China’s Modern Silk Road Project: What it means for the Philippines and the world

Richard Javad Heydarian, Non-Resident Fellow of the Stratbase ADR Institute

In the 21st Century, infrastructure development has become the new pivot of geopolitics. Power and influence are no longer measured by military prowess or economic size alone but also the ability of international actors to provide the necessary capital and technology to overhaul decaying or underdeveloped public infrastructure around the world.

Asia’s leading economies have all pitched in. Japan has launched the Connectivity Initiative and Partnership for Quality Infrastructure projects, South Korea introduced the “New Northern” and “New Southern” Policies, and India has its own International North–South Transport Corridor project. The biggest of all projects, however, is China’s.

On May 14, 2017, Beijing launched the Belt and Road Initiative (BRI), China’s modern version of the Silk Road. During the summit of global leaders, President Xi Jinping opened up the mega-event as the keynote speaker in front of leaders from as many as 28 nations, all of whom were more than eager to tap into Chinese infrastructure development largesse.

At its very core, the event served as the chief register for China’s new role in the international economic system and, more personally, Xi’s emergence as a global leader. And the timing couldn’t be any more perfect, given America’s abrupt withdrawal from its historical role as the anchor of the global free trade regime.

Through the BRI, which Xi has dubbed as “the project of the century,” not only does China reiterate its commitment to globalization, it also puts itself in the prime position to shape the post-American international economic order.

Over the coming decade, China is expected to invest up to $5 trillion in transcontinental infrastructure projects, which will connect the country’s industrial heartland to the world’s largest consumer markets in Western Europe. The mega-project is slated to cover as many as 64 nations across four continents (Asia, Australia, Africa and Europe), accounting for 62% of the world’s population and about a third of the global gross domestic product (GDP).

China’s policy banks, namely the Development Bank, Bank of China, Export-Import Bank of China, The Industrial and Commercial Bank of China, are set to play a central role in funding the ambitious transcontinental infrastructure initiative.

But over the next two decades, even if China were to spend as much as $8 trillion on the BRI projects, this would amount to only 1.5% of the annual GDP of recipient nations. According to the Asian Development Bank, individual states would need to spend close to 5.1% of their GDP to address their profound infrastructure needs.

The threat, therefore, isn’t falling into a debt trap for most countries, including the Philippines, but instead in a possible “investment chimera”: namely, large investment pledges that never come into fruition, but are enticing enough to soften geopolitical tensions, if not buy influence over, recipient nations.

CHARMING THE WORLD

The BRI’s genesis goes back to 2013. In a high-profile conference in October that year, which was attended by the entire Standing Committee of the Politburo (SCP) and practically all key foreign policy players in the country, the Chinese president held the first-ever policy-meeting about “peripheral nations” (China’s immediate neighbors) since the founding of the modern Chinese state.

Dubbed as the “Peripheral Diplomacy Work Conference,” the event saw the Chinese paramount leader emphasizing the “extremely significant strategic value” that Beijing attaches to its relations with neighboring countries. He highlighted the centrality of deepening economic cooperation and security partnership with nations in the Middle Kingdom’s historical backyard.

Highlighting the centrality of “maintaining stability in China’s neighborhood” to his new foreign policy strategy, the Chinese leader underscored his country’s commitment to “encourage and participate in the process of regional economic integration, speed up the process of building up infrastructure and connectivity. We must build the Silk Road Economic Belt and 21st Century Maritime Silk Road, creating a new regional economic order.”

To prove its determination to realize the BRI vision, China has set up an initial $40-billion Silk Road Fund, with an additional $50 billion to be provided by the Beijing-based Asian Infrastructure Investment Bank (AIIB).

STRATEGIC OBJECTIVES

In 2016, the AIIB approved $1.7 billion in loans to nine projects under the BRI. During the BRI summit in Beijing, Xi pledged another US$113 billion, with Chinese policy banks (e.g., China Development Bank, Bank of China, Export-Import Bank of China, The Industrial and Commercial Bank of China etc.) expected to shoulder up to $1.3 trillion in investments over the coming years.

Half-a-trillion dollars worth of projects and mergers and acquisitions (M&A) deals were announced in 2016 across seven infrastructure projects, a third of them within China. Between 2013 to mid-2017, about 50 major Chinese state-owned enterprises were involved in about 1,700 BRI-related projects.

The BRI is a comprehensive, deliberate, yet flexible strategy, which aims to achieve seven key objectives simultaneously, which are both geopolitical and economic:

1. Develop hinterlands and underdeveloped regions, particularly those with large ethnic minorities;

2. Outsource internal infrastructure glut and productive overcapacity amid an economic slowdown;

3. Develop export markets’ infrastructure for next stage of trade;

4. Expand domestic supply-chain beyond the Pearl River Delta, and internationalize Chinese industrial standards;

5. Save China’s troubled State-Owned Enterprises (SOEs), which employ millions of workers;

6. Lock in rare commodities key to Chinese long-term development;

7. Gain a foothold in key sectors of foreign countries for geopolitical gain, push back against Western influence

The ultimate goal is to mitigate, if not eliminate, existing imbalances in the Chinese economy, while shaping the next chapter of the international economic order along Beijing’s preferences, standards, and interests.

The BRI means emerging countries across Asia, Africa and Europe — developing Oceana as well as Latin American nations may one day be included — increasingly relying on Chinese capital, engineering and, likely, even labor. Between 2000 and 2014, China has invested up to $350 billion around the world, a staggering number that is expected to exponentially increase under the BRI strategy.

THE INVESTMENT CHIMERA

Crucially, the operationalization of the BRI means a growing portion of the world relying on Chinese legal, regulatory, and technological standards. This would make China a global cultural power, similar to where the West and Japan stand today. In fact, China is already establishing parallel international courts to oversee dispute-settlement cases vis-à-vis the BRI projects, especially in matters of debt-repayment and implementation standards.

The problem, however, is that, as one authoritative study by the Center for Global Development put it, “China’s behavior as a creditor has not been subject to the disciplines and standards that other major sovereign and multilateral creditors have adopted collectively.”

There are also concerns over foreign currency fluctuations, since Chinese loans tend to be made in Renminbi or dollars, to which the former is pegged. In fact, the Chinese regime itself fails to provide comprehensive, systematic, centralized, and transparent cross-border reports of its projects. The terms of the agreements also lack transparency.

In some cases, China has pushed for onerous debt-settlement measures including 80:20 debt-to-equity ratios, with financing ratios ranging from 75:25 to 80:20 (with Beijing in clear command position).

It’s precisely the concerns over economic viability as well as China’s aggressive, if not neo-colonialist debt settlement arrangements in places like Sri Lanka, that have forced even Pakistan, a key strategic partner, as well as Myanmar and Nepal, to reject major hydroelectricity projects under the BRI worth close to $20 billion.

Chinese infrastructure projects across key Southeast Asian countries such as Thailand and Indonesia have also been hobbled by delays, concerns over quality, as well as terms of agreement. In Laos, there is fear of long-term debt trap by China.

Despite the lofty pronouncements and pledges, however, BRI investments may not be as large and consequential in the long run. Only a minority of beneficiaries, especially small economies with low sovereign credit ratings, are at risk of a so-called “debt trap.” If anything, what’s even more likely is what can be described as “Chinese Chimera.”

Despite repeated announcements about a new “golden age” of bilateral relations, the first year of Duterte’s administration, for instance, only saw $31 million (PHP 1.61 billion) in Chinese investments, 5% that of Japan’s ($600 million).

Yet, the (limited) Chinese investments may instead have a significantly negative impact on the institutions of host nations, especially where transparency and accountability regimes are sorely lacking. The other concern with BRI-related investments is the competence and economic viability of Chinese contractors. In the case of the Philippines, several of them have been blacklisted by the World Bank for their anomalous track record.

This doesn’t even include concerns over exorbitant interest rates (3-6%), as well as China’s willingness to observe bidding competitiveness procedures, follow standard practices in good governance and environmental sustainability, and, above all, provide jobs for the locals, rather than relying on fully-integrated Chinese supply of capital, technology and labor.

Nonetheless, the Asian Development Bank (ADB) estimates that Asia alone confronts an $8-trillion infrastructure-spending gap over the next decade. Developing countries in Asia need $1.7 trillion annually to cover their infrastructure needs. This makes the BRI an indispensable infrastructure boost, which will have to be welcome with cautious embrace by targeted beneficiaries, including the Philippines.

 

 

This article was originally published in BusinessWorld’s Anniversary Report, “The Changing Game”.

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