China Has A Plan And We are Not In It

The news that on Sunday China signed a massive free trade deal with fifteen Asia Pacific Nations confirms China is busy cutting a path forward even as much of the world is in economic turmoil due to covid-19. This is a major victory in that it encompasses almost one-third of all global economic activity. It also gives the impression the United States is being left out in the cold. The Regional Comprehensive Economic Partnership, or RCEP, establishes the world's largest trading block. It was signed virtually during the annual summit of the 10-nation Association of Southeast Asian Nations (ASEAN).

One Belt One Road Is China's Path Forward

This underlines the fact that despite economic problems popping up in countries across the world, China is hellbent on pursuing its goal of galvanizing itself as the leading global power. Not waiting to resolve trade issues with America, China is busy turning economic lemons into lemonade. One example of China reaching out can be seen in its courting of Europe. Last year the European Union and China, after a series of meetings, came up with an important joint statement. It outlined agreement on three quite sensitive fronts and paved the way for a complex, wide-ranging EU-China investment deal. 

 

To put this in context, this came at a time when the German government had just cut its GDP forecast and the Euro-zone economy was slowing. The statement was signed by Chinese Premier Li Keqiang, European Commission President Jean-Claude Juncker, and head of the European Council, Donald Tusk.

This has been described as "the real deal" and is viewed as a departure from antics such as the endless Brexit saga. The agreement was free of any accusations of “unfair” trade hurled at Beijing. It appears that Brussels and Beijing seem to be finally engaging in building some sort of synergy between the One Belt One Road (OBOR) Initiative. this is outlined in the EU Connecting Europe and Asia project report.

 

China is pushing forward and financing OBOR with its economy having a huge debt/GDP ratio already well above 300% according to the Institute of International Finance.  

The president of the World Bank, David Malpass has claimed there is too much debt floating around the world and China is a big reason why. While his view could be written off as totally political, this is not the first indication that China has gone, shall we say, over the top in creating new credit. Last year the IMF has warned China of the risk having to do with increasing China's debt by agreeing to loans which could prove economically explosive. More and more of the debt over the last year has been related to and intricately interwoven into China's far-reaching and encompassing OBOR initiative. Malpass said, “There are challenges facing the world in terms of how do you have transparent projects that are high quality, where the debt is transparent. China moved so fast that in some part of the world there is just too much debt.” 

 

While at the IMF, Christine Lagarde the current head of the ECB raised these concerns and has made it clear that Beijing was fully “aware” of the potential potholes associated with such a massive undertaking as OBOR and underwriting its funding. The cost of the planned network to connect China with 68 countries and 4.4 billion people across Asia, Africa, the Middle East, and Europe in a labyrinth of multi-trillion-dollar transportation, energy, and telecommunications infrastructure projects may total as much as 8 trillion U.S. dollars.

Now Airborn The C919 Will Be A Major Player

Articles have appeared on this site over the years arguing that China is not our friend and its economy is predatory by nature. One such article explored how China was ramping up its fledgling aviation industry and how when it hits its stride we can expect cutthroat competition. The article warns that COMAC (Commercial Aircraft Corp. of China) claims its new twin-engine, narrow-body design of the C919 is superior to the Boeing 737  the best-selling jetliner in the world. COMAC also says it can bring the C919 in at a price lower than the $50 million range that Boeing and Airbus charge for each of their planes. If history is any indication, this industry will not grow organically but to be driven forward by an aggressive government with a mission. When China's aviation industry takes flight over the next few years America and Europe should expect to say goodbye to a huge chunk of exports in this field.

Chinese-Bullet-Trains On Display

Another issue addressed in past blogs is the merger of China’s two largest companies involved in the production of railway locomotives, bullet trains, passenger trains, and metro vehicles. It pointed out that no effort was made to deny the impetus for the merger of China CNR Corp and CSR Corp in 2015 was the quest for a deeper push into overseas markets. Since the merger, China has been able to win by a wide margin nine-figure contracts, such as the supply of metro cars to Boston and LA. It should also be noted that CRRC formed a consortium with Bombardier which allowed it to compete for the renewal of the New York subways a huge contract that should amount to around 1.5 billion dollars.

Another article focused on America's trade deficit with Mexico. When following the money it becomes clear that money from the United States huge trade deficit with Mexico eventually ends up in China.  When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash, however, a bit of research quickly confirms that the money Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route and each year the numbers are huge. North Americans have been sending over half a trillion dollars a year to Asia each year.

Emboldened by this influx of wealth China has played fast and loose with creating and loaning out new funds. As debt service rises, this can create serious balance of payment challenges. OBOR to move forward has to provide the financing for infrastructure that many countries desperately want and need but will they be able to repay the loans in coming years? The Center for Global Development, a Washington-based think tank, has highlighted in a report entitled Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective, the underlined the problems of extending credit to poor or unstable countries. It has pointed out that as many as 23 countries could be prone to “debt distress.” This group includes Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan, and Kyrgyzstan which were rated in the “high risk” category. This brings us to the question of whether OBOR will become a massive expensive bridge to nowhere?

While China has lent trillions of dollars to countries the motivation behind these loans must be questioned. Circling back to Malpass, it should be noted he has also criticized China for taking low-cost loans from the World Bank despite being the second largest economy in the world, China even surpassed the bank’s income threshold for low-cost loans in 2016. Malpass has also been critical of China’s lending in conjunction with funding its OBOR infrastructure initiative claiming these loans can saddle weaker countries with “excessive debt and low-quality projects.” 

 

The bottom-line is, China is our rival. China's state-run economy is based on a business model that is geared to expand by crushing the competition. China has no intention of being locked into producing low-end manufacturing of basic goods but is determined to move into high-tech products. China's plan centers around both state-owned and private firms investing in and acquiring foreign companies to steal their technological innovations. Subsidizing those companies working within its system in a multitude of ways helps China achieve this goal. Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and America and the rest of the world are their prey.