China tightens the belt on Belt and Road
China’s economic slowdown is forcing it to tighten its belt and provides new geostrategic opportunities for the US and other Western countries. Unfortunately, though, the US is likely to be so self-absorbed that it will miss out on this opportunity.
Given the economic slowdown in China, the country’s government and central bank are facing the usual fiscal headwinds that come with such an event. On the one hand, tax revenues decline as corporate income declines and stimulus measures like the VAT tax reduction announced last week reduce the tax burden. A traditional export-oriented economy would make up for these shortfalls by a weaker currency and greater income from exports. But unfortunately for China, the trade surplus is shrinking at the same time as the tax revenues are because the country is in the process of changing its business model towards a more service- and consumption-oriented economy.
Our chart shows that the Chinese trade surplus used to be in the order of $500bn to $600bn per year in 2015 and 2016 but it has since declined to $374bn in 2018. If you are raking in half a trillion US Dollars a year it is easy to spend the money on investments for the future like the famous Belt and Road Initiative (BRI) launched by President Xi Jinping in 2013. Now that the trade surplus is shrinking, China is forced to tighten the belt (no pun intended) and reconsider where to use its surplus capital. According to some reports, China’s propaganda apparatus has reduced the frequency of reports on the BRI in the media dramatically and China has offered Pakistan new loans of $2.5bn vs. the $6bn Pakistan allegedly asked for.
Recipients of investments from the BRI are also seemingly becoming more reluctant to accept Chinese loans in the first place since they fear they might be squeezed by excessive debt and eventually forced to give up important state infrastructure, as has happened in Sri Lanka. Malaysia’s Prime Minister Mahathir Mohamad has cancelled two BRI projects, including a $20bn railway financed by China. Pakistan is reviewing the $60bn China-Pakistan Economic Corridor and the Maldives are trying to renegotiate a $3bn loan from China for BRI projects.
The problems for BRI might increase if the Chinese trade surplus with the US, which currently accounts for 90% of the total Chinese trade surplus, starts to narrow as the US Economy cools and US import tariffs (possibly) increase. If China is forced to cut back on its international investments, this will provide an opportunity for the US to catch up with China and invest in third world countries directly or via the World Bank to increase its “soft power” in these countries. As I have written in our recent study on China, in the cold war between China and the US, the exercise of soft power through investments and political pressure is crucial to keep China at bay and prevent a further loss of influence by the West. But instead of seizing the opportunity, the White House continues to disincentivise businesses from investing abroad and has even proposed an outspoken sceptic of the World Bank to head the institution in the future.
Additionally, last week, the White House announced it will take India off the list of countries benefitting from the Generalized System of Preferences (GSP) , which could subject $5.6bn of Indian imports to $190m of additional tariffs. While this is a small increase in tariffs, it helps push India closer to China and away from the US, especially now that Prime Minister Modi faces a general election. In short, these actions, or inaction in terms of investments in emerging economies, seems yet another way of hastening the decline of the American Empire.
China trade balance with different regions
Source: Bloomberg, Fidante Capital.
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