China's Empire-building strategy
by Vijay Kumar Kaul on 11 Sep 2017 8 Comments

The President of China announced the Belt and Road Initiative (earlier known as One Belt One Road, OBOR) for the first time in 2013 in Kazakhstan which included six main corridors comprising of the ‘Silk Road Economic Belt’ (SREM) and the ‘21st-Century Maritime Silk Road’ focusing on interconnectivity and economic cooperation between China and Eurasia and other parts of the world. Its aim is to strengthen Beijing’s economic and political power through a massive program of infrastructure building throughout China’s neighbouring regions. Historically, ‘silk route’ referred to transit routes through which much of economic and cultural interaction did take place among countries of Asian region; as such, it did not belong to any particular country. However, China has owned it and used it to brand its BRI initiative to provide the later historical legitimacy in a shrewd move to mask its geostrategic ambition.


Geostrategic Ambitions


BRI is an example of a brilliant geo-economic strategy which aims at using the country’s current economic woes as a tool to achieve even greater geostrategic ambitions. China is struggling with the problem of economic slowdown, excess capacity, falling exports, and, above all, regional disparity. Inequality between inland western regions and prosperous eastern sea bound states is a huge challenge for the ruling party in China, making regional development as one of the most important economic policy objectives.


In the past, China has followed a policy of ‘silent rise’ by feeding consumption needs of the western world with cheap supplies. While keeping exchange rate low, it has encouraged MNCs
to invest in China and support its own domestic industry with huge state subsidies to participate in global value chain. The government also invested huge amounts of money in to building a massive network of roads, railways, ports and airports to create an excellent supporting infrastructure. The Chinese cost of production for a large number of commodities is the lowest in the world due to economies of scale of its production units, low labor costs and exchange rate, and massive state subsidies on the input items of production. This has helped China to emerge as a global manufacturing hub. Riding on the unprecedented global growth of the past decades, China has built huge capacity in several industries.


However, the US financial crisis of 2008 and subsequent global slowdown has created a big dent in the Chinese economy as it grew mainly on world demand. Today, a number of industrial sectors in China are beset with excess capacity exhibiting volatility and decline in sales revenue and profits of firms therein. Excess capacity has impacted sales revenue and profits for seven manufacturing industries, namely, Textile, Leather, Paper, Chemical fiber, non-metal minerals, steel, and non-ferrous metal. Since 2005 the growth in sales revenue has been erratic and by the year 2014 it has declined. The result of this decline in growth of revenue is visible in declining profitability.


To ameliorate the situation Chinese firms have resorted to dumping goods globally at lower than cost prices and this has led to de-industrialization of several developing countries including India. In India, large number of firms and enterprises in several industries has been facing losses or even closure thereby rendering large number of workers unemployed. Faced with this situation, a large number of WTO compliant countries, both from developed and developing world, have resorted to filing anti-dumping measures and countervailing duties on Chinese goods. To deal with the problem of excess capacity on a long term basis, China now is eyeing for the growing markets in its neighborhood by creating a huge infrastructure under the BRI initiative.


Yet another objective of BRI (earlier OBOR) has been to counterbalance US policies such as the pivot and the Trans-Pacific Partnership (TPP). With the rejection of TPP by the newly elected president of the USA, President Xi wasted no time in promoting China as the new champion of free trade. President Xi declared at World Economic Forum that China is all in favor of free trade and globalization. It must be noted that China’s success as a global manufacturing hub has come about due to market access given to it by the USA and West European countries – a fall out of the cold war between USA and the former USSR. As such, any change in the policy stance of the developed world especially the USA may change the ground situation in a way which has the potential to affect China adversely. This may, in turn, prompt China to explore Asian markets even more aggressively.


Reformulate the international financial architecture


China is well aware that success of an initiative of the scale of BRI would require huge finances. Therefore, it is also making attempts to reformulate the International financial architecture by first, asking for Reforms in Existing International Financial Institutions so as to acquire greater heft in them based on its newly acquired economic strength, and second, by creating New Financial Institutions. Its move to create new financial institutions are partly a response to slow pace of reforms at the International financial Institutions and partly a move to channel China’s vast unutilized foreign exchange reserves.


The stated objectives of creation of new financial institutions are funding of infrastructure projects, promotion of South-South exchange and a palliative to slow reform in The Global Financial Architecture. It is true that there is huge financial need for building infrastructure in developing countries. In Asia itself, investment needs for power, transport, telecom and water & sanitation is approximately $26.2 trillion over a period of 2016 to 2030. The existing international financial institutions alone cannot provide the finance to fund such projects.


Sensing this as a profitable opportunity, China has created several new financial institutions
during the last three years. Some of the prominent financial institutions are as follows: Asian
Infrastructure and Investment Bank (AIIB); New Silk Road Fund (NSRF); New Development
Bank or BRICS (NDB, not directly linked with BRI); Contingent Reserve Arrangement
(CRA); Shanghai Cooperation Development Bank. People’s Bank of China has also
recapitalized its several banks so as to enable them to overcome their difficulties and support the infrastructure needs arising out of BRI. After initial Reluctance several European countries have also joined these institutions. India is also part of BRICS New Development Bank. Now
international Financial Institutions have also agreed to cooperate.


However, many experts and institutions have raised questions about the functioning of these financial institutions and the viability of projects that they are supposed to finance. There are concerns linked with debt-sustainability, extent of employment creation, labor practices, and competition with local domestic firms etc., associated with these projects.


There are apprehension that new projects approved by these institutions will not take into
consideration the concerns of safeguarding people’s livelihood and environment. If lax standards are followed, this may devastate local environment and accelerate global warming. It is public knowledge that projects executed in the past by China have been lacking in quality and have brought unacceptable environmental damage.


There are serious concerns regarding debt sustainability of projects being constructed under BRI; low credit rating of many of the countries under BRI is likely to lead them to a binding economic and political relationship with China. Countries such as Sri Lanka and Myanmar are already facing such problems. Recently, Sri Lanka has renegotiated its debt by offering its port on a 99 year lease to China albeit under certain conditions relating to the non-use of these ports for military purposes. This is an example of how China traps smaller countries in debt trap and eventually controls latter’s assets and limits it sovereignty.

Employing military power to expand


With Xi Jinping’s elevation to the top position in the China, the country has adopted an
aggressive foreign policy. It began with China’s declaration of ‘imaginary 9-dotted lines’ in the
South China Sea to carve out its own area of influence so as to exercise control on the South
China Sea, ignoring the genuine rights of all other littoral countries in the region. China has
captured several islands, created new artificial islands which for purposes of converting them in to naval bases with civil and military facilities and for monitoring maritime trade activities.


In an exercise aimed at demonstrating national power, China has started sending regularly its
submarines and war ships close to the neighboring countries’ port and naval bases in a bid to
declare a ‘new normal’. On the request of Philippines when International Court of Justice gave
its ruling against China, the latter refused to accept it showing its utter disregard for international system of dispute settlement.


The recent standoff at Doklam tri-junction between India, Bhutan and Tibet (China) is a
continuation of the same Chinese mindset of bullying other nations. China’s strategy has been to ‘peacefully’ resolve disputes in its favour by leveraging its neighbours’ reluctance to allow
incidents to escalate into outright conflict. China first makes an extravagant claim - like the nine-dash lines in the South China Sea, or the map of tri-junction at India, Bhutan and Tibet.
Neighbours seek to use bilateral diplomacy, multilateral forums and international law to negotiate with China. This is time-consuming and China ensures that it becomes even more time-consuming.


In the meantime, it builds islands, roads, runways and military bases in the disputed areas. The only way this can be stopped is through the use of force, but which its smaller, less powerful neighbours do not want to resort to due to fear of losing out. In this manner, China changes the status quo and keeps hold of the physical control of the once-disputed territory. The developments along the India, Bhutan and Tibet tri junction fit this pattern. Left unchallenged, China will repeat the trick in other areas as well.


The aggressive foreign policy of President Xi Jinping has reinforced the impression that BRI is
primarily driven by broad geostrategic aims. The China-Pakistan Economic Corridor is one such example. Ignoring India’s sovereign right on the state of Jammu and Kashmir, China decided to construct a road and undertake several other construction activities in the Pakistan occupied Kashmir (POK). It is continuation of its earlier acts of illegally constructing strategic assets such as Karakoram Road in the disputed Pak Occupied Kashmir (POK) region. The way CPEC has been designed and investment are being made in power plants, economic corridor, Gwadar port and naval base, clearly shows Chinese design to convert Pakistan in to its client state.



Author acknowledges with thanks the contributions to this paper made by Prof Shekhar Singh (Dayal Singh College), Prof Surender Kumar (PGDAV College), Dr. Bhavneet Kaur (PGDAV College), Sunil Kumar (Department of Business Economics), Dr Yamini Gupt (Department of Business Economics), Mr Chandra Mohan (Department of Business Economics), and Mr Hemdari Singh (MBA Student, Department of Business Economics)


Based on paper presented at a seminar held on 8 July 2017 as part of the ‘India-China Relations: Interface across Academia-Industry-Policy’ Series, organised by the Department of Business Economics, Faculty of Applied Social Sciences and Humanities, University of Delhi, South Campus

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