Submitted by Taps Coogan on the 7th of November 2018 to The Sounding Line.

In October 2013, Chinese Premier Xi Jinping unveiled China’s Belt and Road initiative. Through the initiative, China has extended over $300 billion of financing to countries in Asia, Africa, and Europe to construct a network of ports, highways, pipelines, railways, and power plants. Beyond the obvious financial incentive of hefting hundreds of billions of dollars of debt onto foreign nations, the premise of the Belt and Road initiative is straightforward. For the countries receiving financing, they are hungry for infrastructure investment. For China, amid growing geopolitical tension, it is about creating a new growth engine to diversify its economy away from a heavy reliance on exports to the US.

Unfortunately for China, the opposite is happening. Since 2013, exports to the US have grown from 19.9% of total Chinese exports to 22.3% in 2017, and are on pace to rise further in 2018. Meanwhile, European and emerging market growth is decelerating.

The problem:

The economic growth that the world has enjoyed since the mid 20th century is not an accident of history but the result of a massive shift to democratic institutions and free markets following a cascade of geopolitical events from the Allied victory in World War II, to the fall of the Soviet Union, the partial liberalization of China’s economy, and the rise of democracy in Africa and South America.

As we noted here, the artificially low interest rates that have dominated the global economy since the 2008 financial crisis have led to deep structural problems that are now handicapping growth.

“Since 2008, the world has witnessed the largest buildup of debt in modern history. The search for yield in a negative interest rate environment has pushed trillions of dollars of debt into emerging markets that didn’t have the means to support it, companies that never turned a profit, and governments that don’t use it productively. With few exceptions, Europe’s labor markets have become less flexible, taxes have risen, regulation has tightened, and fiscal discipline has gone out the window. The torrent of cheap money allowed emerging markets like Turkey, South Africa, Brazil, and the Philippines to paper over weak institutions, corruption, and autocratic tendencies.”

The US economy has serious economic problems as well, the growth in corporate and government debt being chief among them. Yet the US has spent the last few years cutting taxes, reducing regulation, raising interest rates, reducing the Federal Reserve’s balance sheet, and generally taking steps to rehabilitate the free market. Accordingly, the US is enjoying a period of stronger economic growth despite a broad global slowdown. The prospects for a commensurate long term acceleration of growth in Europe or emerging markets is about as high as the prospect for an embrace of democratic institutions in Turkey, lower taxes in France, or deregulation in Italy.

In the long run, infrastructure and debt are not substitutions for capable institutions and free markets. If the trends of the past several years are indicative of the future, China’s economic dependence on the US isn’t going anywhere.

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