Macroscope | The economics and politics of China’s New Silk Road

China’s New Silk Road project is evidence that Beijing is developing policies to realise President Xi Jinping’s “Chinese Dream” to “reclaim national pride and enhance personal well-being”.

In economic terms, this amounts to creating incentive compatibility between the state and the people.

Officially dubbed “One Belt, One Road” (OBOR), Xi’s plan is to connect Asia and Europe by investing in infrastructure projects using vast financial resources including the US$40 billion Silk Road Fund, the US$100 billion Asia Infrastructure Investment Bank (AIIB) and the US$50 billion New Development Bank (NDB).

It plans to build roads, railways, and gas pipelines across central Asia to Europe and ports and maritime facilities from the Pacific Ocean to the Baltic Sea. Building closer economic ties with the regional economies lays the foundation of an economic empire centred in China.

OBOR is the next step of China’s strategic development. The initiative will unleash a regional and domestic infrastructure boom, helping to stabilise mainland growth while structural reforms are implemented. China’s large state companies will likely lead most of the OBOR projects, paving the way for the small (including private) companies to follow.

But it would be wrong to view OBOR as an escape route for China to revive its investment-led growth model.