2 May 2019
We should not play down the geopolitical consequences of the Chinese-led globalization that BRI v.2.0 represents.
Last week, China hosted the second Belt and Road Forum (BRF) for International Cooperation in Beijing. This was an occasion to take stock, as well as introduce course corrections into the process of unrolling the six-year old Belt and Road Initiative.
37 countries and 29 international organizations participated in the event, with notable presence of Russian President Putin, President Pinera of Chile, President Ueli Maurer of Switzerland, Prime Minister Giuseppe Conte of Italy and Malaysian Prime Minister Mahathir Mohamad. Prominent India’s neighbors who marked their presence over there were President Bindiya Bhandari of Nepal, Prime Minister Imran Khan of Pakistan, State Counsellor Aung San Su-Kyi of Myanmar. The UN Secretary General Antonio Guterres and managing director of the IMF Christine Lagarde also attended the event.
The first phase of BRI was an unfolding of China constructing connectivity hardware — railway lines, highways, ports and pipelines. The emphasis now is to improve the software — international cooperation, trade agreements, customs and taxation procedures and financial processes, which is to be linked with China’s overall plans for transforming its domestic economy to emphasize “quality construction” based on innovation and science and technology. On the other hand there is a conscious effort to connect it to a new phase of Chinese global policy which seeks to expand China’s geopolitical reach by assisting developing countries to overcome poverty and joblessness.
The emphasis now is to improve the software — international cooperation, trade agreements, customs and taxation procedures and financial processes, which is to be linked with China’s overall plans for transforming its domestic economy to emphasize “quality construction” based on innovation and science and technology.
In recent past China had to face severe criticism for the way in which one its company gained control of the Hambantota Port in Sri Lanka. This compelled China to cut the price for its multi-billion dollar railway project in Malaysia by a third and scale down the plans for the expanded port of Kyaukpyu in Myanmar to a $ 1.3 billion project from the $ 10 billion being talked off earlier. Currently Maldives, too, is seeking a renegotiation of the loans granted by the Yameen government. However, as of now there does not seem to be a clear idea as to the extent of the debt.
On the eve of the event, the Office of the Leading Group for Promoting the Belt and Road Initiative issued a report on its progress, contributions and prospects. The central theme of the report is that the BRI may have originated as a Chinese national program, but it is now “a process of open, inclusive and common development,” open to all countries. According to the report, the BRI is now in a transition phase from planning to “intensive and meticulous implementation.”
Looking at the future prospects of BRI, the leading group report asked participating countries “to work together to foster a modern business environment which is corruption free and efficient.” In addition, the report highlighted the need to abide by laws and regulations during the process of tendering, construction and operational management of any project. It expressed China’s willingness to work in unison with other countries to improve legal systems, fight corruption and punish commercial bribery.
Xi Jinping’s speech
On April 26th’ Chinese President Xi Jinpingaddressed the opening ceremony of the BRF. His focus was mainly on offering a 2.0 version of his signature foreign policy initiative, one that sought important modifications in lieu of the criticism that China has received in the past couple of years.
According to Xi, the new version, emphasized on consultation and joint action with other partners. It spoke of “open, green and clean” cooperation which stressed the need for protecting the environment, transparency and prohibits corruption. According to Xi, the new “people centric” BRI would stress sustainability and adopt international rules and standards in, ‘project development, operation, procurement and tendering and bidding of the same.’
According to Xi, the new “people centric” BRI would stress sustainability and adopt international rules and standards in, ‘project development, operation, procurement and tendering and bidding of the same.’
China would continue to fund the BRI through its financial institutions, but it will also “welcome the participation of multilateral and national financial institutions,” also encouraging “third market cooperation.” Thus — encouraging and endorsing liberalization and establishing new, “high standard” free trade agreements.
He also took the opportunity to combine BRI version 2.0 initiatives with issues related to economic policy raised by the US in its spat with China. He assured a series of “reform and stronger institutional and structural move to boost higher quality opening up.”
China aims to expand its market access for foreign investment in more areas by reducing their negative list and opening up of new free trade zones. Also, intensify efforts to boost intellectual property protection, which will help China to promote innovation driven quality development.
The Issue of ‘Debt Trap’ Diplomacy
Chinese trade financing policy of deliberately trapping countries into debt has irked the international trading community hugely attracting a lot of criticism of the Chinese policy. A company named China Merchants Port Holdings acquired a lease over the port and 15,000 hectares of land for a special economic zone in exchange for a write off, of a $ 1.12 billion debt that Sri Lanka had incurred.
Chinese trade financing policy of deliberately trapping countries into debt has irked the international trading community hugely attracting a lot of criticism of the Chinese policy.
President Xi Jinping addressed the issue of debt sustainability in his speech. It also became a topic of discussion at the thematic forum on financial connectivity held on April 25th along with the BRF in Beijing. It was here that the Yi Gang, governor of the People’s Bank of China said that, ‘China would take measures to contain the debt risks related to the BRI projects and take a market based approach in financing projects, rely on commercial funds and private sector investment thus, reduce the amount of funds available for concessional financing. He said that henceforth investment and financing decisions should “fully consider a country’s overall debt capacity… to ensure debt is sustainable.”
Finance Minister Liu Kun said that China had published a “debt sustainability analysis framework” to prevent risks from spiraling out of control, based on World Bank and IMF research into low-income nations’ debt capacity.
In response to remarks made by Yi and Liu, IMF Chief Christine Lagarde welcomed the decision to focus on long-term success and debt sustainability in building safe and long-standing projects.
Several studies has suggested that pushing indebtedness to promote geopolitical goals is not really a part of Chinese policy. A recent article in Financial Times citing a study by the Rhodium Group has pointed out that developing countries have actually managed to renegotiate some $ 50 billion worth of loans that they had received from China and the resolution has been largely in favor of the borrower countries. It also suggests that the renegotiations shows a lack of competency among lending institutions.
Third Party Cooperation
Another major development in the BRI has been the evolution of the “third party cooperation model” which aims at promoting shared development and spreading China’s risks. The origin of this model lies in the political decision of Japan to cooperate with the BRI in practice if not in name. As part of this, in the year 2018, both the countries agreed to a joint execution of 50 infrastructural projects across Asia. This would combine China’s financial support and production capacity with Japanese rich overseas experience, advanced technology and risk management mechanisms. BRI v.2.0 seeks to leverage such links to boost its own capacity and capability. As an Ernst & Young report notes, the model seeks to link the ‘competitive production capacity advantages from China, the advanced technology from developed countries and the vast development needs from developing countries.’ This can help China to export its production capacity and products to international markets, help developed countries explore new growth drivers and boost the economic prospects of developing countries.
As Klaus Schwab the founder and head of the World Economic Forum puts it in the year 2017, when the first BRF took place, the BRI was still a ‘growing child,’ but now it has become an adult which signifies its importance in the global economy.’
It has matured as the cutting edge of a Chinese push towards globalization. The Chinese have laid out the vision of this collaborative BRI, what remains to be seen is the sincerity with which they implement it, as they face challenge from both external environment and domestic environment.
The Chinese have laid out the vision of this collaborative BRI, what remains to be seen is the sincerity with which they implement it, as they face challenge from both external environment and domestic environment.
State owned financial institutions led the first phase of BRI, whose ways of doing business remained opaque. But, now the world community is demanding a level playing field, pushing Beijing to introduce greater transparency in tendering and bidding processes and adoption of norms to ensure sustainable debt levels.
The goal under the BRI is not merely to promote investment and trade but also create newer channels of transportation and directions of trade flow along with reshaping China’s economy at qualitatively higher levels of production and consumption. These cannot but have political consequences in terms of rejigging China’s perception of its interests, the challenges it will confront and the necessary steps it would need to take both military and diplomatic to preserve and further them. Henceforth — we should not play down the geopolitical consequences of the Chinese-led globalization that BRI v.2.0 represents.