All roads lead to Beijing

June 20,  2017

By P S Raghavan*

China’s Belt and Road initiative will give the country an enormous dose of international power

In mid-May, hordes of foreign diplomats and businesses leaders descended on Beijing for a meeting about China’s Belt and Road Initiative (BRI) – a plan to link Asia, Europe, the Middle East and Africa with a view to bolster trade and development. The $4 trillion project across 69 countries is meant to project Chinese President Xi Jinping’s strategic vision for global peace, won through mutually beneficial economic cooperation. 29 world leaders and delegations from over 130 countries attended. Together with the 68 agreements signed at the Forum, Chinese officials estimated the funding generated for BRI so far at around a mind-boggling $900 billion.

The BRI, announced in 2013, includes the Silk Road Economic Belt (SREB) and the Maritime Silk Road. The SREB has two main land corridors – one from China through Mongolia to Russia and the other from China through Central Asia and Russia to Europe, with smaller paths branching off into West Asia, Pakistan, India through Burma and Bangladesh, and eastwards into the Indo-Chinese Peninsula (see map in the source). These corridors are to form part of a vast logistics and transport network including new or upgraded railways, ports, power plants, industrial parks and oil pipelines. The Maritime Silk Road links China’s east coast, through the South China Sea and the Straits of Malacca, to European and African ports in the west and to Pacific seaports in the east.

China set up a Silk Road Fund with $40 billion in 2014 to fund the BRI. A further $14.5 billion has been added since. The $100 billion Asia Infrastructure Investment Bank and the New Development Bank of the BRICS countries will also come into the BRI’s orbit. Most of the financing, however, is expected to come from China’s state-owned banks, which have over $15 trillion in deposits. State-owned Chinese enterprises will implement most of the projects.

It’s not hard to see the benefits the BRI will bring Beijing. On the home front, China wants to harness excess capacity in its manufacturing industries, spur economic activity in its relatively under-developed western region, and open up alternative energy supply routes to the Straits of Hormuz and Malacca, through which almost all of China’s maritime oil imports pass. Externally, BRI would strengthen Chinese influence over swathes of Asia and Africa, establish global financial structures parallel to (and eventually competing with) the Bretton Woods system, and establish China as a global maritime power.

Devil in the detail

study of the Silk Road Economic Belt by the Friedrich-Ebert-Stiftung and the Stockholm International Peace Research Institute identified potential issues that may negate any benefits the initiative brings. The Chinese will likely accept or reject projects based on whether they serve the needs of Chinese industry, rather than what they bring to the recipients. Political tensions between different countries may impede the smooth rollout of projects. Local elites may corner the “spoils” from new projects, thereby exacerbating social tensions. Labour rights and environmental protection may not be given the attention they deserve.

Chinese investments in Sri Lanka point to a disturbing trend in the financing of the great power’s overseas development projects. Sri Lanka borrowed from China at high interest to finance projects including a seaport and airport in the south – which turned out to be unviable. Sri Lanka now owes around 12 percent ($8 billion) of its external debt to China. Indeed, over 95 percent of Sri Lankan government revenue today goes towards servicing its debts. Under pressure, the government has agreed to a Chinese proposal to convert the debt accrued through the two infrastructure projects into equity. This means China will acquire an airport and a seaport of strategic (and potentially military) importance. The benefit to Sri Lanka is minimal.

Indian boycott

India decided not to attend any events connected with the Belt and Road Forum, concerned that the BRI is a tool for furthering China’s geopolitical ambitions. What India is most worried about, however, is the China–Pakistan Economic Corridor, a collection of infrastructure projects under the BRI label, currently under construction throughout Pakistan (see map in the source). The corridor runs from Kashgar in western China through the Himalayan Karakoram range to Pakistan’s Gwadar port. It traverses territory which India considers Pakistan to have occupied unlawfully. China officially claims not to take sides in the Kashmir dispute, but has done so by finalising CPEC with Pakistan and ignoring India’s position.

A neo-colonialist agenda

As well as compromising India’s territorial integrity, CPEC is raising other concerns about BRI projects.

Gwadar Sea Port in Pakistan’s Balochistan province has been leased to China until 2059. Chinese companies are operating the port, developing a 1000-hectare Special Economic Zone nearby, and building an international airport with a Chinese grant of $230 million. These actions are certainly not driven by altruism. They reflect the strategic value to China of access to the Arabian Sea and proximity to energy-rich West Asia. It should be no surprise that Chinese naval submarines have been spotted in Gwadar.

Controversies rage in Pakistan about what benefits CPEC actually brings the country. China is building a number of power plants there under short-term “early harvest” contracts. These projects have a debt-to-equity ratio more than three. On the equity component, the Pakistan government has guaranteed investors a return of between 27 and 35 percent. The investors are Chinese, as are the companies implementing the projects. They bring in Chinese managers, supervisors and (almost always) Chinese labour as well. Investors have been exempted from paying tax on the profits they make. The power plants will use imported, rather than local coal. It’s still unclear whether the power generated on these terms will be competitively priced.

There are concerns that most CPEC investments will benefit the already more prosperous Punjab and Sindh states, from which Pakistan draws most of its elite. Meanwhile, the western part of the country worries CPEC will give Chinese investors untrammelled access to its vast natural resources, denying the region its due recompense. The fact that a special 12,000-strong security force had to be raised to protect work on CPEC indicates the level of local tensions.

A recent report in the Pakistani newspaper Dawn, quoting from a Chinese draft outlining a long term plan for CPEC, envisages a significant Chinese presence in the Pakistani economy. It includes the lease of thousands of hectares of land to Chinese enterprises for farming, the establishment of surveillance systems in major Pakistani cities, the creation of a national fibre optic network for internet and TV, and a Chinese manufacturing presence across various industries. There is more than a whiff of neo-colonialism in these plans.

Accept investment, reject hegemony

Delegates at the Belt and Road Forum called for a rules-based approach, sensitive to the developmental needs of recipient countries. The FES-SIPRI report recommends the EU put forward a joint consultative mechanism with China to ensure projects are implemented smoothly, by ensuring all stakeholders have a hand in planning and supervision. Official development assistance programmes in BRI recipient countries should include assistance in project evaluation. Organisations such as the United Nations Development Programme and the UN Economic and Social Commission for Asia should advise recipient countries on the impact and viability of planned projects. BRI loans should not be allowed to breach the debt burden thresholds determined under the World Bank-IMF debt sustainability framework. Finally, the Belt and Road Initiative needs to attract private capital. Jim Yong Kim, president of the World Bank, says there is around $8.5 trillion “sitting in cash, waiting for better investment opportunities”. Bringing in private capital would increase the scale of BRI, open it to non-Chinese companies and allow projects to be implemented more efficiently.

Chinese officials insist the BRI is not inspired by dreams of international dominance. Many elsewhere may disagree. The fact remains that it offers huge investment opportunities in areas that are crying out for them. China will undoubtedly enhance its global economic clout as the principal financier of this mega enterprise. Meanwhile, stakeholders such as the US, EU, Russia, India and Japan need to coordinate among themselves and engage with China to promote more transparent partnerships, so that the Middle Kingdom’s clout does not progress to hegemony.

*P.S. Raghavan is Convenor of India’s National Security Advisory Board, an independent advisory body on security and strategic issues. He is the former Indian Ambassador to Russia, Ireland and Czech Republic.


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