InfrastructureChina’s Belt and Road Initiative: Prospects and Pitfalls
Chinese President Xi Jinping initially mooted the idea of Silk Road Economic Belt (SREB) and 21st century Maritime Silk Road (MSR) during his visits to Kazakhstan and Indonesia in September and October, 2013, respectively. Subsequently, the two projects together came to be known as ‘One Belt One Road’ (OBOR) Initiative. The Concept was re-christened as ‘’Belt and Road Initiative’’ (BRI) when opposition surfaced to the idea of one nation dictating the existence of ’one belt, one road’ in a globalised world in which ‘many belts and many roads’ exist. Greater clarity was provided on the idea at the Belt Road Forum (BRF) organized in Beijing in mid-May, 2017. According to Chinese authorities, more than 100 countries participated in the Forum, many of them at Head of State/Government level. India was the only major country that did not attend.
In his address at the BRF on May 14, President Xi called BRI as the project of the century to benefit people across the world. He stated that ancient silk routes opened windows of friendly engagement among nations and embodied the spirit of peace and cooperation, openness and inclusiveness, mutual learning and mutual benefit. Xi declared that BRI will promote friendship, shared development, peace, harmony and a better future for all countries. BRI, Xi declared, is a new model of win-win cooperation and would make economic globalization, open, inclusive, balanced and beneficial to all. By constantly hearkening back to the history of East-West exchange, China is striving to propagate a narrative of a globalization in which China had a central and ostensibly benign role. Xi Jinping professes to rekindle the same old ‘Silk Road Spirit’.
BRI spans some 65 countries in Asia, Africa and Europe covering 70 per cent of the world population, three-quarters of its energy resources, a quarter of goods and services, and 28 per cent of global GDP ($21 trillion). Beijing’s rationale appears to be clear: these are large, resource-rich nations in close proximity to it with a severe infrastructure deficit, which China has the resources and expertise to redress. By boosting connectivity, China can hope to spur growth in the short term, gain access to valuable natural resources in the mid-term and create new booming markets for its goods into the extended future.
China’s inability to fully absorb its supply-side production capacity — the problem of under-absorption — has been an inherent feature of China’s economic story. Since the 2008 global economic crisis, China’s investment-intensive export-oriented model, relying on massive reciprocal import demand in high income economies to absorb Chinese production, has widely been acknowledged as unsustainable. The steel sector has become symbolic of this overcapacity. For instance today, China can produce 1.2 billion metric tons of steel, 50 per cent more than what is required for domestic and export markets.
The key motive for China appears to be much bigger and more ambitious. It wants to consolidate its position at the centre of global supply and manufacturing networks. This is crucial for the outlook of the global economy over the coming decades. China understands that as its economy matures and income levels rise, the lower-wage industries that have fuelled the country’s growth so far will migrate to less-developed nations where labour costs are lower.
An overriding objective of BRI is to address China’s deepening regional disparity as the country’s economy modernises. Beijing hopes its transnational infrastructure building program will spur growth in China’s underdeveloped hinterland and rustbelt.
By investing in infrastructure, Xi hopes to find a more profitable home for China’s vast foreign-exchange reserves, most of which are in low-interest-bearing American government securities. He also hopes to create new markets for Chinese companies, such as high-speed rail firms, and to export some of his country’s vast excess capacity in cement, steel and other metals. And by encouraging more Chinese projects around the South China Sea, the initiative could bolster China’s claims in that area.
Xi has launched BRI at a time when Chinese foreign policy has become more assertive, even aggressive. This has meant that BRI is often interpreted as a geopolitical venture rather than a purely economic one. There is considerable truth in this assessment.
BRI is one of President Xi’s most ambitious foreign and economic policy projects. At the recent 19th Congress of the Chinese Communist Party, BRI was enshrined in the Party Constitution signalling the depth of Chinese commitment, giving it greater policy heft and added pressure to succeed.
Many foreign policy analysts view this initiative largely through a geopolitical lens, seeing it as Beijing’s attempt to gain political leverage over its neighbors and to rapidly fill the vacuum created by the increasingly isolationist policies being pursued by US President Donald Trump. Trump’s withdrawal from the Trans-Pacific Partnership Agreement has played into China’s hands. Trump’s dependence on Chinese support to contain North Korea has also given greater leverage to China.
Making this bold vision into reality will require an extraordinary alignment of financial resources, technical skills, political commitment and international cooperation. None of these can be taken for granted.
It is estimated that financial resources to the tune of $4.4 trillion ($1.4 trillion for SREB and $3 trillion for the maritime component) would be required to implement the initiative. China has claimed that nearly $900 billion worth of deals are already underway.
Beijing’s plan is for China-led financial institutions to lend money to countries willing to participate in BRI to create the required infrastructure, deploy the surplus Chinese manpower to build them and ensure that China’s hitherto idle state-owned enterprises construct them.
It is however a moot point whether China on its own will be able to marshal the requisite financial resources required for this ambitious venture. Moreover, it is debatable if Chinese or regional financial institutions would be willing to extend credit to countries with dubious credit-worthiness. Thus far, a significant amount of Belt Road investment has flowed to countries with relatively weak credit profiles. 42 out of the 68 countries identified under BRI are either rated below investment grade or not rated by Moody’s at all. At the same time, China’s armed forces are being upgraded and reoriented to protect Chinese investments and personnel abroad. According to informed estimates, China’s Navy, for instance, plans to build 400 warships and 100 submarines by 2030.
There is an equally important strategic imperative. If it materialises, BRI, which will girdle the globe, will extend China’s economic, diplomatic and military power well beyond its borders and across the world and place China virtually on par with the US. China’s ambition is to achieve this by 2049, the hundredth anniversary of the founding of the People’s Republic of China.
China will need its neighbors’ cooperation for realization of its objectives. However, its handling of regional antagonism in recent years has further exacerbated tensions in the area.
The BRI vision statement claims “Principles of Peaceful Coexistence” which include a “mutual respect for each other’s sovereignty.” Contrary to this, China has escalated sovereignty disputes by pressing territorial claims against its neighbors.
A vital reason for India to stay away from the Belt Road Forum on May 14-15, 2017 in Beijing was China’s utter disregard for India’s core concerns on its sovereignty and territorial integrity with respect to the $ 56 billion China-Pakistan Economic Corridor (CPEC) which has been billed as the flagship project of this initiative. In the South China Sea, China has challenged Vietnamese claims by moving a state-owned oil rig into disputed waters and constructed airstrips suitable for military aircraft on disputed features in the Spratly Islands.
China has shown total contempt for international law by rejecting the ruling of the UN tribunal regarding its claims in the South China Sea. On the Doklam Plateau in 2017, China challenged Bhutan’s sovereignty by attempting to extend a road into disputed territory leading to a military standoff with India. These actions directly contradict the BRI vision statement and send a signal to China’s neighbors that it will aggressively use its instruments of power to assert claims over disputed territories. China’s approach to CPEC, Bhutanese and South China Sea disputes increases the perception that China is unwilling to harmonize regional stability and security with its nationalist objectives.
A few recent cracks in Beijing’s plans for dominance and influence highlight the complicated road to infrastructure based leverage faced by China.
On November 14, 2017, according to a South China Morning Post report, the government of Nepal decided to abandon the $2.5 billion deal to build the Budhigandaki hydroelectric project dam with the Chinese state company China Gezhouba Group. The deal was scrapped because it was signed without an open tender process, which was required by law. Ironically, the agreement was originally signed a few weeks after Nepal joined the BRI.
Then, last week, Pakistan, China’s all-weather friend, also decided to pull out of the $14 billion Diamer-Bhasha dam with China because it refused to accept the strict deal conditions.
Two major projects therefore have been cancelled within a week, in both cases because the terms were considered by the recipient countries, which are closely tied to China, to be unfair and inequitable. This inevitably also raises issues about the commercial viability and financial credibility of some other projects. The Belt and Road seems to be faltering in its initial, conceptual financial stage.
Another glaring example is that of Hambantota port which has become the proverbial millstone around Sri Lanka’s neck. A worrying development emerged in July, 2017 when Sri Lanka was forced to give control of the deep-water port to China for 99 years in exchange for Chinese debt settlement. Huge delays in implementation of high profile, prestigious projects in Singapore, Indonesia and several other countries have occurred due to serious local obstacles and problems.
If full transparency is ensured through competing public tenders, the adequacy, suitability and quality of the Chinese equipment being used could also soon become issues of concern.
The importation of tens of thousands of Chinese workers to install Chinese equipment displacing the employment for locals also leads to significant political fallout.
The above discussion points to an urgent need for China to rethink and reconfigure its financing strategy for overseas development projects.
Several analysts have expressed concern that smaller states could become overly dependent on Chinese loans and trapped in debt servitude to Beijing. To make matters worse, China is finding it hard to identify profitable projects in many belt-and-road countries (Chinese businessmen in central Asia call it “One Road, One Trap”).
When declining China’s invitation to participate in the Belt Road Forum in Beijing in May, 2017, India had stated:
WE ARE OF FIRM BELIEF THAT CONNECTIVITY INITIATIVES MUST BE BASED ON UNIVERSALLY RECOGNIZED INTERNATIONAL NORMS, GOOD GOVERNANCE, RULE OF LAW, OPENNESS, TRANSPARENCY AND EQUALITY. CONNECTIVITY INITIATIVES MUST FOLLOW PRINCIPLES OF FINANCIAL RESPONSIBILITY TO AVOID PROJECTS THAT WOULD CREATE UNSUSTAINABLE DEBT BURDEN FOR COMMUNITIES; BALANCED ECOLOGICAL AND ENVIRONMENTAL PROTECTION AND PRESERVATION STANDARDS; TRANSPARENT ASSESSMENT OF PROJECT COSTS; AND SKILL AND TECHNOLOGY TRANSFER TO HELP LONG-TERM RUNNING AND MAINTENANCE OF THE ASSETS CREATED BY LOCAL COMMUNITIES. CONNECTIVITY PROJECTS MUST BE PURSUED IN A MANNER THAT RESPECTS SOVEREIGNTY AND TERRITORIAL INTEGRITY.
It is essential for China to go back to the drawing board, engage in serious and sincere dialogue with its neighbours and participants in BRI, ensure respect for territorial integrity and sovereignty, uphold the internationally accepted norms of transparency, good governance and observe principles of financial responsibility, skill and technology transfer etc for the Initiative to have some possibility of success.
Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.
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