There is something about financial columnist Matthew Lynn’s op-ed in the Washington Post that really struck me the wrong way. I think he’s missing something fundamental. Here’s the kernel of his piece, “China tried to buy the world. It failed.”:
China’s geopolitical ambitions have suffered a whole series of setbacks. The courts in Panama have ruled against Hong Kong’s CK Hutchison owning the ports at either side of the crucial canal through which at least 40 percent of U.S. shipping flows. Following the arrest of the Venezuelan dictator Nicolás Maduro its investment in the Latin American state looks far less valuable. Iran? You wouldn’t describe any investment in the country as rock-solid right now. Italy scaled down its agreements with China in 2023. The more than $23 billion it has pumped into Argentina probably won’t secure any special favors from President Javier Milei: He hates Marxists almost as much as he loves chainsaws. The list goes on and on. China has spent an estimated $1.5 trillion on its Belt and Road strategy, a huge sum of money for what is still basically a developing economy.
Let me try to investigate the problems I had with it.
I think Mr. Lynn misunderstands China. Labelling it “basically a developing economy” is misleading. It is the country with the 2nd largest GDP and an enormously large middle-income developing economy within the same geographic borders. That economic power enables China to do things no other developing country can.
Selective examples don’t prove a strategy failed. The Chinese Communist Party does not operate like a corporation with a board demanding return on equity. It allocates capital as a political instrument. Judging Belt and Road solely by commercial profitability misses the point.
The sheer size of that developed economy allows it to make mistakes impossible to other countries. The analogy is to wasteful infrastructure or other building projects. They do it because they can. Because the CCP’s objective function is political rather than strictly financial, it can absorb losses that would bankrupt a private actor. That does not mean every investment succeeds. It does mean that “unprofitable” is not the same thing as “failed.”
You’re still using nominal (exchange rate) GDP. nowadays the Chinese economy is about 50% larger than the US’. their manufacturing sector is twice the size of ours, and it is the most modern, most automated, and most optimized in the world. Lynn is right that economic power is hard power, too, and China, not the US, has it.
Lynn is referring to the BRI. That has proven to be one of the most successful capital investment projects in history, like the US Interstater System, only an order of magnitude larger.
Panama cancelled the Chinese management contract at American gun point, literally. It’s really too bad, a blow to the Panamanian economy, because China really knows how to run ports.
You’re still misusing PPP.