The Effectiveness of ‘One Belt, One Road’ Initiative in tackling China’s Economic Slowdown and Its Financial Implications within a Policy Trilemma Context

Abstract

Although China’s 2008 stimulus package has been effective in combating the adverse effects of the financial crisis, a decade later its drawbacks can be observed in the form of funding, debt, and overcapacity making its financial system more vulnerable. Apart from the changing global geopolitical relations, president Xi Jinping launched the ‘One Belt, One Road’ initiative in 2013 as a response to the inevitable economic slowdown. This grand infrastructural project can be used to meet China's desire to capture the higher end of the global value chain with a transition to a slower but structurally more balanced ‘new normal’ economic growth model. However, the lack of financial resources at the government level has undermined the effectiveness of China’s ‘globalisation 2.0’ initiative. This paper will investigate to what extent the ‘Belt and Road’ plan will be effective enough to help China bounce back from its economic slowdown and what are the financial implications in a policy trilemma context. A re-examination of the impossible trinity theory applied to China’s ‘new normal’ economy and its ‘Belt and Road’ plan will be dealt with. Finally the authors will conclude with several possible policy options to cope with the trade-off between financial liberalization and financial stability within a quadrilemma framework.