A Slimmer Belt and Road Is Even Scarier

(Bloomberg Opinion) -- China's globe-spanning infrastructure initiative is shrinking. The rhetoric at the second Belt and Road Forum, being held in Beijing this week, has been less triumphalist — and new plans for roads, pipelines, bridges and rail lines more modest — than at the first: On Friday, Chinese President Xi Jinping pledged high standards and “zero tolerance” for corruption in the program. Unfortunately for the U.S. and its allies, though, a downsized program could pose more, not less of a competitive threat to the West.

Until now, most worries about the Belt and Road have focused on its size and those weak standards. The sheer volume of the supposedly multi-trillion-dollar initiative looked impossible to match. Meanwhile, a corrosive combination of debt, corruption and privileged access for Chinese companies threatened to lure or coerce countries away from the U.S. orbit and into China's.

In many ways, though, this model always contained the seeds of its own failure. The emphasis on speed and scale came at the expense of sustainability, both economically and politically. In most countries, China failed to build a broader consensus for its investments beyond whatever government happened to be in office. In a series of elections from Malaysia to the Maldives, opposition parties have sailed into power by railing against Chinese megaprojects that looked to be lining the pockets of politicians more than boosting the economy. Investments in countries such as Pakistan had already been pared back as rising debt levels limited their ability to take on new projects.

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By spurring fears in the U.S., Japan, India and Europe, the Belt and Road also provoked competition. With the exception of Japan, whose overseas investments have by some measures exceeded China's in recent years, this hasn't cost much money. India has provided financing to help shore up the new Maldivian government and the U.S. has extended legal and political help to governments negotiating major contracts, such as Myanmar. But it has so far proved relatively easy for China's competitors to rely on the Belt and Road catalyzing its own political pushback.

There are limits to Beijing's ability to fix this. Some of the Belt and Road's flaws are endemic to the way the Chinese economic and political system works: Beijing's deep sensitivity to political embarrassment around the scheme, for instance, is only increasing its lack of transparency. Nor is China willing to make the initiative genuinely multilateral, which would slow it down and erode any bilateral leverage Beijing hopes to gain over individual countries.

But leaders in Beijing can and will adjust. They've already shown striking willingness to renegotiate contracts, with Malaysia's $16 billion East Coast Rail Link — now around 30 percent cheaper — being only the largest example. Newly elected governments have found Chinese counterparts relatively flexible on rescheduling loans, revisiting project costs or shifting the focus of the two sides' economic cooperation. Even the flagship China-Pakistan Economic Corridor is set to level out at around a third of the scale that was once touted.

This leaner version of the Belt and Road will potentially be far more potent. China will still be able to deploy its many advantages in the new scheme: its capable infrastructure firms, large-scale subsidies for its major companies, speedy decision-making, increasingly cutting-edge technology, and willingness to finance non-bankable projects that fit broader strategic goals.

At the same time, a more measured approach, better attuned to political and economic risk and more responsive to local demands, will give China greater scope to entrench its presence in the economic sectors that matter. Most important of these will be digital infrastructure projects, where China's advances — from fiber-optic cables to telecoms networks — will likely do more to affect U.S. security and commercial interests than any number of roads, railways or dams.

China's 5G capabilities are proving attractive even to key U.S. allies, posing risks for U.S. intelligence-sharing and military mobilization. Chinese surveillance technologies are being rolled out across the developing world, promising to spread China's authoritarian capabilities. From data access to standard setting, the so-called Digital Silk Road will also augment China's edge in the industries of the future — and will receive a warm welcome from countries looking to benefit from Beijing's subsidized prices and fast rollouts, even if they'd chafe against Chinese port or airport acquisitions. 

A rebalancing away from the most toxic aspects of the Belt and Road would certainly limit China's ability to ensnare smaller countries in debt and gain access to such strategic assets. But, it will also force the U.S. to compete against China's underlying strengths and most compelling appeals rather than on the Belt and Road's most obvious — and fixable — flaws.

To contact the editor responsible for this story: Nisid Hajari at nhajari@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrew Small is a senior transatlantic fellow on the Asia program at the German Marshall Fund of the United States and author of "The China-Pakistan Axis: Asia's New Geopolitics."

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