CHIECO-00959; No of Pages 5

China Economic Review xxx (2016) xxx–xxx

Contents lists available at ScienceDirect

China Economic Review

Three questions on China's “Belt and Road Initiative”

Leonard K. Cheng 1
Lingnan University, 8 Castle Peak Road, Tuen Mun, N.T., Hong Kong

a r t i c l e i n f o a b s t r a c t

Article history: Three broad questions about China's “Belt and Road Initiative” are raised. First, what are
Received 12 July 2016 likely to be the real objectives behind the Initiative? Second, are investment and trade,
Accepted 26 July 2016 considered the “major task” of the Initiative by China, to be driven by market-based
Available online xxxx
transactions, or will they be a form of foreign aid that is not based on economic calcula-
tion of gains and losses? Third, which of the 60 or so countries in Asia, Europe and
JEL classification: Africa along the Belt and Road will likely be the Initiative's priority targets of economic
F1 cooperation?
F2
© 2016 Published by Elsevier Inc.
F5
O1
Keywords:
China
Belt and Road Initiative
Foreign investment and foreign trade
Infrastructure facilities
Regional economic cooperation

1. Introduction

The “Belt and Road Initiative” for regional development proposed by China has attracted much attention in both China and
the rest of the world. However, its specific contents are still evolving and commentators differ in speculating what its real
objectives are. Some describe it as containing boundless business opportunities, while others see it as an indication of general
directions without specifics, and still others regard it as merely an empty slogan. In this paper, I would like to raise three general
questions.
First, what are the likely real objectives behind the Belt and Road Initiative (hereafter “Initiative”)? Second, are invest-
ment and trade, considered the “major task” of the Initiative by China,2 to be driven by market-based transactions, or will
they be a form of foreign aid that is not based on economic calculation of gains and losses? Third, which of the 60 or so coun-
tries in Asia, Europe and Africa along the Belt and Road are likely to be the Initiative's priority targets of economic
cooperation?

E-mail address: leonard@LN.edu.hk.

1
I am grateful to the comments and suggestions provided by an anonymous referee, Prof. David D. Li of Tsinghua University and Prof. Xiangdong Wei of Lingnan
University. They have helped me improve the clarity of my arguments and conclusions.
2
See Section 4 below for reference to “major task”.

http://dx.doi.org/10.1016/j.chieco.2016.07.008
1043-951X/© 2016 Published by Elsevier Inc.

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dx.doi.org/10.1016/j.chieco.2016.07.008
2 L.K. Cheng / China Economic Review xxx (2016) xxx–xxx

2. The Initiative's real objectives

Commentators have argued or inferred the following as the Initiative's real objectives:

(1) To conquer world markets by opening up the markets of emerging and developing economies to deal with (i) China's
excess production capacity, (ii) inadequate Chinese domestic demand, and (iii) bottleneck in further expanding the satu-
rated export markets in developed economies;
(2) To make direct investment in these countries, thereby securing supply of resources, especially in the natural resource
sector; it is a new phase of China's “going global” policy officially proclaimed in 2002 after China's outward investment
initiative was frequently dampened by Western countries which created various barriers to takeovers, mergers and acqui-
sitions, and greenfield investment;
(3) To extend the country's global strategy of promoting Renminbi's (RMB) internationalization by using RMB as well as part of
an excessive foreign reserves;
(4) To strengthen the diplomatic relationship with, and increase the popularity of China among, the partner countries; it is
friendship building strategy motivated by geopolitical objectives;
(5) To counter the economic aspects of the U.S. strategic “Pivot to Asia” policy, which includes the Trans-Pacific Partnership
(TPP) free-trade agreement that appears to explicitly and intentionally exclude China's participation.3

As one can see, the above claimed objectives of the Initiative overlap to a certain extent. Also, even though these objectives
may appear to be different, they are not necessarily contradictory, especially because in reality economic and political consider-
ations are very often closely knotted. If the Initiative's objectives are better understood, then it would also be easier to answer
the question whether the Initiative is profit-oriented or driven by non-economic considerations such as geopolitics. Similarly,
as the objectives become clearer, it would also be easier to predict which countries are the Initiative's likely priority targets of
economic cooperation.
To start, let's first examine China's official statements as contained in “Vision and Actions on Jointly Building Silk Road Economic
Belt and 21st-Century Maritime Silk Road” (hereafter “Vision and Actions”), a document authorized by China's State Council and is-
sued jointly by the country's National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of
Commerce in March, 2015. According to this document, the Initiative was first proposed by President Xi Jinping when he visited
Central Asia and Southeast Asia in September and October 2013, respectively. It is “aimed at promoting orderly and free flow of
economic factors, highly efficient allocation of resources and deep integration of markets; encouraging the countries along the
Belt and Road to achieve economic policy coordination and carry out broader and more in-depth regional cooperation of higher
standards; and jointly creating an open, inclusive and balanced regional economic cooperation architecture that benefits all.”
A key assumption underlying the analytical framework adopted in Vision and Actions is that for countries located in between
“the vibrant East Asia economic circle at one end and developed European economic circle at the other,” there is a “huge potential
for economic development.” The official objectives of the Initiative are to “maintain closer economic ties, and deepen political
trust; enhance cultural exchanges; encourage different civilizations to learn from each other and flourish together; and promote
mutual understanding, peace and friendship among people of all countries.”
This official description of the Initiative appears to rule out China's entry into areas troubled by wars and serious internal
conflicts for non-economic (e.g., geopolitical) reasons. While this official Chinese government position may differ from the
reading of commentators, there are few irreconcilable contradictions either. Furthermore, in surmising the real objectives
of the Chinese government, there appears to be room to accommodate and reconcile the commentators' different beliefs
and assumptions.

3. What are the real objectives?

Dr. William H. Overholt is a well-known expert on the Chinese economy. In Overholt (2015), he regards the Initiative as a
Chinese grand strategy towards Europe, Asia and Africa that closely resembles the U.S. global grand strategy in the post-
World War II (WWII) era – the core of which was “to rejuvenate Western Europe and Japan and to develop the ‘third
world’,” binding all to the U.S., while protecting that strategy with a strong military.” The U.S. strategy, according to him,
succeeded in making the world's prosperous countries become its allies which were supportive of the U.S. interests.
Nevertheless, while he considers the Chinese strategy covering a wide geographical area has integrated economic, political and
national security considerations, China, unlike the U.S. which had the military might to protect Europe, Japan and its other allies in
the world during the post-WWII period, does not have the military power to provide protection to its economic strategy at the
moment. In addition, he thinks the Initiative “could be jeopardized by hubris and by an increasing global perception of China
as a country of reef-grabbing expansiveness” in the South China Sea that could antagonize “virtually all of its maritime neighbors.”
When Dr. Overholt discusses the military power that China would need to protect its economic strategy in the region, he also
points out China's need to ensure that “the jihadist conflagration ceases to spread in the Middle East, North Africa, and Central

3
The TPP, proclaimed to operate with higher standards than WTO agreements, paradoxically includes economies that are clearly less open than the Chinese econ-
omy, such as Vietnam.

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 L.K. Cheng / China Economic Review xxx (2016) xxx–xxx 3

Asia.” He may well be right, but one should note that there is another source of risk for China's trade and investment in these
host countries arising from geopolitical maneuver and confrontation. The example of Libya has demonstrated that Western
governments, in particular the U.S., might be hostile to countries that are friendly to China and could subvert those countries'
governments by providing military support to their opposition military forces or even intervening directly with military
means.
It would also be worthwhile to take note of another difference between the present situation and that in the post-WWII era.
After WWII, Japan and Europe were basically peaceful, and there were no hostile domestic military forces in countries that re-
ceived economic assistance and direct investment from the US. The USSR, the U.S.'s arch enemy at the time, was not effective
in stirring up countries which were in proximity to the U.S. to confront and challenge it in any serious fashion.4 In contrast,
quite a number of countries in Central and South Asia and the Middle East today are dangerous military and political minefields
that are not very conducive to investment and re-construction work. If risk-adjusted profit is the primary consideration of Chinese
firms, then they may not be willing to plunge into these minefields at all.
More importantly, some of the countries in the Belt and Road regions are U.S. allies who have been given incentives to seek
confrontation with China as part of the Western countries' effort to contain China's geopolitical influence; some countries such as
India and Russia are themselves historical and future regional rivals of China striving to expand their own spheres of influence;
and some countries are fence-sitters ready to benefit from the underlying China-U.S. rivalry in Asia and beyond.
Given the above realities and the gap in overall economic power and military might between China and the U.S., it would be
highly questionable that China has either the ambition or the capability to pursue a grand economic and geopolitical strategy in
the Belt and Road regions that is comparable to the above-mentioned U.S. global grand strategy in the post-WWII era. From a
pragmatic point of view, China's real objectives seem to be much more limited than those suggested by Overholt. What is
more, even China's official objectives mentioned above appear to be achievable only for a subset of the 60 or so countries in
the regions.5 Referring to Vision and Actions' assumption about these countries “huge potential for economic development,” it
should not be a surprise if the slump in the prices of key commodities (such as oil since 2014 and minerals from 2014 to
2015) is not conducive to major investment in infrastructure and rapid economic development in the Belt and Road regions,
with implications for the Initiative's implementation.
Even if the Chinese government is particularly keen on cultivating specific key political relationships (one can think of its “all-
weather” friendship with Pakistan,6 or its special friendship with Burma, a country whose geographical position entails strategic
significance to China), it might not wish to plunge into too many of the minefields, because there are foreseeable risks and costs,
especially in view of their possible defection to the U.S.-led camp. It would also be worthwhile to point out that these very special
geo-political relationships existed long before the Initiative was introduced.

4. Are investment and trade driven by market-based transactions?

In Hong Kong, some officials have proclaimed that in promoting the Initiative, the principle of market mechanism and strictly
business dealings must be upheld, meaning that the government's primary role is to facilitate the promotion and protection of
trade and investment in the Belt and Road regions. If this same principle were also adopted by the Chinese Government, then
how can there be any element of foreign aid in the Initiative to make it comparable to the U.S. Marshall Plan implemented across,
Western Europe after WWII?
According to Vision and Actions, investment and trade cooperation is a “major task” in building the Belt and Road regions, and
infrastructure facilities connectivity is a “priority area” of the Initiative ‘s implementation, with financial integration serving as an
“important underpinning,”7 people-to-people bond providing “public support,” and policy coordination providing “important
guarantee” to the major economic task.
The interaction among the three economic aspects of the Initiative, namely, investment and trade, finance, and infrastructure
facilities, is naturally related to the two aspects of relationships among the people and governments within the regions, namely,
people-to-people bonding and government policy coordination. Apparently, if a good foundation at the people-to-people level
does not exist, neither can government policy be sustainable, nor can the financial resources be put to good use. But how can
China improve its relationships with the people and governments of these countries before large-scale Chinese investment
takes place there? From this perspective, at the national level there may not be a genuine choice between (a) treating invest-
ment and trade as a pure market transaction driven solely by profitability and (b) treating investment and trade as foreign aid
and paying no heed to economic gains and losses what-so-ever. When viewed more broadly, foreign aid and profitability may
be complementary, with aid creating conditions for trade and investment. This is hardly a new phenomenon in international
trade and investment, as developed economies often tie the two explicitly or implicitly in their dealings with developing
economies.

4
The outcomes of the Cuban missile crisis were an extreme, but telling example of the Soviet Union's ineffectiveness in using its proxies to effectively challenge the
U.S.
5
Namely, “maintain closer economic ties, and deepen political trust; enhance cultural exchanges; encourage different civilizations to learn from each other and flour-
ish together; and promote mutual understanding, peace and friendship among people of all countries.”
6
Pakistan reached an all-weather partnership agreement with China in April 2015.
7
Agencies providing funding may include the Asian Infrastructure Investment Bank (AIIB), Silk Road Fund, New Development Bank (NDB, previously known as BRICS
Bank), and China Development Bank.

Please cite this article as: Cheng, L.K., Three questions on China's “Belt and Road Initiative”, China Economic Review (2016), http://
dx.doi.org/10.1016/j.chieco.2016.07.008
4 L.K. Cheng / China Economic Review xxx (2016) xxx–xxx

President Xi Jinping delivered two speeches at the United Nations in September 2015 that may help shed light on China's
approach to profitability and foreign aid. Speaking on global development work, he said: “Facing the future, China will continue
to give due consideration to both self-interests and justice, but as a matter of principle will give priority to justice over self-
interests” (Xi, 2015a). Speaking on global partnerships, he said China will “take a right approach to justice and interests by
putting justice before interests” (Xi, 2015b).
But how can the above broad principle (of considering both self-interests and justice while giving priority to the latter) be
implemented in specific situations? Or more specifically, under which conditions will the government adopt preferential
policies to facilitate those projects with great social benefits but would not otherwise become a reality if they are left to
the market?8 And when there is a need to pay for “justice” in financing development projects, who should pick up the bill?
Probably not the international banks (such as AIIB) in which China is only one of the many shareholders, even if it is a
major shareholder. Instead, perhaps China's US$40 billion strong Silk Road Fund or China Development Bank, or a new
Chinese institution will be in a position to take up the responsibility.
In the presence of preferential government policies such as subsidies and tax concessions, there will likely be rent-seeking
behavior. Thus, some commentators are concerned that the Initiative may become an ATM, through “priority” investment and
development projects, for enterprises owned by China's Central Government and “priority” host countries in the regions. In any
event, which organizations or agencies ought to be authorized to consider non-market factors in order to avoid falling victim
to rent-seeking behavior mentioned above? The National Development and Reform Commission, known in China as the mini-
State Council, is often charged to take on complex economic issues whose scope straddles government ministries and agencies.
It may perhaps be an appropriate body to play a leading role in deciding on preferential government policies with genuine
participation by the Ministry of Foreign Affairs and Ministry of Culture. For implementation, guidelines approved at a higher
level of government would need to be developed on which non-economic criteria should be included in evaluating and approving
applications for preferential measures.
It should be pointed out that consideration of both self-interests and justice in business decisions is a behavior that is not only
appropriate for governments, but also for firms. Multinational companies (MNCs) from developed economies quite often take on
social responsibility projects in specific areas in their host countries to their investment. They understand that promoting and un-
dertaking social responsibility in the host countries within their ability may help build their corporate reputation in these coun-
tries, which is obviously a valuable long-term asset for a going concern. Thus, regardless of whether they do so in the Belt and
Road regions, Chinese firms investing overseas should take note of the good practices of MNCs and make some commitments
to social responsibility as a way to build up goodwill for long-term profitability in the host countries.
Relatedly, who will take up the task of people-to-people cultural exchange, and how can it be done to effectively develop
people-to-people bonds? Besides government-funded scholarships to encourage students from the regions to study in China
and vice versa, business associations may also play a useful role.
A priority area of cooperation identified in Vision and Actions is to improve the “division of labor and distribution of industrial
chains.” When it comes to the division of labor along the “value chains” of industrial production, positions and preferences
reflecting the national interests of countries in the regions may well differ from or even contradict China's own positions and pref-
erences. In these circumstances what can be done to resolve the differences, including ways of coordination and compromise? It
seems that a variety of cooperative arrangements, e.g., joint ventures and quid pro quo agreements, can be explored in specific
contexts. In other words, it might be necessary again to go beyond pure market-based transactions.

5. Which countries are priority targets of economic cooperation?9

This appears to be a difficult question to answer because specific conditions and factors matter. Clearly, a pre-condition is that
the specific countries in the regions welcome, or at least do not oppose to China's trade and investment. Overholt (2015) specif-
ically points out “the need for the host countries to feel politically respected and equitably profitable.” As one would expect,
among those that welcome China's trade and investment, some are more enthusiastic than others, and enthusiasm will serve
as an impetus when coupled with economic calculus.
Pakistan, China's “all-weather strategic partner” from April 2015, agreed to build the China-Pakistan Economic Corridor (CPEC)
linking its Gwadar Port in the southwest to China's Xinjiang autonomous region, with key areas of economic cooperation includ-
ing transport infrastructure, energy and industrial cooperation.
As China's “comprehensive strategic partner,” Russia agreed in May 2015 to integrate the Russia-led Eurasian Economic Union
(EEU) with the Silk Road Economic Belt in building an integrated trade and infrastructure network across the regions. In November
2015 China signed cooperation agreements with five central and eastern European (CEE) countries (Bulgaria, Czech, Serbia, Poland
and Slovakia) related to the Belt and Road Initiative. In March 2016, China and the Czech Republic established a strategic relationship,
and in June 2016 China agreed with strategic partners Serbia, Poland and Uzbekistan to enhance Belt and Road cooperation during
President Xi's visits to these three countries.
In a different region covered by the Initiative, Saudi Arabia, Egypt and Iran agreed with China to expand cooperation in January
2016 around the time that the Asian Infrastructure Investment Bank (AIIB) started operation.

8
Preferential policies include subsidy, tax concession, indirect benefit or other related preferential treatment.
9
The information contained in this section on which countries have reached agreements with China on economic cooperation under the Initiative is obtained from
Turkish Weekly (2016) and Xinhua (2015, 2016a, 2016b).

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dx.doi.org/10.1016/j.chieco.2016.07.008
 L.K. Cheng / China Economic Review xxx (2016) xxx–xxx 5

According to Xi's remarks made during his visit to Serbia, Poland and Uzbekistan, by June 2016 more than 70 countries and
international organizations will have participated in the Initiative, Chinese enterprises have invested a total of 14 billion U.S. dol-
lars in countries in the regions and created about 60,000 local jobs. Neither the amount of investment nor the number of jobs
created is very impressive at this fetal stage of the Initiative's implementation. So far, it seems that several small east and central
European countries have shown the greatest enthusiasm to the Initiative. However, whether these small economies are able to
play the pivotal role of serving as China's entry points and beachheads to push the Initiative forward in broader areas remains
to be seen.
Returning to a point raised earlier, would domestic peace and safety be a pre-condition for Chinese investment to take place?
So far, China has not moved into countries that do not enjoy peace and safety, except for a few with which it had established
long-term strategic partnership well before the Initiative was introduced (e.g., Pakistan). This seems rational since China has nei-
ther the power and resources nor good justifications to throw itself into a foreign country that is at war. Enlightened economic
interests (i.e., win-win in the long-term) would be a good guiding principle to determine on which countries in the regions
the Initiative should be focused.

6. Concluding remarks

Some commentators have expressed concern that the Initiative may be a repeat of China's “Develop the West” initiative, which
after some fanfare has come to naught. Given that the Chinese government from President Xi down has committed a great deal of
diplomatic and financial resources as well as their personal prestige to move the Initiative forward, China appears to be very se-
rious about following through with its key regional cooperation strategy. Given the overall global economic landscape, it would be
fair to say that the Belt and Road regions do offer great potential for economic cooperation, as they offer benefits to be derived
from complementary economic structures as well as specialization and division of labor, so long as China's pursuit in these regions
do not prevent it from exploiting mutual economic benefits that are available in the other regions of the world. Nevertheless, the
success of the Initiative will depend on many factors beyond China's control. A key factor is the resources available to the regions'
target countries. The recent slump in the prices of key commodities such as oil and metals will definitely increase difficulties in
carrying out major infrastructure projects in the countries affected, regardless of whether the countries finance the projects on
their own or through foreign direct investment or with international borrowing? Countries facing economic difficulties look to
China for assistance, but what can China do when it faces difficulties of its own. AIIB's resources can help, but it would be
much easier if the countries in the regions have more financial resources of their own and a more promising economic outlook.
Mutually beneficial outcomes may fail to realize due to the lack of certain pre-conditions, and the creation of conditions that
help turn potential into reality requires someone to provide the requisite “public goods.” China seems ready to take the leadership
in providing such public goods that benefit all participants, such as creating a policy framework (in the form of multilateral and
bilateral agreements) for economic cooperation and establishing appropriate economic institutions (such as the Silk Road Fund
and AIIB) to support it. Still, only history can tell whether China's effort in promoting the Initiative is productive for itself and
the regions.

References

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building silk road economic belt and 21st-century maritime silk road. March 28.
Overholt, W. H. (2015). One belt, one road, on pivot. Global Asia summer, 8–12 and 51–52.
Turkish Weekly (2016). China, five CEE countries signed memo to promote belt and road initiative. November 26. Retrieved July 1, 2016, from http://www.
turkishweekly.net/2015/11/26/news/china-five-cee-countries-signed-memo-to-promote-belt-and-road-initiative/
Xi, J. P. (2015a). Seek common and sustainable development and forge a partnership of win-win cooperation. Statement delivered at the UN sustainable development
summit at the UN headquarters in New York, September 26 in Chinese.
Xi, J. P. (2015b). Working together to forge a new partnership of win-win cooperation and create a community of shared future for mankind. Statement delivered at the
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Please cite this article as: Cheng, L.K., Three questions on China's “Belt and Road Initiative”, China Economic Review (2016), http://
dx.doi.org/10.1016/j.chieco.2016.07.008