China's 'Silk Road' Initiative Is at Risk of Failure

China’s “Silk Road PR” is in full swing, but the reality on the ground is different than the rhetoric.

The Silk Road Initiative is the major project for Chinese President Xi Jinping. On every state visit and within every diplomatic forum, he has promoted his idea of “One Belt, One Road” (OBOR). Beijing wants to create China-centered infrastructure networks in order to expand its own economic and political influence in Eurasia.

But the time when the country was able to make economically unprofitable investments on the basis of political motives is long gone. Beijing had intended to invest more than $900 billion in infrastructure expansion in Eurasia. However, the money is now needed to stabilize its stagnating economy and nervous financial markets. China‘s currency reserves decreased drastically in August.

Due to financing difficulties a number of infrastructure projects have come to a standstill. For example, the gas pipeline known as “Power of Siberia,” the subject of an agreement signed by Russia and China in May last year, is in danger of flopping. In addition to this, the release of funds for the construction of the Altai gas pipeline to connect western Siberia and China has been delayed indefinitely.

At a more basic level, the OBOR represents an economic step backwards: instead of placing more emphasis on domestic demand, Beijing is speculating on new export markets in unstable regions such as Pakistan. The overcapacity of Chinese state-owned enterprises are not addressed but simply exported abroad. In this way the leadership is hampering its own ability to overcome the structural crisis of the Chinese growth model.

For the time being, OBOR remains a speculative bubble. Part of the initiative is to create around 20 cross-border Special Economic Zones. Khorgos, on the border with Kazakhstan, serves as a cautionary example: two years after the go-ahead China has built a city consisting of a number of multi-story shopping centers in the desert. In one of those buildings, for example, there are roughly one hundred shops, each one of them selling exactly the same product: fur coats. By way of contrast, on the Kazak side stands only a yurt and a couple of plastic camels. Inside the yurt, where one can buy German sweets and Russian beer; there is no sign of any customers.

At the same time, there is a lack of partners for the OBOR initiative: China is virtually on its own. The Chinese leadership has until now only been able to reach a handful of vague cooperation agreements, such as those with Russia and Hungary. But none of those states (and maybe not even China itself) know what OBOR really means. Xi Jinping wants to promote the idea of a “community of common destiny”. He has, however, not been able to convey what this term signifies and he has failed to convince other states why the OBOR should be attractive for other countries.

While Xi promises win-win situations, the biggest winner would be China. This is because Beijing is at once the project’s architect, financier, and builder. The suspicion towards OBOR is also fueled by China’s increasingly aggressive foreign policy. By following a more assertive approach in the South China Sea territorial disputes or more recently, by displaying modern military hardware during the World War II commemoration military parade in Beijing, the Chinese leadership risks losing the very thing it most needs from neighboring countries to make OBOR become a reality: trust.

In addition to this is the problem of unfortunate timing, a problem which could result in the collapse of Xi’s grand plan. In the light of the crisis in Ukraine, the prospects for a joint Chinese-Russian-European project have never looked worse. Moreover, ISIS threatens to spread to the very Central Asian regions that are key to the success of OBOR.

Despite these obstacles, the Chinese “Silk Road PR” is in full swing. Berlin and Brussels should exercise restraint and should not allow themselves to be dazzled by this PR offensive. Individual projects should only be considered if they are in the direct interest of Europe and are economically viable.

By (and photos) Moritz Rudolf is a Research Associate at the Mercator Institute for China Studies