China’s push to reshape global trade comes with high costs

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Had you come to Gwadar in 2000, you would have taken in what Sohaib Jamali saw on his first trip here: a small, dusty fishing outpost huddled at the end of a long and terrible road in the distant southwestern corner of Pakistan, just 70 kilometres from the border with Iran.

Even three or four years ago, "it was still a sleepy village and nothing else," said Mr. Jamali, a Karachi-based economist and independent researcher who has been to Gwadar a dozen times.

Now, the town is showing glimmers of a transformation that promise to turn it into a major trading axis in a vast project led by Beijing, one using Chinese money and Chinese methods to redraw maps of global trade and influence to the benefit of the world's second-largest economy – while also, China promises, allowing others to emulate its own success in building prosperity.

When Mr. Jamali returned this January, he found a gleaming new six-lane highway leading into town. Worker accommodations have been erected and new dams completed nearby to store water that can keep the arid town alive. Roadside shops are booming, while car companies have set up showrooms to sell vehicles. Hotel rooms are hard to come by.

"The last time I went there I checked into a decent-sized room for 300 rupees a night. Today, it's not available available for 3,000," Mr. Jamali said.

Gwadar lies 5,200 kilometres from Beijing, closer to Berlin than the Chinese capital. But its location on the Arabian Sea makes it the perfect point of connection between China's far west and markets in the Middle East and Africa. That has placed it at the heart of China's sweeping ambition to remake the surrounding world in its own image, using a deluge of cash to fund a horizon-bending network of new and upgraded roads, rail lines, power plants, ports and factory floors.

It's a future where all roads and rail lines lead to China – a new "empire building," said Victor Shih, an expert on Chinese elite politics at University of California San Diego. "China has been trying to establish itself as the pre-eminent power in Asia, and maybe even the Eurasian continent."

Beijing calls it One Belt One Road, an unremarkable banner that flies over a project whose ambition it will place on full display this weekend, with a Belt and Road Forum that will bring together 29 national leaders, including Russia's Vladimir Putin, Italy's Paolo Gentiloni and Turkey's Recep Tayyip Erdogan. Canada is sending Pamela Goldsmith-Jones, parliamentary secretary to the Minister of International Trade, while the U.S. has dispatched Matt Pottinger, special assistant to the president.

It is the latest Chinese-hosted mega-event, following recent meetings of the G20 and Asia-Pacific Economic Cooperation.

This time, though, the world is gathering not to discuss its own agenda, but Beijing's – one of the most visible steps in China's bid to seize on instability in the U.S. and take a much more prominent global leadership role.

Sometimes called a "new Silk Road," it is a concept even Chinese academics struggle to define. "This whole Belt and Road has no real map, no real number," acknowledges Zha Daojiong, a professor of international political economy at Peking University, who has spent time in Pakistan discussing plans there.

But, he said, think of it this way: "It's the present-day Chinese version of what the British used to want out of China – what if every Chinese would add an inch to their clothing? That would keep British cotton mills running for a century," said Prof. Zha.

Only this time, China is selling machinery, cement and the construction power of its companies – all underpinned by the immense strength of its banks. The project gives them broad new vistas in which to operate. "It will open a window for China to allocate resources around the world," said Chen Wenling, chief economist at China Centre for International Economic Exchange, a government body led by former top-level bureaucrats.

A document drafted by the centre paints China as global shepherd, coaxing nations near and far to set aside differences to get rich together.

The project will "rejoin the scattered, fragmented and broken resources" of countries in Asia and Europe in "a new paradigm of globalization," states the document, one that envisions a free-trade network system, a formal security co-operation mechanism and a customs union.

The Belt and Road Initiative, the document predicts, "is expected to contribute 60 per cent of the world's economic growth over the next 10 years," an astronomical number based largely on individual growth in sovereign nations whose future Beijing nonetheless now seeks to shape (the total number of Belt and Road participants is hard to pinpoint, but China counts at least 65 countries).

It all serves to undergird China's desire for pre-eminence: "With another five or 10 years of effort, China's GDP will hopefully reach around the same size as that of the U.S. by 2030," Ms. Chen said.

Few countries have fallen more under the spell of this vision than Pakistan, where local authorities estimate One Belt One Road spending will amount to $51-billion (U.S.) over the next decade. Work is already under way on road connections between China and Gwadar and on power plants that will expand Pakistan's electrical-generating capacity nearly 50 per cent by 2020, with more to come later. The country suffers from chronic electrical shortfalls that produce lengthy blackout periods.

With problems that have festered for years being fixed, Pakistan's leaders have been left struggling for superlatives.

It's "a fate changer, because this is going to completely change the dynamics of the economy for Pakistan and for the region," said Ahsan Iqbal, federal minister for planning, development and reform. In the years since the Sept. 11 attacks, "Pakistan's economy was crippled due to poor investments in energy and physical infrastructure," he said in an interview.

Where the U.S. has over the years made plans to invest but never fully delivered, China is reliable and dependable, Mr. Iqbal said. Nor does it attach political conditions to its money. The result: "The steel industry is now expanding its production. The cement industry is booming. The construction materials industry is booming."

Consultancy Deloitte looked at the numbers and concluded that the raft of planned projects, if all built, would exceed in value "all foreign direct investment in Pakistan since 1970 and would be equivalent to 17 per cent of Pakistan's 2015 gross domestic product."

Not mentioned: how much risk that will create for Pakistan, which exemplifies the way China's ambitions also risk burdening its partners. The highway from China to Pakistan crosses through disputed Kashmiri territories, and ongoing Chinese roadwork there has angered India.

Then there are the financial bills. The $51-billion in expected spending is a big number relative to Pakistan's total $73-billion in existing national and international debt.

Some of the spending will be financed through U.S.-dollar loans from China that will add more than $4-billion to Pakistan's annual repayment costs over the next decade, Mr. Iqbal said.

On top of that come power purchase agreements, which obligate Pakistan to buy electricity from new generating plants. Though the terms are not entirely transparent, one senior member of Pakistan's financial community said the Chinese-dominated power investors will receive average guaranteed rates of return of 26 per cent, in addition to multiple tax breaks.

"It's obviously a big fiscal challenge for our government, at a time when exports are not rising and remittances are falling," said Pakistani economist Ali Salman, who founded Policy Research Institute of Market Economy, a thinktank.

The government logic: With more electricity will come more factories, whose economic output will far exceed the costs. Mr. Iqbal expects annual spending on what is called the "China Pakistan Economic Corridor" to push GDP growth past 6 per cent from its current 4.7 per cent. Chinese activity, he said, will "jump-start the economy."

It's not so simple, Mr. Salman cautioned.

"They consider this the economic solution to Pakistan's economic and business problems. This is absolutely wrong," he said. In the thrill of selling One Belt One Road, Pakistan's government has "totally forgotten all its promises of economic reform," he said. If domestic tax and competitiveness issues aren't fixed, Chinese roads and electricity will deliver false hope rather than an economic turnaround, he said.

Pakistan, too, has to be "exceptionally careful" that Chinese companies don't invade sectors where local firms are strong, said Maheen Rahman, a celebrated money manager who is chief executive of Alfalah GHP Investment Management Ltd.

But, she said, "at the moment this does not appear to be the aim," since "Chinese investments have been focused on areas which have not received either private- or public-sector spend in a meaningful way."

Pakistan can afford to take on a bit of debt, she said, and "should be able to manage the additional financial burden."

Back at Gwadar, officials are putting the final touches on an urban master plan that will build a small regional centre of 150,000 into a port city of over one million, its expected population a decade from now. They hope a Chinese company will sign on this weekend.

Other planning papers are inked with designs for a new airport and power plant, terminals for liquefied natural gas and oil, factories to manufacture steel pipe and assemble electric motorbikes, and plenty of space to temporarily store fridges, forklifts, pharmaceuticals and whatever else Chinese companies might want to ship through here.

The first stage of port expansion should be complete by the end of next year.

"You know the Chinese speed," said Dostain Khan Jamaldini, chairman of the Gwadar Port Authority. "This is the beginning of a new industrialization phase for Pakistan."

On Mr. Jamali's latest trip to Gwadar, he was surprised to see four-storey buildings rising from the earth, even as Chinese planners ran around trying to set up a technical institute that can train local workers to participate in the lightning-speed transformation of their home from backwater to global nexus.

"Of course it's not Dubai, and it's not going to become Dubai in the next three years," Mr. Jamali said. "But relative to what it was, a place which was literally shacks, I was like, 'Wow that's amazing.'"