China’s railway project in Nigeria reflects Beijing’s new foreign policy, which stresses regional integration and cooperation among emerging and developing economies.
Recently, China Railway Construction Corp. (CRCC) signed a deal worth almost $12 billion with Nigeria to build a 1,402 kilometre railway along the coast, linking Lagos in the west with Calabar in the east.
To Beijing, these huge international railway construction projects support efforts to export its high-speed technology and upgrade its manufacturing productivity up the value chain.
To Lagos, the project could result in equipment exports from China worth $4 billion and the creation of up to 200,000 local jobs, says CRCC.
According to a 2014 BBC World Service Poll, some 85 percent of Nigerians view China’s influence positively, with only 10 percent expressing a negative view. A successful railway project would take the bilateral relationship to new level.
The railway deal occurs in parallel with vital shifts in China’s foreign policy and growth model.
Regional Silk Road initiatives
In a recent APEC forum, China presented its new regional initiatives, including a $40 billion Silk Road fund, and the $50 billion Asian Infrastructure Investment Bank, which will augment the already-launched New Development Bank (NDB) by the BRICS nations.
Furthermore, Beijing is paving way for the Silk Road Economic Belt to serve a combined market of 3 billion people, as well as the 21st century Maritime Silk Road along with $1 trillion in bilateral trade with Southeast Asia by 2020.
In turn, these initiatives are evolving hand in hand with the proposed Asia Pacific Free Trade (FTAAP) plan, which would include both China and the United States.
“With the rise of its overall national strength, China has the capability and the will to provide more public goods to the Asia-Pacific and the whole world,” President Xi Jinping said in the APEC meeting.
As China’s foreign economic relations are moving toward greater integration, its growth model has begun to shift as well.
From strong economy to higher living standards
Recently, China announced an interest rate cut that surprised the markets. While Beijing wants to avoid new huge stimulus packages, it does seek to lift the country’s housing market, large state-owned companies, while bolstering other nations that are reliant on those core parts of China’s economy.
In the third quarter, China’s economic growth slowed to its weakest pace in five-and-a-half years. Yet, markets reacted fairly calmly. However, there was also a pickup in momentum. With a solid fourth quarter, the government’s growth target for 2014 – “about 7.5 percent” – remains viable.
What matters for future growth is that the reform momentum continues and employment remains steady, even as inflation is relatively low. The goal for 2014 was to create 10 million urban jobs, which was exceeded already in the first three quarters.
In order to morph from a middle-income nation into an advanced economy, China needs not only steady real GDP growth, but greater productivity and consumption.
first half of 2014 suggests that investment accounted for 49 percent of GDP growth. However, consumption contributed significantly more; that is, 54 percent.
China’s growth model has begun to move toward consumption but the shift will take years. Since some 45 percent of the Chinese still live in rural regions, much potential remains for urbanisation and industrialisation – but both require substantial investment as well.
The challenge of debt
In a precarious balancing act, Premier Li Keqiang seeks to manage the housing market volatility, while continuing deleveraging in the local government.
Despite the relaxation of curbs in a number of major cities to stimulate demand, the property market downturn has been adding pressure on local governments, banks, and developers. Indeed, a massive local and regional government (LRG) deleveraging is now underway.
In mid-2013, the LRG debt amounted to some $1.8 trillion, which accounts for some 20 percent of GDP. As the reforms are implemented gradually, debt growth should begin to decline.
Besides, Chinese leverage should be seen in the international context. In the Euro area, the general government gross debt as percentage of the regional GDP soared to 93 percent in 2013.
In the United States, the national debt is now close to $18 trillion or more than 100 percent of the GDP, despite the Fed’s lifeline of $4.5 trillion in the past half a decade. Japan is struggling with the third lost decade. After two years of reforms, its national debt is almost 250 percent of GDP.
In China, the national debt is about 25 percent. Add the local debt and the total remains around 45 percent.
Unlike the major advanced economies, China can still grow out of its leverage without taking more debt – but only on the back of reforms.
Dan Steinbock
