Belt and Road Page 5
Connectivity (wu tong) projects are seen as a tool in the service of larger goals: “The connectivity projects of the Initiative will help align and coordinate the development strategies of the countries along the Belt and Road, tap market potential in this region, promote investment and consumption, create demands and job opportunities, enhance people-to-people and cultural exchanges, and mutual learning among the peoples of the relevant countries, and enable them to understand, trust and respect each other and live in harmony, peace and prosperity.” Cooperation in infrastructure development could be a first step in facilitating the growth of trade, investment and economic development in China and participant countries, but it would also require policy cooperation and domestic efforts to lower trade and investment barriers. The geographic space being transformed must be connected before it can start to grow areas of economic activity; industrial parks along infrastructure routes are slowly integrated to establish regional value chains and eventually support fully developed cities—culturally creative, internationally connected and technologically advanced.
Connectivity is not only or even primarily about roads and railways. Several projects are aimed at building telecommunication networks between Asia and Europe under the Belt and Road and create what the Chinese authorities call a “digital silk road” or a “community of shared destiny in cyberspace.” Xi Jinping himself has shown a strong interest in the concept. Inmarsat, a leader in providing mobile satellite services, was the only British company he visited during his state visit to London in October 2015. Around the same time, China and the European Union issued a declaration on the development of 5G mobile networks. The mobile technology is so important that it was highlighted in the Government Work Report delivered by Premier Li Keqiang during the National People’s Congress session in March 2017 and a report by the China Academy of Information and Communications Technology predicted that 5G will drive 6.3 trillion yuan of economic output in the country by 2030. Massive overseas investment fits with China’s ambition to boost key technologies in artificial intelligence, big data, smart cities, the industrial internet and cloud computing. An early benefit will come from new opportunities for its e-commerce companies. Many of the Belt and Road countries are yet to experience a thriving e-commerce sector due to a lack of good digital infrastructure. Partly as a result of the initiative, Chinese online retail giants such as Alibaba will be spearheading the development of a truly global e-commerce market.
Data flows will be managed on a global scale and large pools of data connected through new infrastructure and technological breakthroughs. In March 2018, the Guangzhou startup CloudWalk Technology signed a strategic partnership with the Zimbabwean government to begin a large-scale facial recognition program throughout the country. The agreement, part of the Belt and Road, will see the technology primarily used in security and law enforcement and will likely be expanded to other public programs. The project will help the government build a smart financial service network as well as introduce intelligent security applications at airports, railway stations and bus stations. In the process, Zimbabwe may be giving away valuable data as Chinese AI technologists stand to benefit from access to a database of millions of Zimbabwean faces. Rolling out the technology in a majority black population will allow CloudWalk to expand the algorithm’s training and to eliminate racial biases, getting ahead of US and European developers. As one commentator put it, this could very well be the latest example of Africa handing over natural resources to China.4
The Belt and Road will enable China to further expand and deepen its opening-up, and to strengthen mutually beneficial cooperation with countries in Asia, Europe and Africa and the rest of the world. “It will integrate itself deeper into the world economic system,” as the Vision and Actions document puts it, but a grand bargain is presupposed: this new and deeper pattern of opening-up should go with a greater global role for China, as it starts to shoulder more responsibilities and obligations within its capabilities, and makes greater contributions to the peace and development of mankind. Revealingly, the geographic range of the initiative is limited to the Asian, European and African continents—but “not limited to the area of the ancient Silk Road.” Its historical mission is explicitly that of reinventing Eurasia as an integrated supercontinent: “The Belt and Road runs through the continents of Asia, Europe and Africa, connecting the vibrant East Asia economic circle at one end and the developed European economic circle at the other, and encompassing countries with huge potential for economic development.”
In line with the philosophical notion of a “community of shared destiny” underpinning the initiative, the Belt and Road seeks mutual benefit. It accommodates the interests and concerns of all parties involved, and “seeks a conjunction of interests and the biggest common denominator for cooperation so as to give full play to the wisdom and creativity, strengths and potentials of all parties.” The language is that of a dialogue of civilizations—the “Silk Road spirit”—while also appealing to economic theories of comparative advantage. The different countries along the Belt and Road are said to “have their own resource advantages and their economies are mutually complementary.” But the ties that bind are first and foremost financial.
The Asian Development Bank has estimated that Asia and the Pacific will require on average $1.7 trillion per year of additional infrastructure investment—or $26 trillion by 2030—if current economic growth rates are to be sustained. This funding deficit amounts to 2.5 per cent of the region’s GDP—a full 5 per cent if you remove China from the equation. According to various estimates, the Belt and Road alone would require $4 trillion to $8 trillion to realize its goals. The question, of course, is who will foot the bill?
The terms of Chinese credit to countries along the Belt and Road vary widely, from interest-free loans and even grants in the case of some Pakistan projects to a fully commercial rate in the case of the Ethiopia-Djibouti railway. Revealingly, Djibouti’s public external debt has increased from 50 to 85 per cent of GDP since 2015, the highest of any low-income country. Much of the debt consists of government-guaranteed public enterprise debt and is owed to the China Export-Import Bank. China has provided nearly $1.4 billion of funding for Djibouti’s major investment projects.
Foreign direct investment and concessional loans make up the vast majority of Belt and Road financing. The former carries far fewer risks for the recipient country, but even in this case they are present. Pakistan, for example, is expected to assume indirect liability for payment of electricity generation projects, which are private-sector investments, with the Finance Ministry obligated to create a revolving fund equal to 22 per cent of the monthly invoicing for electricity projects to ensure seamless repayment of Chinese power producers. Pakistan would also have to bear the burden of paying Chinese companies for electricity that Pakistani distribution companies would not be able to pay for. The chief economist of Pakistan’s Planning Commission, Nadeem Javaid, said in 2018 that debt repayment and repatriation of profits would range from $1.5 to $1.9 billion beginning in 2019, to double that in 2020, and peak at $5 billion in 2022. The Chinese company operating the port of Gwadar reportedly receives 91 per cent of the port’s profits.
In December 2017 Sri Lanka formally handed control of Hambantota port to China in exchange for writing down the country’s debt. Under a $1.1 billion deal, Chinese firms now hold a 70 per cent stake in the port and a 99-year lease agreement to operate it. The $1.3 billion port project was intended to transform a small fishing town into a major shipping hub. In pursuit of that dream, Sri Lanka relied on loans from a Chinese state-owned bank, but the government struggled to repay the debt, with the project incurring heavy losses. The first phase of the Hambantota port project was a $307 million loan at 6.3 per cent interest, much above the typical rates charged for large infrastructure projects. Could anyone have expected a different result from that announced in 2017, almost ten years after construction started? “With this agreement we have started to pay back the l
oans,” Sri Lankan prime minster Ranil Wickremesinghe said during a handing-over ceremony in parliament. China’s official news agency tweeted triumphantly, “Another milestone along the path of the Belt and Road.” In July 2018, the Sri Lanka government decided to move a naval unit to Hambantota. With reports in the media that China is considering gifting a frigate to the Sri Lankan Navy—the move creates the grounds for the insertion of Chinese training and support teams in Sri Lanka’s naval command—it seems clear that a process for the creation of a Chinese naval outpost in Hambantota has begun.
In April 2018, Li Ruogu, the former president of the Export-Import Bank of China, argued publicly that most of the countries along the routes of the Belt and Road did not have the money to pay for the projects with which they were involved. Many are already heavily in debt and need sustainable finance and private investment, he said, adding that the countries’ average liability and debt ratios had reached 35 and 126 per cent, respectively, far above the globally recognized warning lines.
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One of the apparent contradictions contained in the Belt and Road is the way it is meant to combine market mechanisms benefiting from comparative advantage and the free flow of economic factors with an active role for the state in providing a common framework for the initiative. Finance is how China attempts to solve the contradiction.
While Western commentators like to speak of the costs and mechanisms for funding the Belt and Road as an external variable, Beijing regards financing mechanisms as a critical part of the initiative, the motor of the engine which gives the Belt and Road a certain pace and direction, bringing its disparate elements together in a coherent whole. The giant state banks—Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank—will retain a dominant role, but new financial institutions have also been created.
The Asian Infrastructure Investment Bank, founded on December 25, 2015 with its headquarters in Beijing and an authorized capital of $100 billion—about half that of the World Bank—considers Belt and Road projects as one of its investment priorities. Thus, it approved $509 million in investments for its first four projects on June 25, 2016, on power, transportation, urban development and other projects in Bangladesh, Indonesia, Pakistan and Tajikistan, all countries along the core area of the Belt and Road.
The Silk Road Fund is a development and investment fund established in Beijing on December 29, 2014 with an investment of $40 billion from the State Administration of Foreign Exchange, China Investment Corporation, Export-Import Bank of China and China Development Bank, focusing on investment opportunities and providing investment and financing support under the framework of the Belt and Road. By June 2016, it had announced three sets of investment projects: to inject capital in the China Three Gorges Corp to develop hydropower plants in Pakistan and other South Asian countries; to fund ChemChina in its acquisition of Italian tyre-maker Pirelli; and to make investments in the Russia-based Yamal LNG project.
Domestic policy banks serve as the backbone for financial cooperation. Quickly following the detailed plans set out in the Vision and Actions document, China Development Bank set up a Belt and Road project pool involving over 900 projects from over sixty countries in transportation, energy, resources and other sectors. In January 2018, Hu Huaibang, chairman of the bank, told a panel at the Asian Financial Forum in Hong Kong that the bank had extended $110 billion in loans to projects along the ancient trade route by the end of 2017 and announced plans to invest an additional $250 billion. The Chinese bank, which has assets of $2.4 trillion, was set up to provide medium- to longterm loans to the country’s major economic and social development projects. The bank falls under the direct leadership of the country’s State Council and is financially backed by the Ministry of Finance and Central Huijin Investment, China’s largest investment company. Similarly, the Export-Import Bank of China started to redirect its focus to Belt and Road countries in 2015. It reportedly planned to finance more than one thousand projects in forty-nine countries, covering transportation, electricity, resources, telecommunication, and industrial parks, and has set up three cooperation funds for investment in the Belt and Road.5
Reflecting the planned nature of the Chinese economy, commercial banks have been moving in step. After authorities in 2017 announced they would strengthen regulation to reduce risk for domestic firms investing abroad and curb irrational Belt and Road investment, China’s largest state-owned commercial banks started to raise billions to fund investment under the Belt and Road. Industrial and Commercial Bank of China, the largest bank in the world by assets, is already taking part in 212 projects related to the Belt and Road, with credit facilities exceeding $67 billion. The first official Belt and Road bond in China’s domestic market introduced a new financing instrument for the initiative. Hongshi Holding Group, a privately-owned cement-maker, issued a $47 million three-year corporate bond on the Shanghai Stock Exchange on January 19, 2018 Proceeds are earmarked for the purchase of equipment for a $300 million yuan cement plant in Laos with an expected daily capacity of 5,000 tons.
The Vision and Actions document describes the government’s central role as marshaling domestic resources to provide stronger policy support for the Belt and Road. It will facilitate the establishment of the appropriate financial institutions and dedicated funds, while developing the right financial regulation to promote the initiative. Speaking at the China Development Forum in March 2018, Wang Zhaoxing, vice-chair of the newly formed China Banking and Insurance Regulatory Commission, said that its creation would provide a surer foundation for the financing of Belt and Road projects. “Banking and insurance integration is of benefit to strengthening regulation and expediting the healthy development of the banking and insurance sectors. At the same time, this is of benefit to fully using the rational integration of bank and insurance credit, bank loan capital and insurance capital sources to provide short and medium-term financing to One Belt One Road, and even infrastructure development.”
The state remains firmly in charge of the financial system, being able to redirect immense financial resources to pursue its policy objectives when that is deemed useful or necessary. Although the largest commercial banks are prompted to compete against each other, they remain under state control. By operating as the state’s bailout fund for the financial system, Central Huijin—a subsidiary of China’s sovereign wealth fund—has become the largest shareholder in the main commercial banks. As a result, it holds the reins of the vital credit channels linking the financial system to the booming—and nominally independent—private sector.
Wang Yingyao shows that since the mid-1990s the Chinese state has “refashioned itself as a shareholder and institutional investor in the economy and resorted to financial means to manage its ownership, assets and public investments.”6 The state-owned banking system remains a critical instrument for managing development strategy, allocating credit to priority industries and projects, but the Chinese authorities know that they run the risk of exercising too much control over investment decisions at the expense of a more decentralized system for processing information, and one more clearly determined by a purely economic calculus. The risk of waste resulting from politically determined support for inefficient or unviable projects—“white elephants”—is a serious one. Even more damaging is the impact for the financial sector, which may be saddled with nonperforming loans, high leverage and unsustainable ratios. The Belt and Road may play an important role here, giving a general direction to economic development but leaving specific projects to be decided later and at the appropriate level—and preserving an element of competition between economic agents.
As in Taoist dialectics, the single concept first divides in two—land and sea—then in several—the corridors and countries—then in many—the specific projects and privileged locations. Taoism understands Tao as the one which connects the many. As the one divides in two, an alternating rhythm begins to pulsate between the poles, bringing the
first wave motion into being.
The Belt
On land, there are three routes, understood as broad geographical areas. One from Northwest China and Northeast China to Europe and the Baltic Sea via Central Asia and Russia; one from Northwest China to the Persian Gulf and the Mediterranean Sea, passing through Central Asia and West Asia; and one from Southwest China through the Indochina Peninsula to the Indian Ocean. These three routes divide into six economic corridors connected by six means of communication: “China has proposed a framework including six corridors, six means of communication, multiple countries, and multiple ports.”7 The Belt and Road will focus on jointly building a new Eurasian Land Bridge corridor and developing the China-Mongolia-Russia, China-Central Asia-West Asia and China-Indochina economic corridors by taking advantage of international transport routes, relying on core cities along the Belt and Road and using key economic industrial parks as cooperation platforms. The Vision and Actions document still described the China-Pakistan Economic Corridor and the Bangladesh-China-India-Myanmar Economic Corridor as “closely related to the Belt and Road Initiative,” but since then they have been fully absorbed under the umbrella concept.