The year just ended was a hard one for Chinese president Xi Jinping, and 2019 looks no easier. He has had to acknowledge sudden and unusual domestic criticism of his two signature policies, the Belt and Road Initiative and Made in China 2025, and, seemingly, pulled back from both. The air is rich with speculation about change. Whether this is about optics or substance, it will determine the outcome of the trade war truce with the US and shape China’s economic prospects.
Stung by some bad publicity about Belt and Road financing, cancelled projects, and a new awareness of debt sustainability problems in a rising number of countries, China has started thinking about alternative features. These include foreign direct investment, equity partnerships and co-financing with western official institutions. Some countries have also complained about neo-colonialism, lack of governance transparency and a reliance on Chinese contractors and labour.
A major flaw in Belt and Road as an alternative development strategy is its reliance on US dollar financing at a time when China’s financing capacity is being impaired by the emergence of a balance of payments deficit, and external US dollar liabilities that are not far short of two-thirds of China’s foreign currency reserves. Renminbi financing might be an option, but the currency is facing structural depreciation pressure, and its international role is strictly limited by capital controls.