Economic Roundups

With the Belt and Road Initiative (BRI) now firmly enshrined in the Chinese Communist Party constitution, it is safe to assume that this flagship project of President Xi Jinping will continue long after the country’s most powerful leader since Chairman Mao Zedong officially steps down, whether that happens in 2023 or not.  

If the execution matches the rhetoric of China’s leadership, this bold vision for transnational infrastructure development – linking Asia to Europe, and Africa to the South Pacific through land and sea corridors and industrial clusters – has the potential to transform the dynamics of global trade and accelerate the pace of development across the emerging world.    

A wealth of opportunities for China

The benefits for China are manifold, from securing a plurality of trade routes, to exporting excess manufacturing capacity and Chinese industrial innovations. Each time the Chinese government or a Chinese firm inks a deal to build a rail network or communications infrastructure overseas, for example, they secure recurrent business for decades to come, as other countries become reliant on Chinese technology to upgrade and maintain their systems. 

Furthermore, by building infrastructure that links China’s underdeveloped interior provinces with the markets of Eurasia, ASEAN and beyond, China is able to accelerate the pace of development in its secondary and tertiary cities, making it easier for companies in the hinterland to export their goods and forge cross-border trading networks. The BRI can also be seen as a long-term vehicle for internationalising the renminbi as a rival trading and reserve currency to the US dollar. 

All roads lead to Beijing?

China likes to talk about the BRI as a win-win initiative, with all participating countries benefitting from integrated, transnational infrastructure development. Certainly, there can be no denying that the emerging world has daunting infrastructure gaps to fill, with the Asian Development Bank estimating that developing Asia needs to invest $1.7trn per year in infrastructure through to 2030. 

Yet sceptics question whether Beijing’s motives are truly benign, or if the BRI will in reality provide China with excessive leverage over the emerging economies of Asia-Pacific, and foster unhealthy dependence on Chinese investment, loans, contractors and technology. 

Others question whether the astronomical funding requirements of the BRI pose too great a debt risk to China itself, with $900bn of projects already in the pipeline or under way, according to credit ratings agency Fitch. Although some funding for BRI-linked projects has already come from multilateral financial institutions, and international banks have expressed growing interest, the bulk of financing has come from Chinese policy or commercial banks, and through the state-owned Silk Road Fund. 

Furthermore, due to the rather fluid parameters of what constitutes a BRI project, any bilateral Chinese concessional loans for infrastructure development in the countries covered by the initiative can also be viewed as BRI funding. 

If we can assume that a certain proportion of the China-backed loans allotted to BRI-linked projects will never be fully recovered, particularly from heavily indebted countries such as Pakistan, then it is understandable why some observers view the initiative as more of a strategic, geopolitical power play than a shrewd economic endeavour. 

On the ground, we find a mixed response in the Asia-Pacific countries where Oxford Business Group is currently engaged in active field research. 

Willing partners

One of the most enthusiastic ASEAN members for BRI-linked projects is Thailand, with the government declaring it is “natural, logical and mutually beneficial” for its flagship $44bn Eastern Economic Corridor to link up with the BRI, and in December 2017 construction on the high-speed rail line linking Thailand with China finally got under way. 

Over in Indonesia, Thomas Lembong, chairman of the Indonesia Investment Coordinating Board, told OBG, “President Joko Widodo’s administration is determined to make the most of our participation in this initiative, to help drive investment across the economy.” With the government so far receiving investment pledges that cover just over half of the $327bn worth of road, airport and rail projects in its five-year pipeline, China is an obvious source of funding to pick up the slack. 

Handle with care  

Sri Lanka, perhaps, provides the most cautionary tale from OBG’s active Asia-Pacific markets about over-reliance on China-backed infrastructure development. At the close of last year, the country formally handed over 70% control of Hambantota Port to Chinese interests on a 99-year lease, as a result of being unable to service the loans from Chinese state-controlled entities it acquired to build the $1.3bn maritime complex.

Chinese acquisition of equity in strategic assets from countries unable to honour their debt commitments is understandably making other emerging nations in the BRI crosshairs nervous.   

In Myanmar, a frontier market with one of the lowest GDP per capita levels in ASEAN, we have witnessed bubbling opposition to some China-backed infrastructure projects in recent years, most notably the $3.6bn Myitsone Dam, which remains on hold due to grassroots protests against perceived Chinese exploitation of Myanmar’s resources.

Given its strategic location on the edges of South and South-east Asia, and between China’s landlocked south-west and the Indian Ocean, one hopes Myanmar can leverage its geographic position to secure advantageous terms for participation in future BRI-linked projects.

Filling the void

I happen to be writing this blog on the plane to Manila from Port Moresby, where OBG has just held a roundtable event centred on the economic opportunities arising from PNG’s chairmanship of Asia-Pacific Economic Cooperation (APEC) in 2018. PNG is hosting APEC at a time when it faces formidable fiscal challenges due to a ballooning national debt and a chronic shortage of foreign exchange. 

Into the void has stepped China, which has been providing opaque concessional loans to the PNG government for some time, primarily for infrastructure investments. Financial assistance is now being packaged as BRI funding, including three memoranda of understanding signed in November 2017 for infrastructure upgrades and the development of an agriculture industrial park.  

Jury’s still out 

So far, the US and allied regional powers, such as Japan, India and Australia, have failed to muster a coherent response to the BRI, with opinions divided on whether to counter, ignore or embrace the China-led model. 

Recent reports suggest Washington is considering boosting infrastructure projects across the Indo-Pacific region following a congressional hearing on policy responses to BRI.  However, the presidency of Donald Trump has yet to demonstrate that it has the strategic sense to effectively respond to China’s long-term visions and ambitions.

While India and Japan have put forward a joint initiative dubbed the Asia-Africa Growth Corridor, this is still very much in the embryonic stage, and is not yet backed by the same level of political will or variety of financing vehicles as its Chinese counterpart.  

In an interview with OBG in October 2017, the outgoing CEO of International Enterprise Singapore, Lee Ark Boon, said that the biggest risk for emerging countries participating in BRI projects was the creation of so-called white elephants that operate below capacity, rendering them economically unviable. Lee proposed, sensibly, that the most effective way to mitigate this risk was to link infrastructure developments with long-term economic strategies focused on openness to international trade and investment.  

What is not in doubt is that the BRI is here to stay. However, for it to be a road to prosperity rather than a belt around the neck of emerging economies in Asia-Pacific and beyond, it needs to be paved with more than empty rhetoric about win-win investments. Participating states must ensure their projects are well structured, sustainably financed and compatible with the medium- to long-term needs of their respective economies, while at the same time attuned to a broader national vision for raising domestic demand and translating international investment into inclusive growth.