A View from Asia

Tom Miller

Skeptics will scoff, but China is on course to replace the United States as the leading power in Asia. China is still not trusted: The Belt and Road Initiative (BRI) is stirring up as much fear as hope, and few countries buy its diplomatic mantra about delivering “mutual benefits.” Yet China’s economic diplomacy is bold, forward-looking, and practical. No doubt it will deliver some costly boondoggles along the way, but the BRI will also bring useful infrastructure, new trade routes, and better connectivity to Asia and Europe. Following President Trump’s decision to withdraw the United States from the Trans-Pacific Partnership (TPP), Beijing—not Washington and its allies—is now leading the charge for greater Asian integration.

Asian Integration 2.0

As America turns inwards, a newly self-confident China is attempting to replace it. Picking up from where he left off at Davos, President Xi Jinping urged delegates at May’s “Belt and Road Forum” in Beijing to reject protectionism and embrace globalization, implicitly under Chinese leadership. Beijing’s PR machine is spinning the BRI as “Globalization 2.0,” a more inclusive and equitable version driven by the East rather than the West. Much of this is bluster, but Xi is playing a serious diplomatic game. Thirty heads of state attended the forum—not as many as Beijing hoped for, but a sufficient showing for Xi to present himself both at home and abroad as an international statesman of substance.

The BRI is the first pillar of Beijing’s push to deepen economic integration across Asia. China’s interests clearly come first, but few countries feel they can ignore its promise to deliver much-needed infrastructure. The Belt and Road Forum attracted top leaders from a majority of countries in Southeast and Central Asia, where much of China’s infrastructure diplomacy is focused. China’s leverage over its neighbors will inevitably grow as its economic grip strengthens, but that might be an acceptable trade-off for countries anxiously seeking economic development.

The second pillar of China’s Asian integration push is the Regional Comprehensive Economic Partnership (RCEP), the only pan-Asian trade deal left on the table after the death of TPP. While China has struggled to persuade the world that the BRI is truly a cooperative enterprise, RCEP is officially led by ASEAN with strong support from Japan and Australia, both US allies. If a deal can be done—and the political will to make that happen is now high—it opens the door for China to expand its influence across Asia under a conveniently multilateral umbrella.

Defining the Indefinable

Yet Beijing still has much to learn about effective international leadership. It is far better at inventing clunky slogans than actually explaining its intentions. Even after May’s forum, BRI remains poorly understood. The basic geographical parameters of the initiative are extremely broad, and, therefore, hard to define. On land, the “Silk Road Economic Belt” envisages new transport infrastructure and industrial corridors stretching across Central Asia to the Middle East and Europe. On water, the “Maritime Silk Road” encompasses new ports and trade routes across the South China Sea into the South Pacific, and through the Indian Ocean to the Mediterranean Sea. Beijing talks about 65 or so countries belonging to the initiative, but there is no definitive list. It is tempting to conclude that it is now shorthand for Chinese financing, investment, and construction across the developing world.

BRI is less a coherent plan involving a clear list of infrastructure projects than a series of wide-ranging policy aims. It attempts a more strategic approach to overseas infrastructure construction than in the past, but the success of individual projects will rely on the vagaries of diplomatic negotiations and corporate deal-making. Another issue is bankability. Xi announced at May’s forum that an extra $55bn would be injected into China’s policy banks to help bankroll Belt and Road projects. China Development Bank and China Exim Bank must carry out state orders, but even their appetite for projects with no commercial viability is surely not without limit.

Given that building infrastructure and fostering new trade flows takes years, it is too early to assess whether the initiative is a success. Direct investments in the 60-plus countries along the Belt and Road were a whisker below   $30bn in 2015-16, according to the Ministry of Commerce. That barely amounted to 10% of overall outward direct investment—so the numbers are not huge by Chinese standards and do not look politically inflated. In March 2017, the head of the National Development and Reform Commission said that “more than US$50bn” had been invested since Xi proposed the initiative in late 2013, without giving details. 

More substantively, there was a significant jump in 2016 in overseas construction contracts and revenues, which are not included in outward investment data. Mofcom reports  that 61 Belt and Road countries generated new construction contracts worth $126bn and revenues of $76bn, accounting for about half of China’s total for both. These figures need to be treated with caution: there is a high probability that the contracted revenues are inflated to some degree by state-owned enterprises and officials looking to hit political targets. Moreover, not all of these projects are necessarily related to the Belt and Road’s core infrastructure push. Even so, the data are encouraging for engineering firms seeking new markets outside China, and do suggest the initiative is gaining traction.

Bridges, Railways, and Ports

Much of this construction was planned or already underway before Xi repackaged it under the Belt and Road moniker—yet that does not mean the initiative is phony. Take the New Eurasian Land Bridge, a series of roads and railway lines from China to Europe. Kazakhstan began building a railway linking China to Russia back in 2004, and the first rail services to Duisburg in Germany began in 2012, a full year before Xi first spoke of building a new Silk Road. But his political support has added considerable momentum to the project. The number of transcontinental services rose to 40 by the end of 2016, connecting 16 cities in China with 15 cities in Europe in as few as 10 days. More than 1,700 freight trains left China for Europe last year, double the total in 2015. Further services are planned.

In South Asia, the China-Pakistan Economic Corridor—a $50bn ragbag of infrastructure and agricultural projects that includes a planned highway, railway, and pipeline linking landlocked western China to the Arabian Sea—is making headway. Gwadar Port, the gateway to the corridor, opened in November 2016 after upgrades worth $1.6bn. China began work there as far back as 2002, completing the first phase of a deep-water port in 2007. Still, BRI has provided extra cash and linked the project to the more ambitious economic corridor. China Overseas Port Holding Company plans to spend $4.5bn on roads, power, hotels and other infrastructure in Gwadar’s industrial zone. The Pakistan Stock Exchange soared by 40% in the year to May, buoyed by the promise of Chinese-led investment.

Over the past year, projects to improve connectivity across Southeast Asia have also progressed. One example is an alliance between 10 Chinese ports and six Malaysian ports, which are working together to reduce bottlenecks and boost trade; China is investing $10bn in a deep-sea port and commercial marina in Malacca. Up the coast, China Communications Construction Company has begun work on a 620-km rail line from Kuala Lumpur to the Thai border, with a $12bn loan from China Exim Bank. This will link to a $7.2bn railway across Laos, which Chinese engineers are carving through the jungle. Across the Malacca Strait, preparatory work has begun on the Jakarta-Bandung high-speed rail under a consortium of state-owned Chinese and Indonesian contractors, with $4.2bn funding from China Development Bank.

Beyond Asia, Chinese engineers have upgraded the railway line from Nairobi to the port of Mombasa on Africa’s east coast, while China will soon open its first overseas military base in Djibouti. In the Mediterranean, China Ocean Shipping Company (Cosco) has invested €4.3bn on a 35-year management lease at Greece’s Piraeus port. Container throughput nearly quadrupled under its management in 2010-15, with Huawei, ZTE, Samsung, HP, and Sony using Piraeus as their gateway to Europe. In August 2016, Cosco obtained a majority stake in the port, committing to invest a further €700mn over the coming decade. It aims to make Piraeus the biggest commercial port in the Mediterranean, eventually competing with Hamburg, Rotterdam, and Antwerp.

Skepticism—Necessary but not Sufficient

Despite all this, doubts hang over the viability of many Belt and Road projects, for a variety of reasons. One issue is security in politically volatile states. Pakistan has reportedly deployed 14,500 security personnel to ensure the safety of some 7,000 Chinese nationals working on the economic corridor. The danger was evident in May, when two Chinese language teachers (later identified as Christian missionaries) were kidnapped and killed by armed men in Quetta, a remote but important section of the corridor.

Another issue is commercial viability. Freight trains from China to Europe may not prove profitable, however much time they save, while critics fear that new railways through Laos and Thailand will not deliver the economic benefits Beijing promises. The high-speed rail line in Indonesia is also suffering from expensive delays.

Critics of BRI have begun to refer dismissively to “One Belt, One Trap.” Executives in some Chinese banks and construction firms privately complain they are under pressure to deliver projects that will never make a decent return. Meanwhile, opposition to Chinese investment abroad is deepening, stirred by fear that Chinese loans-for-infrastructure really amount to an inescapable debt trap. In Sri Lanka, the new government has tried in vain to extricate itself from a series of high-interest loans negotiated by the corrupt regime of Mahinda Rajapaksa, who was ousted in January 2015. Failing to find alternative sources of financing and investment, Colombo has turned back to Beijing. It is swapping debt for equity in Chinese-financed infrastructure projects to pay back some of the US$8bn it owes.

BRI will continue to elicit fear and skepticism. India, condemning the initiative as a strategic ploy, has refused to come on board. It views China’s port-building in the Indian Ocean, especially in Sri Lanka and Pakistan, as a platform for military expansionism—a “string of pearls” around the neck of Mother India. In truth, this paranoia about China’s naval ambitions overstates reality: China does not yet control the South China Sea, let alone the Indian Ocean. Scaremongering about its military ambitions is a useful ruse for the Indian Navy, which uses it to squeeze extra funding out of the national budget.

For all its faults, BRI is a concrete and useful attempt to boost regional development and integration. No other country has come close to articulating such an ambitious plan, and no other country could finance one. This is important, because trade growth in the Asia-Pacific is slowing, having fallen below GDP growth since 2012. That may partly reflect a consolidation of production chains in China, which pushed down intraregional trade in intermediate goods. But better connectivity provided by China could begin to reshape those regional supply chains by creating newly viable manufacturing bases. This should be positive for developing Asia.

A Noodle Bowl of Acronyms

The next step for China as it attempts to boost regional integration is to push for the adoption of RCEP. TPP promised to bring a large chunk of the Asia-Pacific closer together. But it pointedly did not include China, in addition to such other large Asian economies as India, South Korea, and Indonesia. RCEP, by contrast, includes all 10 ASEAN member states and the six countries with which they have FTAs: China, Japan, South Korea, Australia, New Zealand and India. With its prospective members accounting for 40% of global GDP, RCEP’s market size is much larger than the total market size of the Asian countries in the now defunct TPP.

The death of TPP was a big blow to the seven Asian nations involved, which remain hungry for trade even as the United States and Europe flirt with protectionism. Once viewed as an also-ran, RCEP is now seen as a necessary alternative. “The RCEP is key to stopping the protectionist tide,” Seko Hiroshige, Japan’s minister of economy, trade and industry, said in April 2017. “With the TPP gone,” added Malaysian prime minister Najib Razak, “it is more relevant now than before.” The toughest task will be finding common ground among the three largest economies: China, Japan, and India. But if a final deal can be struck, the strong political will to deepen trade ties means RCEP stands a decent chance of being ratified by national parliaments.

If that happens, RCEP should be a boon for Asia. It promises to support trade growth and regional manufacturing by eliminating trade tariffs within the regional supply chain. It would also untangle a noodle bowl of trade agreements: by 2015, there were 18 bilateral FTAs among East Asian states, in addition to various regional agreements. RCEP should prove especially beneficial to members with no current bilateral FTAs: China and India, Japan and South Korea, and South Korea and India. Negotiations are at an advanced stage: launched in 2013, RCEP had already seen 16 rounds of talks by the end of 2016. Two previous deadlines have been missed, but there is considerable pressure to conclude an agreement either by the end of this year or early in 2018.

Who Can Stop China?

RCEP’s success is a litmus test of Asian commitment to closer cooperation and greater regional institutionalization. The biggest stumbling block is likely to be India: while other nations focus on lowering tariffs on goods, New Delhi fears a flood of cheap imports. Instead, it is pushing for liberalization of services and greater freedom of labor, which other countries, in turn, fear could presage a flood of Indian migrant workers. India could be left out of any initial deal.

That would hardly dismay Beijing, which quietly views RCEP as another means of strengthening its sphere of influence in Asia. Beijing’s relationship with New Delhi is as awkward as it is with Tokyo, and India could prove a difficult partner. Indian intransigence is already an obstacle to the success of the BRI in South Asia. It objects to the China-Pakistan Economic Corridor, which runs through territory claimed by India in Pakistan-occupied Kashmir and Gilgit-Baltistan. Prime Minister Modi, who turned down an invitation to attend the Belt and Road Forum, has implicitly criticized China’s connectivity projects for “overriding [the] sovereignty” of other nations.

As a clearly multilateral initiative, RCEP is less politically fraught for Beijing than BRI. For all its talk of “interconnected development” and “international cooperation,” many countries still fear that China’s infrastructure diplomacy is really a ruse for its own economic and geopolitical advancement. There are also valid doubts over the economic benefits that some Chinese-led projects will bring. But as the United States withdraws from its international obligations, an alternative power is needed to provide regional public goods. And as the principle engine of economic activity in Asia, China will play the leading role in shaping regional integration. It is difficult to see how Washington, or anyone else, can compete.

#Belt and Road Forum #BRI #RCEP #TPP #Xi Jinping