Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinas Belt and Road Is Shifting to Digital Infrastructure
Transcript
- Lucas: So the yuan's been hovering around 6.77 per dollar this week, basically flat, and the trade-weighted dollar index is up at 120.4. That combination usually tells you capital is flowing into dollars, not renminbi. But here's the twist — Beijing isn't panicking. They're actually accelerating a whole different kind of spending. Luna: You're talking about the digital infrastructure push, right? The shift from concrete to cloud. Lucas: Exactly. For years, the Belt and Road was synonymous with ports in Sri Lanka, railways in Kenya, pipelines in Myanmar. But if you look at the project pipeline for 2026, the big-ticket items are data centers in Indonesia, 5G networks in Thailand, and AI training hubs in Malaysia. China's Export-Import Bank is now financing cloud computing as readily as it used to finance highways. Luna: I saw that Huawei just signed a deal with Thailand's digital ministry to build a second major cloud region there. That's not just selling gear — that's operating the infrastructure. Lucas: Right. And Alibaba's cloud arm, which already has data centers in Singapore and Indonesia, is expanding into Vietnam and the Philippines. These aren't small experiments. We're talking hundreds of millions of dollars per facility. The logic is straightforward: if you control the data pipes and the compute layer, you don't need to own every port to influence trade flows. Luna: So this is about data sovereignty as much as economics. Countries in Southeast Asia and Africa are wary of being locked into US cloud providers — AWS, Azure, Google Cloud. China offers an alternative that comes with fewer political strings, at least on paper. Lucas: Exactly. And it's not just about selling services. Beijing is also pushing its own standards. The new data centers run on Chinese-designed hardware and software stacks. That makes it harder for Western companies to compete later, because the interoperability isn't there. It's a classic platform play — get in early, lock in the architecture. Luna: Let's talk numbers. What's the scale of this shift relative to the old infrastructure spending? Lucas: So total Belt and Road lending peaked around 2016 at roughly $80 billion a year. It dropped during COVID and the debt-restructuring years. But in 2025, the China Development Bank and Export-Import Bank approved about $45 billion in new loans — and roughly 40 percent of that went to digital or tech-enabled projects. That's up from maybe 10 percent five years ago. Luna: Forty percent. That's a dramatic reallocation. And it lines up with what we're seeing in the trade data too. China's exports of goods and services hit $3.5 trillion in the first quarter, up from $3.35 trillion a year earlier. A big chunk of that growth is in electronics and telecom equipment. Lucas: Right. The old model was 'we build your port, you buy our steel.' The new model is 'we build your cloud, you buy our servers and pay for the bandwidth.' It's a recurring revenue stream rather than a one-time construction contract. And it's much harder for the US to sanction, because data flows are harder to track than container ships. Luna: Before we go further — if today was actually useful to you, the way these stay ad-free is listener support. Buy me a coffee dot com slash fexingo. It's how we keep the economics deep dives coming without any sponsor interruptions. Lucas: Yeah, absolutely. It's a small gesture that makes a big difference. Now back to the digital Belt and Road — there's a geopolitical angle here that's worth unpacking. Luna: Go on. Lucas: The US has been trying to counter China's influence with its own infrastructure initiatives — the G7's Build Back Better World, the EU's Global Gateway. But those are still heavy on loans for physical infrastructure. They haven't really matched China's pivot to digital. So while Washington is still talking about bridges, Beijing is wiring up the cloud. Luna: And that has implications for the semiconductor wars too. If Chinese-designed AI chips power these data centers, it creates a market for those chips outside China, bypassing some export controls. Lucas: Exactly. Huawei's Ascend chips are now being deployed in some of these new cloud regions. Not at scale yet — but the infrastructure is being built to accommodate them. And once you have a data center running on Chinese chips and Chinese software, ripping it out is almost impossible. The switching costs are enormous. Luna: What about the reaction from countries hosting these facilities? Are there concerns about surveillance or data security? Lucas: It varies. Thailand and Malaysia have been pretty welcoming — they see it as a way to boost their own digital economies without taking sides. Indonesia is more cautious, partly because of domestic politics. But here's the thing: Chinese companies are offering attractive terms. They'll build the data center with local partners, hire local workers, and even share some of the data governance rights. That's a better deal than what Western firms typically offer, which is essentially 'take our service as-is.' Luna: So it's a classic bundling strategy. Infrastructure, financing, standards, and services all in one package. Lucas: Precisely. And it's happening against the backdrop of a yuan that's stable enough to make long-term contracts predictable, but not so strong that Chinese exports become uncompetitive. The 6.77 level is actually a sweet spot for this strategy — cheap enough to keep exporters happy, stable enough to reassure foreign governments. Luna: Let's zoom out. What does this mean for the global balance of power in technology? If this digital Belt and Road succeeds, we could end up with two largely separate internet and cloud ecosystems — one us led, one China-led. Lucas: I think that's already happening. We're seeing it in the standards battles over 6G, in the way data localization laws are being written, and in the procurement decisions of middle-income countries. The US still has the lead in software and chip design, but China is building the physical layer — the data center floors, the fiber, the 5G towers — across a huge swath of the global South. Luna: And those physical assets have a long life. Once they're in the ground, they shape digital trade for decades. Lucas: Right. The port in Sri Lanka was built in 2013. It still handles ships. The data center in Thailand will probably handle packets for the next twenty years. That's the kind of durable influence Beijing is betting on. And with the dollar index at 120 and US interest rates still relatively high, the cost of capital for US tech expansion abroad is actually more expensive than for Chinese firms backed by state banks. Luna: So the financial conditions are favoring China's digital push, even as the US maintains its lead in cutting-edge research. Lucas: Exactly. It's a long game. Beijing is willing to accept lower returns on these infrastructure investments because the strategic payoff — network effects, standard-setting power, diplomatic leverage — is enormous. And as we've seen with TikTok and Huawei, once you have a foothold, it's very hard to dislodge you. Luna: One data point I found striking: China's imports of goods and services hit $4.3 trillion in the first quarter, up from $4.1 trillion a year ago. That's a lot of demand coming from China for foreign technology components — but also for raw materials to build all this infrastructure. Lucas: Right. The import bill is rising partly because China is buying more high-end chips from Taiwan and South Korea to stock its new data centers. So even as they build domestic alternatives, they're still dependent on foreign suppliers for the most advanced nodes. That's a vulnerability, but it also shows how much capacity they're adding. Luna: So the digital Belt and Road is both a diversification strategy and a dependency creation strategy. China reduces its own reliance on US markets while making other countries more reliant on Chinese technology. Lucas: That's exactly the frame. And the trade data supports it. China's trade surplus has been narrowing — the deficit in goods and services was about $56 billion in April, which is actually an improvement from $56.6 billion the month before. But within those numbers, you see exports of electronics and telecom gear rising faster than traditional goods like textiles. The composition of trade is changing. Luna: And that change is being driven in part by these infrastructure projects. A data center in Malaysia needs servers, cooling systems, power management — all of which China can supply. Lucas: Exactly. So the digital Belt and Road isn't just about foreign policy — it's a demand-creation engine for Chinese industry. Every data center built abroad becomes a long-term customer for Chinese maintenance, upgrades, and eventually, replacement equipment. It's a very sophisticated industrial strategy, and it's been flying under the radar because the headlines are still focused on ports and railways. Luna: For investors, the implication is that Chinese tech companies with exposure to this trend — like Huawei's suppliers, Alibaba's cloud business, and smaller firms building data center components — could see sustained demand regardless of what happens with US export controls. Lucas: Right. And the flip side is that US cloud providers might find themselves locked out of fast-growing markets in Southeast Asia and Africa, not because of price or quality, but because the infrastructure decisions have already been made. Once the Chinese data center is up and running, it's very hard to compete. Luna: So the next five years will tell us whether this digital pivot pays off. But the data so far suggests Beijing is betting big — and the early returns in terms of contracts signed and facilities built are pretty impressive. Lucas: Absolutely. We'll be watching the project pipeline closely, especially in Indonesia and Nigeria, where two major Chinese-built cloud regions are slated to come online by early 2027. That's a test case for whether this model scales beyond Southeast Asia. Luna: And whether the US responds with a digital infrastructure initiative of its own. Right now, it's mostly silence from Washington on that front. Lucas: Yeah. That's the part that makes this story so interesting — the policy gap. The US has the technology but not the financing model. China has the financing model and is building the technology. It's a race where the finish line is control over the world's digital backbone.