China: High stakes geopolitics of Belt Road - I
by G B Reddy on 22 May 2017 4 Comments

Recently, as part of Xi Jinping’s attempt to revive the legendary Silk Road, viewed as a “Marshall Plan” with Chinese characteristics, Beijing hosted the Border Roads Initiative (BRI) summit on 14-15 May 2017. Leaders from 29 countries across Asia and Eastern Europe along with representatives from 130 nations participated in the Summit to commemorate four years of progress. India and Japan were the significant absentees. The USA sent its representatives to attend the meet after dithering.


The One Belt One Road (OBOR) offers exciting possibilities, opportunities and challenges not only for China’s growth, but in host nations. For example, trade between China and the five central Asian states (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan)   has grown dramatically since 2000 from about $1.5 billion, to $50bn in 2013 compared with Russia’s $31.5 billion. The Silk Road countries account for 26 per cent of China’s foreign trade. 


Massive hard currency reserves, nearly $3 trillion, and excess industrial capacity at home, provide China an opportunity to take up ambitious infrastructure projects beyond its borders. China is determined to invest overseas to earn a profit and exert its influence. Thus, Chinese economic initiatives are set to draft a “New Global Economic Order”.


As per ‘China gazers’, China is building a new global economic empire; it is set to become the largest program of economic diplomacy since the US-led Marshall Plan for postwar reconstruction in Europe. Like the Marshall Plan, the OBOR (new Silk Road) is designed to use economic investments to address other vulnerabilities. It is viewed as a modern version of the 19th century Great Game, where Britain and Russia battled for control in central Asia.


However, there is nothing new in the conception of the OBOR-New Silk Road project. In 2001, the ADB launched it as a regional integration venture through CAREC, connecting Afghanistan with Central Asia and the Eurasian countries. Six corridors with 2,500 miles of new roads, 2,000 miles of new railways, 1,500 miles of transmission lines running east, west, north and south, and trade facilitation have been developed, besides helping to rehabilitate the Ring Road, a 1,367-mile highway that links major cities like Kabul and Kandahar with Mazar-e Sharif and Heart and supporting the development of a north-south corridor that will one day provide improved access for Central Asian countries to the ports of Karachi and Gwadar in Pakistan. . 


Even in 2011, USA proposed the New Silk Road, placing Afghanistan at the centre, as a hub of regional trade with two specific projects: TAPI, and the CASA-1000 electricity export project, which would ship electricity from Kyrgyzstan to Tajikistan to Afghanistan and Pakistan. The plan did not take off due to regional mistrust.


Four years ago in 2013, Xi Jinping seized the opportunity to exploit the infrastructure already in place by projecting OBOR as part of a “Chinese Dream”. Its end objective is to demonstrate its emerging global power status. 


The OBOR plan connotation needs to be correctly understood – it is not a single overland road coupled with a single maritime route. Instead, it envisions six economic corridors to mitigate the risk of maritime interdiction to include: 1) The China-Mongolia-Russia corridor, anchored by the Trans-Siberian railway; 2) The New Eurasian Land Bridge, anchored by a set of railways running from central China (Wuhan, Chongqing and Chengdu) to Europe via Kazakhstan, Russia and Belarus; 3) The China-Central Asia-Western Asia Corridor, speculated to follow the overland Silk Road Economic Belt passing through Central Asia, Iran and Turkey to reach Europe; 4) The CPEC - build highway and rail links all the way through Pakistan to the port of Gwadar; 5) Indo-china Peninsula Corridor; and 6) the BCIM Corridor.


Specifically, the infrastructure projects proposed as part of the “Economic Corridors” run through some of China’s least developed regions. So, they could provide employment opportunities for the locals. China is also hoping that, by improving connectivity between its underdeveloped southern and western provinces, its richer coast, and the countries along its periphery, the “Economic Corridors” will improve its internal economic integration and competitiveness and spur regionally balanced growth. 


In 2014, China established a $46 billion OBOR infrastructure fund, focusing on building “roads, railways, ports and airports across Central Asia and South Asia.” China has sealed numerous high-profile trade deals across Central Asia recently, which could make its ‘Grand Design’ vision a reality: $30 billion investment package with Kazakhstan, $15 billion deal with Uzbekistan, and $3 billion financial aid package with Kyrgyzstan; and $46 billion infrastructure investment package for Pakistan to develop the CP economic corridor. Add to it, the availability of funds from the AIIB for various projects.


The scope of the “Grand Design” may appear challenging. A number of roads and railway lines already exist. What is involved is to link and enhance existing transportation networks, besides commissioning of energy pipelines, build intermodal transport hubs, power plants, SEZs and communication technology such as fiber-optic cables, promotion of enhanced policy coordination across the Asian continent, financial integration, trade liberalisation, and people-to-people connectivity.


The program will include efforts to promote greater financial integration and use of the RMB by foreign countries to create an “Information Silk Road” linking regional information and communications technology networks, and lower barriers to cross-border trade and investment in the region, among other initiatives.


China understands that it cannot shift its total maritime trade to land routes. After all, 90 percent of foreign trade is dependent on seas, mainly, the Yellow Sea, the East China Sea and the South China Sea. All of them are vulnerable to naval blockade by the US. The proposed 21st Maritime Silk Road (21 MSR) is, therefore, to facilitate trade to Europe bypassing the South China Sea and the Indian Ocean in one route, and from China’s coast through the South China Sea to the South Pacific in the other connecting Latin America nations. It is also to minimize the distance of any single maritime leg of Chinese shipping. For example, the CPEC could allow goods to travel overland to Pakistan before embarking for Europe at the port at Gwadar. Similarly, the land oil and gas route in Myanmar.


The 21st MSR not only will boost the ties between China, Southeast Asia, Africa and Europe, but gives importance to the province of Fujian. Xi Jinping, with deep understanding of the Taiwan issue, is offering Taipei an opportunity to benefit from his grand strategy.


China has also offered to India to link 21st MSR with India’s “Mausam and Spices Route” projects. Unless China mitigates India’s security concerns in its strategic backyard and develops mutual trust by resolving contentious issues for mutual benefit, the plan will get delayed.


Be that as it may, the OBOR has long-term strategic implications both economic and political. China’s western frontiers and its central Asian neighbors are home to vast reserves of oil and gas. China has 40% of and 22% of domestic oil reserves in Xinjiang. The Xinjiang region is also home to a restive Muslim Uighur population that is culturally Turkish, far poorer than the citizens of coastal China.


China is the largest importer of oil; gets 75 per cent of its imports from Asia and is expected to rise to 90 per cent by 2030. China is Iran’s largest trade partner, largest oil purchaser and largest foreign investor. Even Iraq is very special to China. Israel is also special. China is buying modern technology, both civil (particularly agriculture) and military, including US technology under the counter from Israel. Most of China’s $355 billion worth of trade with Europe, 25% of China’s total exports, travels through the Strait of Bab al-Mandeb that separates Yemen from Djibouti.


China’s economic viability, social stability and CCP survival, therefore, depends on maintaining steady outflow of exports and inflow of imports. If Western demand contracts, it can be a ‘crash’ for China. Thus, the OBOR and 21 MSR enables China’s economic rebalancing by opening new markets, generating demand for higher value-added Chinese goods and helping to build competitive industries.


China faces serious challenges on various counts despite USA retracting from the 14-nation Trans Pacific Pact. In East Asia, it is Japan which is spearheading the TPP minus USA. Still the world’s third-largest economy, Japan, finds it necessary to be a counterweight to China.  In Europe, it is Russia. None can rule out the possibility for escalation in Russian aggressiveness in Europe. Add to them India, which views China with tremendous circumspection.


China also faces significant challenges in CAR, West Asia, Africa and Latin American nations. Investments by Chinese companies have generated political backlash with several big deals falling victim to regulatory concerns. As per Heritage Foundation, in 2011 alone, $32.8 billion worth of investments by China failed to be completed - more than half the $60.1 billion in overseas deals.


China faces security threats: Islamist terrorism threats because of longstanding problems with separatist militants in Xinjiang; and sea piracy at the choke points in the Gulf and the Straits of Malacca etc. and high seas.


Large-scale investment could also trigger concerns about opening the floodgates to Chinese economic dominance as it has done in Myanmar and Sri Lanka, and, by extension, political influence. Many developing countries have unemployment and underperforming steel mills of their own, or ambitions to develop their own industry rather than import someone else’s. So, it is less clear they will want China’s overcapacity lest Chinese aid could become politicized and draw criticism domestically.


Furthermore, internal political instability could also create considerable political risks for China’s construction projects. Many of the projects are in underdeveloped or conflict-ridden regions. Construction teams and the infrastructure itself will need protection. Projects in unstable areas will inevitably test China’s policy of avoiding security entanglements abroad. But, in doing so, China will inherit the same problem that plagued the US in its “nation building” attempts. For example, political upheavals (Libya), failed states (Sudan), regional flashpoints (Iranian nuclear crisis), Syria-Iraq crisis, piracy off Somalia, violent upheavals in Yemen and Somalia spilling over into neighboring Kenya etc. have been matters of grave concern to China. 


Let me highlight that the OBOR and 21 MSR initiatives are part of Xi’s “Chinese Dream of two centenaries”: rejuvenation as a great nation” and the “Four Comprehensives”. The “four comprehensives” are the means to achieve the Chinese Dream: comprehensively build a moderately prosperous society; comprehensively deepen reforms; comprehensively govern the nation according to law; and strictly govern the Party.


The call is for a more prosperous China through deeper reforms. China’s long term goals for 2021 and 2049 are specific: by 2021, when the CCP celebrates its centenary, complete the building of a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious in all respects, with a strong military to make China the world’s dominant power by 2049, when Peoples Republic of China (PRC) marks its centenary. Their cumulative implication is quite clear – super power status by 2049 surpassing the USA in all respects.


Xi Jinping, a realist, views “the first two decades of the 21st century as a period of “strategic opportunity” for its growth and development.” Of course, Xi is challenging the balance of power that existed since World War II. Xi wants “new type of great power relations,” in which the USA recognizes China’s core interests and respects it as an equal. Under Xi’s calculus, China is to establish itself as an economic and institutional equal to the USA.


Xi Jinping has defined the ambitious “Grand Economic Strategy” to traverse, which covers external and internal dimensions. On the external front, the stated strategic purpose includes: promotion of regional connectivity and economic integration of the continents of Asia, Europe, Africa, Australia and Latin America; connecting the vibrant East Asia economic circle at one end and developed European economic circle at the other; link China with the Persian Gulf and the Mediterranean Sea through Central Asia and the Indian Ocean and  link the inland Chinese cities to global markets with a diversified network of transit routes and energy pipelines, many of which would take inland routes.


Finally, it is to streamline trade by pushing for new customs agreements and unified technical standards. These facilitation measures will complement the development of SEZs and industrial parks along the proposed economic corridors. Improved transit infrastructure and the elimination of trade barriers could make it cost-effective for China’s inland industry to access new markets.


On the internal front, the “Economic Corridors” plan is multipurpose to include: reinvigorate China’s slowing economy; correct internal geographic disparities by shifting its industry away from the coast to relatively underdeveloped inland provinces and link them with new markets; alleviate some of its overcapacity problems by stimulating demands for higher value goods like ‘Bullet Trains’; to produce higher value-added goods in coastal regions and expand coastal consumer bases to absorb manufactured goods from the newly industrialized interior.


Cumulatively the end objective is to consolidate the “Four Defining Economic Shifts”: transformation to market socialism with Chinese characteristics: shift from export-based model of economic growth focused on energy and natural resources of the under developed and developing nations towards one dependent on domestic consumption to acquiring the developed world’s value-added industry assets; reliance on state-owned enterprises (SOEs) in external investments is supplemented by investments by private industry; and mergers and acquisitions.


Today, China is the world’s second-largest investor and biggest supplier of capital. Chinese foreign investment surge is from $2.9 billion in 2003 and accounting for only 0.45 percent of global investment to a record-high of $165 billion in 2015, up by 30 percent from the year before. The flow of Chinese funds into the developed states of Western Europe, Asia and North America is expected to reach roughly $150 billion. In contrast, China’s share of investments in infrastructure projects in the developing world is reducing (about $25 billion). The thrust of investments is towards software, hardware and biotechnology. In 2015, its computer chip imports were valued at some $231 billion (14% of total imports). China has completed nearly $15 billion worth of mergers and acquisitions in the semiconductor sector alone.


Many Western nations are apprehensive about Chinese FDI. For obvious reasons, SOEs tend to be viewed with more suspicion than purely private firms. China, therefore, needs to overcome its negative image. Recently, a number of governments – Australia (Ausgrid), Germany (Kuka, robotics firm), and UK (nuclear plant) have raised national security concerns over proposed Chinese investments. 


Furthermore, Americans and Europeans have long complained that many of their investors can’t access the Chinese market, and even those that do often face arbitrary treatment and discrimination. With increasing scrutiny of Chinese acquisitions in the West, China’s negotiators may start to air some of the same grievances and see greater value in locking in a system that provides reciprocal guarantees of investor treatment. The ongoing bilateral investment treaty (BIT) platform with both the USA and EU provides an opportunity to reconcile differences.


China is making impressive technology breakthroughs in high-tech and high-cost industries - High-speed rail, nuclear reactors, superfast computers, military hardware etc. Most of the Chinese investments continue to be from its SOEs. However, private Chinese companies such as Alibaba, Tencent and Baidu are among the firms most assertively buying up foreign assets. In many ways, this is a testament to the broader transformations underway in China.


China is making use of mechanisms such as the SCO, ASEAN Plus China (10+1), APEC, Asia-Europe Meeting (ASEM), Asia Cooperation Dialogue (ACD), China-Arab States Cooperation Forum (CASCF), China-Gulf Cooperation Council Strategic Dialogue, Greater Mekong Sub-region (GMS) Economic Cooperation, and CAREC, to strengthen communication with relevant countries, and attract more countries and regions to participate in its “Economic Corridors” grand design.


Viewed holistically, “Economic Corridors” in conjunction with AIIB, BRICS and other initiatives in Africa and Latin America are bound to promote “new type of major-power relationships” at international level. It reassures China’s neighbors, contributes to their growth and places them in a system designed by Beijing. Xi’s grand diplomacy has the advantage to envelop China’s West, Xinjiang, one sixth of China’s territory, de facto at the center of the Eurasian continent, the centre of gravity. That is why it is viewed as the “Marshall Plan with Chinese characteristics.”


Xi Jinping understands the complexity of high stakes geopolitics in a multipolar world in dynamic flux. With “America First” and Trump building walls to protect its interests, China sees a window of opportunity ajar beckoning it to fill the vacuum and thereby balance its relations with others in pursuit of peace and stability so vital for their national interests.


Unless provoked, Xi Jinping may continue to pursue a peaceful development path. Of course, where it hurts its national interests, China may apply a strategy of ambiguity through the doctrine of “Creeping Incrementalism and Extended Coercion” in a more assertive and aggressive manner.


However, let me recount Xi Jinping’s Napoleon’s quote in March 2014 in a speech in France: “The lion that is China has awoken, but it is a peaceful, amiable, and civilized lion.” A former Colonel stated later, “China was once called the sleeping lion in the East, but now we have been awakened, and Xi Jinping is the leading lion of the lion packs, who dare to fight anytime.”


(To be concluded…)

The views expressed are personal

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