An article by Ben Wong https://www.linkedin.com/in/benjaminwongvt/

A critical assessment of China’s “Belt Road initiative” and its impact on the global economy

One Belt One Road (OBOR), renamed the Belt and Road Initiative (BRI) amid concerns of misinterpretation over the word “One”, is a project by the Chinese government in “a bid to enhance connectivity and embrace a brighter future”. 

President Xi Jinping, in September and October 2013, during his visits to Kazakhstan and Indonesia, revealed this plan. The intention of the BRI is to build trade networks connecting Asia to Europe and Africa, beyond the ancient routes of the Silk and Amber Roads. This initiative is divided into, the Silk Road Economic Belt and Maritime Silk Road, consisting several infrastructure corridors which will cost an estimated US$4-8 trillion just to get this initiative off the ground (HSBC, 2018). The corridors span over 65 countries (Centre for Strategic and International Studies, China Power Project, 2017), with many of them already members of Asian Infrastructure Investment Bank (AIIB). Tom Phillips said, “In concrete terms, the Belt and Road initiative is an immensely ambitious development campaign through which China wants to boost trade and stimulate economic growth across Asia and beyond. It hopes to do so by building massive amounts of infrastructure connecting it to countries around the globe. By some estimates, China plans to pump $150bn into such projects each year. In a report released by ratings agency Fitch, said an extraordinary $900bn in projects were planned or underway.” (Phillips, 2017).

On the surface, BRI looks to be one of mutual win-win for all involved, but looking deeper, seems to suggest that it is much more like a self-serving prophecy to build up China’s economic position. One where China will continue to grow its trade surplus by leaps and bounds, expose its people to an international setting, acquire trade benefits with neighbours and strengthen the RMB while boosting employment.

In the scheme of things, many countries will corporate with China in order to grow economically. Given that China has pledged $1 trillion to fund the development of the belt and road, what would the impact, of the remaining $25 trillion financial injection by 2030, look like to emerging economies within the region? With about 90% of the funding coming mostly from governments, Natalie Blythe said that there is still a need to tap into available private investments to embark on BRI (HSBC, 2018). From the necessary financing required by these developing economies, many wonder how such mega projects would be funded and if repayment over contracted timeframes is indeed feasible. With cash injection in 2017 amounting to $124 billion through the Silk Road Fund ($14.5 billion), special lending schemes available through China Development Bank ($36 billion) and Export-Import Bank of China ($19 billion) (Deloitte China, 2018), this is still a far cry from the amount required.

As China has put it, BRI is an initiative, as opposed to a strategy. By making BRI an initiative, the ownership does not fall on China but on all the countries currently, and yet to be involved in this. The hope that President Xi has from now to 2030, is many more countries will buy into BRI and become one of its contributing members. This seems to be holding true based on the most recent second Belt and Road Forum for International Cooperation (BRF), where an increased participation by world leaders was seen and $64 billion in new deals penned (Zhou, 2019). Looking at Asian Infrastructure Investment Bank (AIIB) and its list of 80 members, one cannot help but acknowledge that BRI is gaining traction internationally. Separately, it is also worth mentioning that there are pointers indicating, outside of China, funding will be made available via the World Bank and Asian Development Bank (Deloitte China, 2018). There is no doubt that BRI will, at some point in time, be able to achieve its financial goal, but at what expense to emerging countries?  

The servicing of loans or the inability to pay back brings about ‘debt trap’ finance and diplomacy. This is where China makes a hard stand, in some cases, on taking over sovereign assets from countries with loans that they are unable to pay back. Bear in mind that in an event of a default, assets seized ultimately belong to China since the financial institutions named here are China state owned entities. Case in point, Zambia (Chiwanza, 2018) and Hambantota port (National Review, 2018) are just two examples of how China is slowly taking control through debt repayment default. Could this be considered modern day colonialism? Instead of military takeover by force, this is economic takeover by virtue of a debt owed. China obviously knew that the repayment of debts would be a monumental task for developing countries they loaned to, to aid development but yet, still went ahead with projects that did not align well with economic growth plans. Here then arises the question of ‘aid’. By virtue of a policy put forth in the OECD-DAC aid regime, loans or aid China gives out to developing countries do not fall under Official Development Assistance (ODA) but Other Official Flows (OOF) due to lack of compliance to the definition of ODA as stated under the aid regime. Under OOF, the aid China gives could allow them to gain almost anything in return, so long as they are agreed upon in the conditions of loan. The surrendering of sovereign assets being one glaring item (Brautigam, 2011).

China is a big economic power with the world’s largest population to boot. In order for the country to sustain itself and grow, it has to provide jobs for its people and, at the same time look outwards as part of an investment strategy by providing aid under OOF. It can be argued that this strategy could also be one of potential takeover. Encouraging developing countries, to loan essentially from Chinese backed financial institutions, to build massive infrastructures without having a strategy in place to profit from them, is simply absurd. BRI has seen a number of mega projects fail in terms of return on investment. With the projects being very turnkey in nature and without proper studies and strategy, the governments involved spend millions of dollars building but in the end get not much in return. This said, there are also projects that have done well after coming under Chinese management. As with everything in this world, there are trade-offs. In this case, it is surrendering sovereign assets vs sacrificing the general well being of its citizens through various cost cutting measures to repay a bad debt.

Leveraging on the chips in its pocket, China is in a position of power as many of the projects involve State Owned Enterprises (SOE). These SOEs end up controlling a sovereign asset once a country is unable to repay a loan. Very much like Sri Lanka and the handing over of control of Hambantota port to China for 99 years. China looks to be leveraging loans to developing countries to create a position of over dependence rather than inter-dependence which allows for easier negotiation of terms in the areas of trade concessions and subsequent Chinese influenced infrastructure projects – further loans. This outpour of projects allows China to ‘export’ local resources for management and work, creating jobs for its people while at the same time exposing them to the international arena. From a mercantilism viewpoint, China is exporting finished goods and services to many, if not all of the BRI projects. It is China’s goal to create a huge trade surplus even though it is inviting foreign investment to boost domestic productivity. It is clear too that with BRI, China stands to export goods, people and technology at a scale that can only be imagined. This includes SOEs that are not doing well domestically and exported abroad to engage in lucrative projects. A very good way to turn SOEs around and further boost its economy at the expense of developing countries, where unemployment rates could be high. These SOEs when exported leapfrog from being a local enterprise to one of emerging multinational enterprise (EMNE) by virtue of a government created advantage (GCA). These EMNEs have neither firm specific advantage nor experience outside their home market but are given the opportunity due to the fact that the Chinese government places them into BRI projects. Chinese EMNEs involved in such projects have the advantage of learning from these foreign talent, acquiring knowledge and skills that over time would allow this EMNE to become a provider of similiar services in other projects. This said, BRI projects are not 100% Chinese based, there will always be parts of a project requiring domestic talent to take on and manage in the area of government and local institutions, whether formal or informal. This, in turn, provides projects for EMNEs in these countries. Many other countries, globally, are involved in BRI in instances where the Chinese do not have adequate products, skills or experience. One question that comes to mind is whether more jobs could be handed off to local talent within a developing country instead of employing overseas Chinese resources?

Countries engaged in BRI projects must transparently provide a strategy to profit from projects they embark on. China would need to look into tightening its governance over projects, track them wisely and reduce corruption. Many countries are captivated by the amount of money available to them without thinking deeply about return on investment, project viability, ability to repay loans, managing corruption, risks and contingencies. This is and will always remain the sole responsibility of individual governments to objectively decide what is best for their country and people. If a BRI project seizes to produce more future goods and services thus, allowing a country to grow economically, then the question of feasibility should be investigated. Every government has aspirations to build a better city but each must take a step back to answer the question of practicality.

When assessing practicality, it is would be wise to address the issues of the environment in parallel as well. China is very poor at considering the environment because of the concept of ‘pollute first, control later’ (Ortolani, 2018). This argument stems from the fact that economic development is vital to survival thus, putting focus on environmental issues would be futile at the expense of development. Chinese companies, globally are reputed for often not meeting environmental standards, be it in the form of damage or pollution. To make BRI sustainable, China would have to start being more deliberate in the way it treats the environments it operates in. This would mean to ensure that ecological damage is minimised. To this end, as cited by Patrick Teese, “China has begun to develop and adopt its own national sustainability commitments that could be used across the whole of BRI”. Teese also, however, states that these guidelines need to be made mandatory for overseas Chinese companies to follow as local standards in developing countries may be less strict or non-existent. To further strength its dominance in environmental governance, President Xi Jinping’s concept of ‘ecological civilization’ was added to the Communist Party Constitution in 2012, a concept representing China’s commitment to building a sustainable future. Developing countries involved in BRI projects also have a big part to play in deciding whether potential projects could, in one way or another, harm its environment. Being one of the world leaders in producing renewable energy products, China should use BRI to promote renewable energy as a norm rather than an exception. This does not seem so at the moment if the 240 coal projects, from late 2016, for electricity generation is anything to go by (Teese, 2018). It cannot be denied that lucrative projects are tempting but governments need to bear in mind that there are times when a healthy environment outweighs economic growth or other hazards that might present themselves with time. In view of an ever depleting global ecology, enough cannot be said about having to preserve what is left available. Those involved in BRI projects must make it a priority to ensure an ecological balance in the name of progress.  

Looking at Chinese - BRI, backed loans, overseas direct investments, EMNEs, goods, talent, services and in more cases, control of host country sovereign assets - How is this not a mercantilist approach to the way China is doing business in BRI? There is definitely no ‘free’ in the trade since China has yet to fully open its doors to trade. As seen, China’s huge trade and financial surpluses are putting it on a path to becoming the world’s largest economic super power and adding BRI to the mix, this is imminent. Through its BRI projects, China is able to provide a lot to the world, in return, it will make more countries reliant on it to provide financial aid / economic growth both internally and externally. Due to this dependence, it will be much easier for China to do business globally since it is the fastest growing economy with the largest population in the world. Most countries would like to do business with China thus, tend to soften their political economic stance, to be seen as a friend rather than foe, since many are eyeing a positive economic future with China.

China is, in fact, doing good in many areas of BRI, and slated over 76 items that comprise more than 270 concrete results in five key areas, namely policy, infrastructure, trade, financial and people-to-people connectivity, at the recent second Belt and Road Forum for International Cooperation (Fengyuan, 2019). It still remains that China is in control of the developments in many parts of Asia / EuroAsia, Africa, and some parts of Europe and Latin America with a growing portfolio to boot. With continued and proliferating pockets of control in these areas, could China slowly creep into a position where it ends up ‘soft’ controlling governments to work in their favour? Only time will tell.

As the Chinese philosopher Sun Tzu, centuries ago said, “fight and conquer in all our battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting”. China has come a long way since 2013 in terms of BRI membership growth and list of projects but one cannot help but continue to see that China is out to dominate the world, not through military engagement but economic prowess.

I fail to see it any other way.

Bibliography

Cairns, G. & Sliwa, M., 2017. A very short, fairly interesting, and reasonably cheap book about international business. 2nd ed. London: SAGE Publications Ltd.

Wikipedia, 2019. Belt and Road Initiative. [Online]
Available at: https://en.wikipedia.org/wiki/Belt_and_Road_Initiative
[Accessed 29 March 2019].

Liu, Z. & Xiaojin, R., 2019. Belt and Road Initiative fulfills developing nations investments needs, govt says. [Online]
Available at: https://eng.yidaiyilu.gov.cn/qwyw/rdxw/82145.htm
[Accessed 20 March 2019].

Yuan, Z., 2018. B&R interconnection witnesses great breakthrough in 5-year development. [Online]
Available at: https://eng.yidaiyilu.gov.cn/qwyw/rdxw/69500.htm
[Accessed 25 March 2019].

Liu, C., 2014. Reflections on Maritime Partnership: Building the 21st Century Maritime Silk Road. [Online]
Available at: http://www.ciis.org.cn/english/2014-09/15/content_7231376.htm
[Accessed 29 March 2019].

Lam, W. W.-L., 2015. “One Belt, One Road” Enhances Xi Jinping’s Control Over the Economy. [Online]
Available at: https://jamestown.org/program/one-belt-one-road-enhances-xi-jinpings-control-over-the-economy/
[Accessed 28 March 2019].

The World Bank, 2018. Belt and Road Initiative. [Online]
Available at: http://www.worldbank.org/en/topic/regional-integration/brief/belt-and-road-initiative
[Accessed 29 March 2019].

Reuters, 2019. Malaysia to cancel $20 billion China-backed rail project: minister. [Online]
Available at: https://www.reuters.com/article/us-china-malaysia/malaysia-to-cancel-20-billion-china-backed-rail-project-minister-idUSKCN1PK03P
[Accessed 26 March 2019].

Chaudhury, D. R., 2019. China's BRI comes under severe criticism on its fifth anniversary. [Online]
Available at: https://economictimes.indiatimes.com/news/international/world-news/chinas-bri-comes-under-severe-criticism-on-its-fifth-anniversary/articleshow/67384058.cms
[Accessed 22 March 2019].

Balding, C., 2018. Why Democracies Are Turning Against Belt and Road. [Online]
Available at: https://www.foreignaffairs.com/print/1123281
[Accessed 29 March 2019].

Campbell, K. M. & Ratner, E., 2018. The China Reckoning. Foreign Affairs, Issue March/April.

Blinder, A. S., 2019. The Free-Trade Paradox. Foreign Affairs, Issue January/February.

Xinsong, W., 2017. One Belt, One Road's Governance Deficit Problem. [Online]
Available at: https://www.foreignaffairs.com/articles/east-asia/2017-11-17/one-belt-one-roads-governance-deficit-problem
[Accessed 28 March 2019].

Stokes, J., 2015. China's Road Rules. [Online]
Available at: https://www.foreignaffairs.com/articles/asia/2015-04-19/chinas-road-rules
[Accessed 27 March 2019].

Allison, G., 2017. China vs. America. Foriegn Affairs, Issue Spetember/October.

Macaes, B., 2019. BELT AND ROAD. London: Hurst & Company.

Yiwei, W., 2016. The Belt and Road Initiative. 1st ed. Beijing: New World Press.

Tobaccochina Online, 2017. Belt and Road Initiative: From China to the World. [Online]
Available at: https://www.tobaccoasia.com/features/belt-and-road-initiative-from-china-to-the-world/
[Accessed 25 March 2019].

Phillips, T., 2017. The $900bn question: what is the Belt and Road initiative?. [Online]
Available at: https://www.theguardian.com/world/2017/may/12/the-900bn-question-what-is-the-belt-and-road-initiative
[Accessed 1 April 2019].

Phillips, T., 2017. World's biggest building project aims to make China great again. [Online]
Available at: https://www.theguardian.com/world/2017/may/12/chinese-president-belt-and-road-initiative
[Accessed 1 April 2019].

Wells, P. & Weinland, D., 2017. Fitch warns on expected returns from One Belt, One Road. [Online]
Available at: https://www.ft.com/content/c67b0c05-8f3f-3ba5-8219-e957a90646d1
[Accessed 1 April 2019].

Centre for Strategic and International Studies, China Power Project, 2017. How will the Belt and Road Initiative advance China’s interests?. [Online]
Available at: https://chinapower.csis.org/china-belt-and-road-initiative/
[Accessed 1 April 2019].

Johanson, J. & Vahle, J.-E., 1977. The Internationalization Process of the Firm - A Model of Knowledge Development and Increasing Foreign Market Commitments. Journalk of International Business Studies, 8(1), pp. 23-32.

Analytical media “Eurasian Studies”, 2018. Action plan on the Belt and Road Initiative. [Online]
Available at: http://greater-europe.org/archives/5056
[Accessed 1 April 2019].

National Development and Reform Commission, 2015. Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road. [Online]
Available at: http://en.ndrc.gov.cn/newsrelease/201503/t20150330_669367.html
[Accessed 1 April 2019].

One Belt One Road Europe, 2018. BRI and the China-Singapore Free Trade Agreement. [Online]
Available at: https://www.oboreurope.com/en/china-singapore-fta-ilstc/
[Accessed 1 April 2019].

HSBC, 2018. Where is the funding for a $26 trillion initiative coming from?. [Online]
Available at: https://www.cnbc.com/advertorial/2018/03/06/where-is-the-funding-for-a-26-trillion-initiative-coming-from.html
[Accessed 1 April 2019].

Deloitte China, 2018. Embracing the BRI ecosystem in 2018, China: Deloitte Insights.

Zhou, L., 2019. China’s Belt and Road Forum ends with more support and US$64 billion in new deals, but is it job done for Beijing?. [Online]
Available at: https://www.scmp.com/news/china/diplomacy/article/3007967/chinas-belt-and-road-forum-ends-more-support-and-us64-billion
[Accessed 28 April 2019].

Chiwanza, T. H., 2018. China To Take Over Zambia's National Power Utility ZESCO - How Zambia is Becoming Chinese Property. [Online]
Available at: https://www.africanexponent.com/post/9124-zambia-is-slowly-becoming-chinese-property-due-to-accumulating-debts
[Accessed 20 April 2019].

National Review, 2018. China’s Debt-Trap Diplomacy. [Online]
Available at: https://www.nationalreview.com/2018/07/china-belt-and-road-initiative-debt-trap-diplomacy/
[Accessed 10 April 2019].

Brautigam, D., 2011. Aid 'With Chinese Characteristics': Chinese Foreign Aid and Development Finance Meet with OECD-DAC Regime. Journal of International Development, Volume 23, pp. 752-764.

Ortolani, G., 2018. China’s Belt and Road poised to transform the Earth, but at what cost?. [Online]
Available at: https://news.mongabay.com/2018/04/chinas-belt-and-road-poised-to-transform-the-earth-but-at-what-cost/
[Accessed 20 April 2019].

Teese, P., 2018. Exploring the Environmental Repercussions of China’s Belt and Road Initiative. [Online]
Available at: https://www.eesi.org/articles/view/exploring-the-environmental-repercussions-of-chinas-belt-and-road-initiativ
[Accessed 3 April 2019].

Fengyuan, D., 2019. How have over 200 tasks been completed under the BRI since 2017?. [Online]
Available at: https://news.cgtn.com/news/3d3d514d7a51544f33457a6333566d54/index.html
[Accessed 25 April 2019].