China wants to build the world a railway

The developing world is embarking on a massive infrastructure boom. And China wants to build it—and bankroll it.

On Thursday, Chinese officials announced the latest infrastructure megaproject—a $12 billion contract to build a railway stretching more than 850 miles (1,400 kilometers) along the coast of Nigeria. It was China's single-biggest overseas contract, according to state media.

With its domestic economy cooling, China is investing heavily outside its borders in multibillion dollar infrastructure projects, launching new financing plans to help developing countries pay for them.

Much of that investment will be geared toward transportation projects like the Nigerian railway, as developing countries seek to put in place the capacity needed to keep up with increased flows of people and goods brought by economic growth.

Much like the 19th century railroad expansion that opened up the American West, many of these projects are designed to expand growth to inland regions with little access. More recently, China's three-decade economic transformation started with coastal manufacturing hubs served by ports that provided gateways to international trade.

In the past decade, China has spent tens of billions of dollars building tens of thousands of miles of roads and railways to expand economic opportunity to hundreds of millions of Chinese inland workers.

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Other developing countries, including Brazil and India, now face the same transportation challenges, according to a recent report by KPMG.

"A large proportion of jobs exist close to the coast, and governments need to enfranchise those living in other parts of the country, in order to maintain their legitimacy and ensure that each region is treated fairly," the report said.

A construction site of the Lagos Rail Mass Transit system in Nigeria.
Joe Penney | Reuters
A construction site of the Lagos Rail Mass Transit system in Nigeria.

Economic expansion in the developing world is creating a huge demand for transportation and other infrastructure projects. One estimate forecasts the level of global infrastructure spending to hit $78 trillion by 2025, or slightly more than the world's current total gross domestic product.

Much of the funding will come from private investment and existing public finance groups like the World Bank and Asian Development Bank, which have historically been dominated by the U.S and its Western allies.

Now, China is tapping the massive reserves it has accumulated during its historic economic expansion to bankroll infrastructure outside its borders.

China's total reserves swelled more than fourfold between 2005 and 2013, rising to $3.8 trillion, according to World Bank data, more than three times the next largest reserve holder, Japan. China's reserves are more than eight times that of the U.S.

China wants to use some of that money to finance big infrastructure.

Last month, Chinese leaders said they were joining with Brazil, Russia, India and South Africathe so-called BRICS countriesto form a new development bank with $50 billion to start. In October, China agreed to pay half the funding for a new Asian Infrastructure Investment Bank serving 20 other Asian countries.

Last week, at the APEC Summit in Beijing, President Xi Jinping also announced $40 billion in funding for a new Silk Road Fund to better connect major Asia cities and to "break the connectivity bottleneck" in Asia. Analysts say Beijing is seeking to become less reliant on freight lines dominated by European shippers and develop new markets for Chinese exports.

It remains to be seen how well these new funding initiatives take hold in the developing world.

Other officials have raised concerns about whether China's new development bank would maintain the same level of transparency practiced by other international lenders like the World Bank.

"The critical question is, 'Do they follow the same kinds of practices that are working to help economies grow and to maintain strong and stable foundations?'" U.S. Treasury Secretary Jacob Lew asked at a conference earlier this month in Washington

China's plan to provide lending alternatives also face skepticism from other Asian countries. Japanese officials have said they don't see a need for an alternative to the Asian Development Bank, which is dominated by Tokyo.

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Others have questioned China's intentions. In Africa, for example, while some countries have embraced China's large-scale investments, critics of these deals see them as part of a wider strategy of expanding access to natural resources like oil and minerals.

But those charges of "neocolonialism" are misplaced, according to PwC Chief Economist Harry Broadman.

"The commercial relationship between China and Africa has nothing to do with colonization, and everything to do with economics and diplomacy, he wrote in a recent report. "China has its plate full of domestic challenges, and it would be naïve to conclude that its leaders would complicate matters by chasing impractical colonial dreams."