The silk road is coming back. Or at least, that’s what China is hoping to achieve with their Belt & Road Initiative.
China, who in modern history have played a somewhat passive role on the world stage, have recently been flexing their muscles and demonstrating their capabilities. Their staggeringly large population (the largest in the world), the sheer size of their land mass (the fourth largest in the world), and their sharp economic rise fuelled by cheaply producing consumer goods for other countries over a decades-long period, have led to the country standing as one of the world’s most powerful and influential in 2018. Recent acts such as the building of artificial islands in the territorially disputed South China Sea, their dismantling of an active Chinese satellite in orbit (the first time in history this has been done), and the announcement of the Belt & Road Initiative have generated some anxiety amongst rival powers.
The Belt & Road initiative, proposed by Chinese President and leader of the unchallenged ruling Communist Party Xi Jinping, was announced in 2013 and is expected to be completed by 2049. It focuses on connectivity and cooperation between Eurasian countries, and the Chinese government have labeled it as “a bid to enhance regional connectivity, and embrace a brighter future.” The below diagram indicates the sheer scope of the project, demonstrating how 70 countries will be linked by the massive global infrastructure undertaking.
Not everyone sees the ‘brighter future’ that China is promising with this project. Many international observers see this as a way for China to refocus global trade with themselves at the centre. Perhaps more harrowingly, some have raised concerns about how the routes and infrastructure could be used to China’s advantage in a war scenario. It has also been noted that China is economically trapping countries, forcing them to bend to their will by loaning them money for Belt & Road projects that they cannot pay back. While concerns about a global restructure of trade and potential wartime ramifications are focused on the future, the economic entrapment of other countries and the toll that these projects take on those countries is happening right now, and there are early indicators casting doubt on the entire undertaking. In Malaysia, Belt & Road projects have been suspended due to corruption investigations. A Washington based consultancy firm, RWR Advisory Group, notes that 14% (234 out of 1,674) of Chinese-invested infrastructure projects as part of the Belt & Road initiative have run into trouble since 2013. Major issues have been public opposition to projects, objections over labour policies, performance delays, and concerns over national security. The murky web of financial entanglements that are funding these projects are also cause for concern, as are the immediate (and deadly) local ramifications of a largely rushed and ill thought out global venture.
The Ex-Im Bank (Export Import Bank of China) and the China Development Bank are the two most powerful lenders in global development finance. On an international scale, these organisations lend more money than the six western-led development banks put together, and they are both controlled in varying capacities by the Chinese government. They resist tenders for contractors, meaning that all of the international Belt & Road projects that they have financed have been given to Chinese state-owned enterprises. Herein lies one of the clearest problems – Chinese banks under the thumb of the Chinese government, lending Chinese money for Chinese companies to build infrastructure in other countries for the benefit of China. Putting China and Chinese interests at the centre of these developments results in local concerns not getting an equal voice in the room. This can mean that projects go ahead even in the face of intense public opposition. Take the Hidroituango Dam, in Colombia, a $4 billion project partly financed by the China Co-Financing Fund for Latin America and the Caribbean – established, of course, by the Bank of China.
The hydroelectric dam is in an area along the Cauca River located 170kms northwest of Medellín where landslides have been known to occur, a fact that was noted in the dam’s environmental impact report. Local activists rallying against the construction were largely ignored. Heavy rains in Colombia this year triggered a predictable landslide, resulting in the evacuation of 26,000 people, and raising concerns that the dam may break under the immense increased water pressure. If the dam is to rupture, it will cause unprecedented damage in the form of a 25-meter high wall of water devastating towns and displacing over 100,000 people. Granted, this project is not entirely financed and controlled by China, and local authorities should share in some of the blame for the current crisis.
Let’s turn our attention 18,943 kms away from Colombia, to Malaysia. Malaysia had an election recently, and at the heart of the election was corruption. Many suspected that Prime Minister Najib Razak was in the pocket of Xi Xinping, and Chinese interests. His opponents objected to China’s many investments in the region. Billions of dollars went missing from the state fund 1MDB (1Malaysia Development Berhad) and Razak was the key suspect. Chinese money ended up purchasing power assets and real estate tied to 1MDB, helping resolve some of its debt issues. Embroiled in corruption and ravaged in the court of public opinion on election day in May, Najib Razak was ousted from his post. Since then, charges have been levelled against him for criminal breach of trust, and corruption. His post was filled by Mahathir Bin Mohamad (the oldest world leader at age 93) who has adopted a far more anti-China tact than his predecessor. On various infrastructure projects throughout Malaysia, China brought in Chinese workers, with a dependance on Chinese materials, and limited opportunities for local companies or workers. There’s that pattern again – China, for China, by China. While China had a yes-man in their pocket in the form of Najib Razak, they’re now seeing their years of careful negotiation going out the window, threatening the collapse of projects in a region instrumental to the wider Belt & Road initiative.
A 688 km East Coast Rail Link project being undertaken by Chinese company China Communication was suspended by the Malaysian government. Malyasian Finance Minister Lim Guan Eng called for a price reduction, after establishing that the project would actually cost $27 billion, nearly 50% more than the estimates of the previous administration. China Communication has pushed back against the decision, insisting that the new Malyasian government should honour the previous government’s commitment. The new government has also put the brakes on a high-speed rail line to Singapore, another Chinese backed project, due to its projected costs. These decisions have been made largely due to the steep increase in national debt as a result of corruption under Najib Razak’s rule.
In the Malaysian special economic zone of Johor state, locals have been aggressively objecting to a project called Forest City, established by Chinese developer Country Garden. The township project will cost $100 billion to complete. Locals have drawn attention to the fact that 70% of apartment buyers there are Chinese nationals. Outside of this, concerns have been raised surrounding the environmental impact of the project, something which appears to have been of little concern to Country Garden. Here, we see a similar pattern to what has occurred in Colombia – Chinese money being used to fund projects with Chinese interests without consideration for local conditions.
Let’s take a look at Sri Lanka. Concerns have been circling over rising debt levels causing Sri Lanka to be financially cornered by China. In fact, more than a third of the countries set to participate in the Belt and Road Initiative are highly vulnerable to debt distress. China is fronting copious amounts of money to countries who cannot afford to pay it back. At best, they are doing this to expand their trade vision for the world. At worst, they are doing it to entrap economically vulnerable countries.
In Sri Lanka, unsustainable Chinese debt has already resulted in problems. In December of 2017, Sri Lanka was forced by China to sign over the Hambantota Port (built with Chinese loaned money at an exorbitant interest rate) to a Chinese state owned company on a 99-year lease. This was the only option for a new Sri Lankan administration who found themselves straddled with debt over infrastructure projects it does not have the financial capacity to sustain. Mahinda Rajapaksa, the former Sri Lankan president who signed off on the Hambantota Port construction deal, was also forced from his post due to corruption. There was little apparent need for a new port in the small nation – but the site was chosen due to its benefit to China, and because Rajapaksa needed a project under his belt which could celebrate and validate his greatness as a leader. As Sri Lanka faced international condemnation and isolation for its perceived crimes against humanity during its ongoing civil war between the government and Tamil insurgents, the country grew closer to China, who provided political and financial support to Rajaspaksa. In return, Rajaspaksa supported Chinese interests in the region. Once Rajaspaksa was forced from office, the government that replaced him had little choice but to hand the port over to China as the country’s debt levels soared. In May 2018, the new government was forced to take out a new loan to the tune of $1 billion with, you guessed it, the China Development Bank.
The below graph demonstrates the current debt and projected debt of 8 vulnerable countries after the Belt and Road projects are completed. This shows just how much of a financial impact these projects will have on their host countries. Of course, China will argue that the benefits to each country will out-weight the costs, but analysis shows that the largest benefits overall will be reaped by China itself.
Over in Pakistan, China has secured a 40-year lease over the Gwadar Port that it financed, near the Strait of Hormuz. This port serves as the crown jewel of the China-Pakistan Economic Corridor, which is projected to be an $80 billion investment overall. Both the World Bank and International Monetary Fund (IMF) have cautioned that Chinese loans with interest rates as high as 5% will become unsustainable for Pakistan, and force another IMF bailout of the country, or worse, a Chinese bank bailout. Pakistan racked up a government debt equivalent to 67.20% of the country’s Gross Domestic Product in 2017.
When Sri Lanka failed to pay back its loans to China, China converted those loans into equity. In a way, they subsequently turned Sri Lanka into a ‘semi-colony.’ Perhaps this was their end goal all along. In Malyasia, it could be argued that China is forming a ‘semi-colony’ on Forest Island. Now, in Pakistan it appears that the same situation is unfolding. As Pakistan becomes increasingly unable to pay their debt, their hand will be forced and they will be required to sign over more infrastructure assets in the China Pakistan Economic Corridor, on 40 to 99 year leases. This will mean that China will take over the entire corridor, collecting tolls from every vehicle that passes along it. Corruption in Pakistan is escalating the costs of the project every day. The country is already living well above its means, as demonstrated by their persistent budget deficits, government debt and external debt.
While it would be a stretch to say that China is attempting to take over the world, they certainly seem to be doing their best to obtain financial control over countries who have nowhere else to turn but into the welcoming arms of China.
Although some projects have gone ahead in the face of environmental concerns, not all have. In Myanmar, the $3.6 billion Myitsone dam project was abandoned after local protests over the environmental impact it would have, as was the Budhi Gandaki hydroelectric project in Nepal, and the Diamer-Bhasha dam in Pakistan. Evidently, in some cases public resistance can lead to positive outcomes.
Xi Xinping has addressed some of the concerns surrounding Belt and Road projects, focusing on those claiming that China is engaging in a complicated geopolitical strategy to tip the scales of power in their direction. He had the following to say in April of 2018:
“China has no geopolitical calculations, seeks no exclusionary blocs and imposes no business deals on others.”
“It must be pointed out that as the BRI is a new initiative, it is perfectly natural that there will be different views on cooperation.”
“As long as the parties embrace the principle of extensive consultation, joint contribution and shared benefits, we can surely enhance cooperation and resolve differences. This way, we can make the BRI the broadest platform for international cooperation in keeping with the trend of economic globalisation and to the greater benefit of all our peoples.”
While Xi Xinping denies geopolitical calculations, the geopolitical benefits to China resulting from the projects are as clear as day. China’s export markets will be expanded. The Chinese RMB will be promoted as an international currency. Growth in the lower-income western Chinese provinces will be boosted through improved connectivity with Central Asia. The world economy will be reoriented towards China, countries around the world will become more reliant on China, and China will be in a position to shape the rules and norms that govern economic and trade affairs in the region.
It is of interest to note how it is that China is able to execute such a large international undertaking that no other country has attempted. President Xi Xinping enjoys a cult of personality around himself, something unseen in a Chinese leader since Mao. He is adored by his people, revered as a God, the new saviour of China. Leveraging his public influence, the president and China’s communist congress abolished presidential term limits, effectively meaning that he will be in power indefinitely. He is playing a larger game than most heads of state in super power countries. In countries where term limits are 4 or 8 or 10 years, that leader will tend to only think within his or her term. They aren’t planning projects which will bear fruit 20 or 30 years down the road – they’re trying to make their mark within their term. Xi Xinping is looking at a bigger picture of a future world in which China is entirely dominant. No other country would undertake such a plan as the Belt and Road initiative, simply because no other country has the political will, the luxury of time, the foresight or the financial means to do so. China has all of these.
The new world that China is trying to construct will undoubtedly make trade between many countries easier, and economically benefit countries within Asia, Europe, Africa and beyond. But at what cost will this come? At what cost to the sovereignty of nations? At what cost to the environment? At what cost to the international order? Only time will provide these answers. As scandals, concerns and murky financial arrangements continue to circle around China’s ambitious global infrastructure initiatives, it is important that we are all aware of the game the country is playing, and what it could mean for the world as we know it. We are on the cusp of a global shift in power tilted towards China. Let’s hope that they exercise that power responsibly.