King of the road

China's new Silk Road paved with hidden costs

China's push west is becoming more than just a clunky slogan. Banks are stepping up to back President Xi Jinping's "One Belt, One Road" strategy of building infrastructure and winning friends in central Asia and the Middle East. The benefits to China are obvious, but the costs, while hidden, can't be dismissed.

Xi's new Silk Road remains more an idea than a concrete plan. While China will fund, co-ordinate and build infrastructure, the overall scale is unclear: existing projects have been rebranded, and old investments re-announced. And some investment is domestic, like $32 billion of airport investments announced for provinces that line the route.

Still, money is amassing. For example, state-owned CITIC Bank offered on June 24 to invest 400 billion yuan ($64 billion) - almost three times its new loans to companies last year. Bank of China is selling lots of Silk Road-linked offshore bonds.

Politics is an obvious motivation: being a bigger benefactor than either Europe or the US will greatly enhance China's clout in the region. But there is also a chance to create new demand for surplus resources and labour. The shift in the domestic economy has left plants idle. China could produce around a third more long steel, the kind used for railways and construction, than it does at present, according to CLSA.

The risks are mostly financial. Some investments will see China act as a coordinator of other people's money, but much will come from home. Unlike the US Marshall Plan of the late 1940s, to which Xi's scheme is often compared, this is mostly loans not aid. That requires returns on investment. Developing states aren't always good borrowers and corruption is a serious problem in many of the countries en route.

The pity is that savers and consumers have already paid. China's $3.7 trillion of foreign reserves and abundant bank deposits aren't free money - they're the legacy of an artificially low currency and capped savings rates that have long suppressed domestic spending power. This policy choice will continue to curb consumption. To make Xi's scheme worthwhile, the non-financial returns will need to be generous and lasting.