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Mecardo Blog

The risk of getting belted by China

Posted by Matt Dalgleish on 26 March 2018
Matt Dalgleish

China has come along way from the “great leap forward” program undertaken by Chairman Mao in 1958 that was aimed to move the country from a largely agrarian based economy into an industrialised, collectively owned global power house. 

The “great leap forward” was widely acknowledged as a dismal failure which lead to periods of famine and economic recession.However, the modern China bears little resemblance to the disaster of the “great leap”.

In this article we take a look at how Australia can change how infrastructure investment is managed, in order to compete on a global stage. 

The free market reforms overseen by Deng Xiaoping put China on the road to economic growth and prosperity, with the Chinese economy now ranked as the second largest in the world. The next major step in the advancement of Chinese interests and influence is the massive infrastructure project of the Belt and Road Initiative (BRI).

The idea for the Belt and Road Initiative was released in 2013 by the Chinese government and is one of the biggest investments in infrastructure ever to have been undertaken, spanning more than 65 countries, gaining access to more than 65% of the world’s population and encompassing 40% of global GDP. In simple terms the goal is to create a new Silk Road via trade deals, investment and infrastructure projects across Asia, Europe and Africa in order to make it easier with China to trade with the world.

The “Belt” part of the initiative is a system of overland trade corridors and oil and natural gas pipelines that will stem from China through Central Asia and ultimately reach as far as Europe. Instead of a single dedicated route, the belt corridors will cross the major Eurasian Land Bridges.

The “Road” part of the initiative refers paradoxically to seaborne corridors, or effectively a maritime version of the Silk Road consisting of a hub of key ports and other coastal infrastructure projects that span from Asia to Africa, the Middle East and Southern Europe.

 Beltedbychina1.pngThe key goals of the Belt and Road Initiative are:

  • co-ordination of government policy across national boundaries
  • connection of infrastructure to remove supply chain bottlenecks
  • promote free trade and connection/co-operation between nations
  • integration of investment and finance.

 

“We must encourage and participate in the process of regional economic integration, speed up the process of building up infrastructure and connectivity.” President Xi Jinping

By developing these infrastructure bonds with its neighbours China aims to reduce physical and regulatory barriers to trade both in and out of the nation. Furthermore, China is using the BRI to deal more efficiently with capacity constraints within its industrial sectors, with the goal that entire production facilities can be moved out of China into participating BRI countries, with Chinese assistance and investment.

“We want companies to move this excess production capacity through direct foreign investment to ASEAN countries who need to build their infrastructure.” Premier Li Keqiang

Beltedbychina2.png

Undoubtedly a key aspect of the BRI is to expand the potential market place for Chinese exports, but it is also key to facilitating the efficient flow of resources and imported raw materials into China, thereby securing supply of key resources into the future.  Additionally, it will go a long way to build China’s political and economic influence within the immediate region and into Africa, the Middle East and Europe – quite possibly at the expense of the US.

Playing the long game

The recent amendments to the term limits on the Chinese presidency will allow Xi Jinping to remain in power for an indefinite period and while this strains against Western notions of democracy and opportunities for political/governmental change it does allow for consistency in long term planning and nation building. 

The one party planned economy structure associated with communist ruled China has many drawbacks. However, in the area of consistency of vision with regard to infrastructure and environmental management over the long term, having the ability to plan, develop and oversee projects that are likely to span beyond multiple Western election cycles can have its advantages.

In Australia, infrastructure projects can be vote winners - particularly in regional areas. Unfortunately, this means that infrastructure announcements closely follow the election cycle of governments at both state and federal levels.

Successive governments have to commit to the plans, or ongoing projects, of their predecessors in order to ensure the delivery of long-term infrastructure goals and to encourage investor support, when applicable. Therefore, it is crucial that a bipartisan approach is taken with regard to major infrastructure projects within Australia.

“..the dual challenge of the need to build confidence and the short termism of politics -- a result of the electoral cycle -- continues to inhibit certainty in the infrastructure pipeline and the realisation of projects the country needs.” – Glenn Stevens, RBA Governor 2006-2016

Australia is a nation built on trade, and a quarter of our exports end up in China. We require a list of major infrastructure projects with real long-term benefits for the nation that can facilitate easier trade flows of our products (particularly perishable agricultural items) both within the country and to overseas destinations. In short, we need the capacity to be able to play on an even footing with the big boys once the BRI comes to fruition, or we might get left behind.

A new framework for long term planning

Perhaps the time is ripe to consider a new methodology when it comes to long term infrastructure and environmental planning that takes the planning, development and implementation away from the political class, who can be swayed by electoral cycles or the whim of minority parties holding a balance of power and placed in the hands of government appointed expert panels.

Consider the manner in which the Reserve Bank of Australia’s (RBA) board controls the monetary policy requirements on behalf of the Australian government based on pre-determined guidelines and a carefully outlined scope of action as identified by the Reserve Bank Act 1959.

Broadly speaking the key objectives of the RBA are to ensure:

  • stability of the Australian dollar
  • maintenance of full employment within Australia
  • economic prosperity for the nation

The key tool the RBA board uses to ensure these objectives are met is through the control of inflation through adjustment to the interest rate level, with the goal of keeping the annual consumer price index (CPI) within a 2-3% range on average over the economic cycle.

The RBA board consists of nine members which include three RBA/Treasury appointees and six external appointees from industry, selected by the Treasurer for a staggered five-year term. This structure allows for both continuity in the economic direction being taken on interest rate policy and removes the ability for interest rate setting to be swayed by the electoral cycle or indeed a change of government.shanghai.png

Imagine a board of expert members appointed by a relevant government minister on a staggered basis with clearly outlined and measurable goals aimed to advance necessary infrastructure/environmental developments such as metropolitan ring roads, train links to major airports, regional freight hubs focused on international transport of perishable items, allocation/management of water resources such as the Murray Darling region, renewable technology programs harnessing the power of battery storage infrastructure, etc. – all of which wouldn’t be at the whim of a decision made by a political party facing an election in a marginal seat.

It's time for a similar model to the RBA board to be implemented for the management of Australia’s long-term infrastructure goals and environmental policy. We need an expert panel installed with a focus on key national infrastructure projects and energy/water resource management, with an overarching environmental consideration, in order to ensure we can keep up with the global pack.

Topics: china, Politics, business, Agriculture

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