The Chinese government has set an example for the rest of the world with its Belt and Road Initiative (BRI). It is supporting the improvement of infrastructure in 68 countries and, according to current plans, is providing around US$1 trillion for this purpose. However, criticism of China’s approach has grown in recent months. Other countries in the Asia-Pacific region are concerned about this development, fearing that target countries for Chinese foreign investment could become heavily dependent on Beijing, that China’s influence on indebted countries could grow rapidly and that the influence of the West, particularly the United States, in the region could therefore decline.
The attractiveness of the BRI demonstrates the failure of other countries, European nations and the US in particular, to provide sufficient amounts of financial support for infrastructure development in Asian emerging economies. Of course, some countries provide bilateral assistance (Notably, Japan’s funding of infrastructure in ASEAN’s six largest economies exceeds China’s in those countries), but the volumes are small compared with the BRI.
So far, developing and emerging economies in the Asia-Pacific region do not have access to a significant alternative to BRI. That situation could be changed: European countries, especially Germany, should develop their own infrastructure initiative for Asia-Pacific economies. The reason for such an initiative is simple: European economies have a vital interest in contributing to and participating in the further rise of economies in the most dynamic region of the global economy.
Infrastructure bottlenecks remain a pressing problem in many developing and emerging countries. Roads, ports and airports must be expanded to enable integration into the world market. Chinese President Xi Jinping recognized this problem several years ago and developed an unprecedented plan. The primary objective of the BRI is to improve market access for Chinese companies.
But the BRI is not only about Beijing giving generously to its neighbors. Primarily, China is interested in investing abroad. Now that there are fewer lucrative domestic investment opportunities, the Chinese are internationalizing their model. They export domestic savings, invest them abroad and hope for a return on these foreign investments in the future.
It goes without saying that the Communist Party of China wants to control and steer this process. This is why in 2015 it drastically impeded the export of private capital through comprehensive restrictions and at the same time dramatically intensified the export of capital by the state. The second advantage of the BRI is that Beijing can avoid domestic economic restructuring. Instead of reforming the previous economic model, which was substantially based on investments in Chinese infrastructure and in housing construction, Beijing is choosing an alternative: Chinese companies continue to build, albeit abroad.
The capital for the infrastructure development comes from China, but the recipient countries do not receive preferential conditions. Although neither China nor the recipient countries provide precise information, interest rates are supposed to be at market levels for developing countries, i.e. 6-8 percent.
The BRI is therefore based on at least two motives. First, political motives: China is striving for a role as an Asian, if not a global, leader. Second, China wants to invest capital abroad and finance its rapidly ageing society from future earnings. China will grow old before it becomes rich. Should the calculation work out and China’s borrowers at least pay most of the agreed debt service, China would profit. It would have facilitated the sales channels for Chinese goods and would have utilized the capacities of Chinese companies during the construction phase. In the repayment phase, the debtor countries would have increased China’s current income. In essence, the BRI constitutes a nice model for organizing tribute payments to China in the 21st century.
Certainly, this model is not without risks. The numerous borrowers could refuse to pay interest and thus ruin Chinese calculations. But China spreads its risks very broadly, demands high interest rates and is therefore perfectly capable of coping with the default of individual borrowers without endangering the profitability of the entire initiative.
The US government in particular continues to accuse China of driving recipient countries into debt and dependence. At the last Asia-Pacific Economic Cooperation (APEC) summit, for example, US Vice President Mike Pence complained that China was driving the recipient countries into a debt trap. So far, the US government has embraced a strategy that only helps potential recipients of Chinese loans to scrutinize contracts and avoid hidden traps. Both the United Kingdom and Australia offer similar support.
However, that technical support does not help economies in the Asia-Pacific that want to improve their infrastructure. Up to now neither the US nor Europe have offered alternatives to the BRI. Japan, on the other hand, is at least financing individual infrastructure projects in both Southeast Asia and India, such as the construction of a rapid transit network in Mumbai.
Like China, European countries have an interest in modern infrastructure in the developing economies of Asia. Europe should complement the Chinese initiative with its own.
What could Europe do? It is undisputed that the economies of Asia have a great need for a more efficient infrastructure. It is also clear that European countries, like China, have an interest in modern roads, ports and airports in the developing economies of Asia. Europe should therefore complement the Chinese initiative with its own.
Europe’s approach could differ significantly from the Chinese model: The construction projects would be examined for economic viability before construction begins and tendered in a competitive procedure. In contrast to China, Europe could offer much cheaper loans and charge interest rates of 3-4 percent.
The main beneficiary of a European infrastructure initiative for Asia would be Germany. No other country in the European Union is engaged in such intense foreign trade, and in the face of China’s much more subdued economic prospects, the expansion of economic cooperation with other Asian countries is in Germany’s interest.
Germany would also have to assume the main responsibility for this European initiative. No other country in the EU has such a solid financial position and can safely finance a large bundle of measures. The volume of a European infrastructure initiative for Asia does not have to be as high as the BRI, but a too tightly calculated approach would limit its impact from the outset. In view of the huge demand, a volume of €250-300 billion (US$280-336 billion) would seem appropriate.
But how should this initiative be financed? One option would be direct financing from the German federal budget. Germany can currently borrow more or less free of charge and could pass on the borrowed capital to the recipient countries at very favorable interest rates. Another option would be to issue a bond guaranteed by the German government with moderate interest rates. In view of the continuing lack of suitable investments in the euro zone, a bond with an interest coupon of 1.5-2 percent would be an attractive option for many savers.
The third variant is somewhat more exotic: the Bundesbank has claims on the European System of Central Banks – the umbrella group for the euro zone monetary authority — totaling €900 billion (US$1 trillion). Admittedly, experts are arguing whether these claims will ever be serviced. But if they are worth anything, it would be possible to borrow against them and thus finance infrastructure development in Asia.
Irrespective of the form of financing, the development of a European alternative to Chinese BRI seems overdue. German and European politicians lament China’s growing influence in ever-louder tones, but have no projects of their own to offer. For Germany, such an initiative would present an opportunity to assume leadership in an area that directly serves German interests. In addition, this government-organized export of capital from Germany to Asian developing and emerging economies could serve to counter the persistent criticism of Germany’s current account surpluses with some concrete measures. Above all, it would provide recipient countries with a wider choice of options and would reduce the dependence of these economies on Beijing.