China has been the main driver of world economic growth over the past decade in terms of its contribution to total global GDP, but its role as an overseas investor, in physical infrastructure especially, has gone into a sharp and rather ominous decline more recently.
Other major powers, including the US (under Donald Trump) plus Japan and some members of the European Union, have been so busy attacking China’s thrust into infrastructure-related and other overseas construction that they have overlooked how important it is to overall global growth.
This implies the severe recession into which the world as a whole (excluding China itself) has been plunged over the past year could prove even deeper and longer lasting than feared, because the China locomotive is losing steam in terms of overseas investment.
Get the latest insights and analysis from our Global Impact newsletter on the big stories originating in China.
China continues to be a major driving force for the global economy on the trade front and as a buyer of commodities but the economic activity and demand created by Chinese infrastructure and other types of construction in advanced and emerging economies is waning.
Most economists agree the current recession is structural – meaning that its causes go deeper than normal cyclical downturns. But it might equally be called a “constructional” recession.
Recent data shows we have entered a general slump in international construction of basic infrastructure and other forms of capital investment, affecting both advanced and emerging economies. That does not bode well for global economic recovery.
One key factor revealed in a report from the Institute of International Finance (IIF) in Washington is that China’s overseas construction spending and investment in basic infrastructure went off a cliff in 2020 after trending downwards for several years from a 2017 peak.
The problem goes wider and deeper. In Asia, Latin America, Africa and other developing regions, investment generally in new construction and production plants (so-called greenfield investment) has been sliding, the United Nations Conference on Trade and Investment (UNCTAD) reported recently.
As UNCTAD director of investment and enterprise development James Zhan noted in the report: “These (investments) are crucial for productive capacity and infrastructure development and for sustainable recovery.”
In China’s case, the slide in spending on overseas construction and infrastructure has been dramatic, from around US$160 billion in 2019 to nearer US$70 billion last year, according to the IIF’s China Global Investment Tracker.
This is hardly surprising, given the effect of the pandemic on economic activity globally. And this is aside from the impact on local labour and material supplies needed for infrastructure building – China and other countries had been unable to dispatch engineers to overseas projects.
But China’s overseas construction investment had ebbed sharply even before Covid-19 struck, from a peak of some US$260 billion in 2017 when opposition to the Belt and Road Initiative, launched in 2015, began to build and China came under attack for pursuing alleged “debt trap diplomacy” via the belt and road.
China has been putting more emphasis of late on a “digital Silk Road” aimed at improving telecoms networks, artificial intelligence capabilities, cloud computing, e-commerce surveillance technology, smart cities and other hi-tech areas in recipient countries.
These projects do not require the same level of capital investment as spending on physical infrastructure projects, such as energy and transport systems, and they are not as high-profile. This may account for some of the drop in Chinese overseas construction.
But China’s overseas investment in countries that are not part of the belt and road network has fallen more sharply, if anything, than in those that are hosting belt and road projects, according to IIF data. Chinese lending of money in general to the rest of the world has also been slowing.
Some pickup in investment in overseas construction by Chinese and other investors can be expected as the pandemic subsides, but meanwhile, as UNCTAD says, “the steep decline in greenfield announcements and international project finance in Africa, Asia and Latin America is a cause for concern”.
This is all part of the deglobalisation syndrome. Just how long that will persist depends critically on how far the Biden administration in the US goes to reverse the iconoclastic four years of the Trump presidency and strike a rapport with China.
In the meantime, hopes of a V-shaped economic recovery, which a euphoric Wall Street continues to entertain as it focuses myopically on tech stocks and trading system tricks, look increasingly absurd. Once “normality” returns, it is likely to be a new normal, where structural changes have made the global economic landscape virtually unrecognisable.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
More Articles from SCMP
This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.
Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.