere to Communist values. Time to sing that old John Denver favorite ‘Commie road, take me home…’

China’s own view of itself as pure is so at odds with the truth. It has pillaged its own countryside in the pursuit of economic growth. For the sake of growth itself it has ravaged the health of its people (China pollution, here). It has snatched the South China Sea and kept it even when a World Tribunal ruled against it (here). China is a repressive society. It is ‘communist’ in name only. You operate in China at your own risk and (you hope) with some protection of your interests by the US government. In a Communist country it is hard to say how you got to build operate and own a plant since property is communal…theoretically. At any time China could drop the boom on a foreign owner as Venezuela did albeit for different reasons. Mc Donald’s has already been Mc-uprooted (here) despite having had a valid 20-year lease. How much effort should the US spend to protect US corporate interests in China when that support just makes more investment flow out of the US into China and reduces US job growth?

No belt, ants in the pants

China’s affirmation of communism is a setback to US policy (here). The US had thought or hoped that China’s developmental pursuit would build a middle class and communism would be unable to control it. But US analysts underestimated the ruthless nature of Chinese leaders as they ran their Tiananmen Square massacre and have run with pogroms against various ethnic and religious groups and most recently against the incipient rich especially those with an independent mind (here, page 466). XI has defanged his richest and left no one as his successor, grabbing absolute power and claiming vision. But when we think about his vision we see it for what it is: about less change not more (here, see section ‘economic changes not market reforms’). His rhetoric is about a shining new China. But in truth, a new China with its requirements of less control, more freedom, more information and much less manipulation is very dangerous to the one man show he has just erected. No wonder he has ginned up an ‘Old China’ plan and called it ‘a vision for the future.’

I think new China is not going to be a very changed China. So invest in China at your own risk with your eyes open- not wide shut. Do not fail to see the risks and the contradictions. Understand where China would be without its belt and road project. It does not need a belt because it is supposed to be transforming itself into New China. In fact China is the emperor without clothes: no belt no pants, marching down the road making its people cheer. The BRI is just another major manipulation and a distraction to enable China to continue its old ways. China has learned to hide its subterfuge in plain sight.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.