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China’s “Game” in the New Silk Road

https://www.ft.com/content/6e098274-587a-11e5-a28b-50226830d644

In recent years, China’s president Xi Jinping has headed a new infrastructure development strategy called the Belt and Road Initiative or BRI. This project aims to accelerate economic growth by reducing an “infrastructure gap” between China and its neighboring countries so that China can expand and improve its trade in the region. This initiative has been compared to the Silk Road of the Han Dynasty in terms of its size and economic impact. In this 4-8 trillion dollar project, China makes deals with nearby countries like Kazakhstan and Sri Lanka to build roads, ports or highways that would boost the economy and trade of both countries. These projects are enormous and require funding, most of which comes from China in the form of a “loan”. The smaller countries then have to pay back the loans, which doesn’t always happen. Many of the countries China makes these deals with are unable or unlikely to pay back the money originally given to them by China. Despite this fact, China had made deals with over 60 countries. So why is China taking this risk over and over again? The answer lies in game theory.

At first glance without the sketchy investments, this seems like an obvious win-win. Considering game theory, an oversimplified way to think of this is a game matrix with two dominant strategies. If the choices are to undertake the project or not, both countries should choose to take it because it benefits them both. Obviously, if at least one country disagrees, then nothing happens and there is no net gain. The Nash Equilibrium lies with both sides choosing the project, as it is always better and there is no loss if one side doesn’t want to participate. Now let’s actually factor in the sub-prime money investments. If we consider the possibility of China losing money by making these risky loans, we actually discover that there is still a dominant strategy for China.  

The crucial aspect to this situation is what happens when a country can’t repay China. China doesn’t simply lose the money, it finds a way to get back in worth what was put in. This comes in the form of many long term leases of ports, stations and other strategic positions. These long term leases (up to 99 years) let China establish their economic and military presence in strategic places beyond their regular sphere of control. This can be considered as equal to or better than the sum of money that is lost in the unpaid loan. With this information we can recalculate the game matrix.

We can consider the three possibilities for countries partnering with China: Not making the deal, making the deal and not being able to pay back the loan and making the deal and paying back the loan. China still has two choices, to build the project or not. We see that if China doesn’t make the deal, they don’t gain anything. If they do, we see that there is actually no downside. If the other country chooses not to partake, the result is the same as if China chose not to participate. However, if China does take the project, they can only gain from it through economic improvement or strategic presence. Thus, we can see that this is truly a “game” that China is playing – and a good one at that considering that China has a great dominant strategy.  

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