By Sarah Lain
An edited version of this article appeared in China Daily Europe, May 12 2017
At a time when the US is reducing its international development contributions, China has pledged additional billions to its multi-national Belt and Road Initiative (BRI). At the recent Belt and Road summit this included adding RMB 100 billion to the Silk Road Fund, as well as creating a China-Russia Regional Cooperation Development Investment Fund. However, some countries, such as those from the EU attending the summit, continue to have concerns over the way in which the project will be implemented.
One of the key concerns for many Belt and Road countries is the lack of detail around the feasibility and planning behind some of the projects the Belt and Road Initiative (BRI) is promoting. Some subsequently wonder whether the BRI could in fact create new risks for certain countries along the BRI. Beijing still need to explain how it assesses and mitigates the various risks prior to investing to ensure the sustainability of the foreign policy vision. This will help add reassurance to the ‘win-win’ rhetoric behind the BRI.
The expectations of the BRI’s impact on economic development both at home and abroad have been set high. The concept’s objectives are to promote common development and prosperity through cooperation, implementation of which has traditionally consisted of significant Chinese loans and contracts to build infrastructure in partner countries. However, investment and infrastructure alone will not achieve China’s objectives unless more strategic thought goes into coordination, cooperation, good planning and strong governance.
One risk is whether Chinese infrastructure will benefit the Chinese economy much more than local BRI economies. Here, it is useful to look at the well-developed existing economic relationships China has with Central Asia and Pakistan, which are key countries to the land-based ‘belt’ half of the BRI. The range of infrastructure investments there shows that it is not just about Chinese-focus infrastructure, such as transport facilities to export Chinese goods to Western markets or pipelines to enhance Chinese energy security. It is also about building stable domestic energy supplies, investing in local industry and ensuring business is developed through Special Economic Zones (SEZs). Such initiatives will be crucial for stimulating local economies and markets rather than just generating transit fees or enhancing China’s own energy security.
It is not just China’s responsibility to stimulate such economic activity. To facilitate this, BRI partner countries will need to respond with their own economic strategies to maximise Chinese investment and attract other foreign investment in order to account for their own economic growth. For example, Kazakhstan has been proactive in meeting China’s BRI policy with its own national Nurly Zhol (“Bright Road”) strategy, announced by President Nazarbaev in November 2014. Nurly Zhol sets out an economic stimulus package of USD 9 billion for 2015-2019 also focused on infrastructure development as well as economic diversification. This offers a model as to how BRI countries can have a say in where Chinese investment is directed.
Apart from proactive responses from BRI countries, to minimise risks China will need to assess and plan projects effectively to ensure they do not exacerbate existing economic vulnerabilities. This requires a deeper study of the countries that China is investing in and possibly cooperating with other foreign investors to ensure appropriate feasibility studies are done. The risks have recently been shown in Pakistan, where China has agreed to invest up to USD 62 billion into the China-Pakistan Economic Corridor, one of the most prominent BRI projects. In April 2017 it was reported that China had provided USD 1.2 billion to Pakistan in emergency loans after Pakistan suffered a drop in foreign currency stocks. This was due to rising imports as well as lower exports and remittances from Pakistanis abroad. Pakistan faces further trouble, as it needs these currency stocks to pay contractors and suppliers working on CPEC. In theory, the CPEC is supposed to help boost exports that will in turn generate revenue to pay back Chinese loans used to fund CPEC. In the short-term, however, the implementation of the corridor has revealed Pakistan’s economic fragility.
For the vision to be sustainable, therefore, it must be driven by stronger commercial logic above political commitment to public policy. Reports have cited industry experts who note that central, local and regional governments heavily subsidize rail transport heading West from China in order to demonstrate commitment to the foreign policy vision, rather than reflecting sound financial planning. Although freight transport is quicker than sea, it is also far more expensive which may explain the subsidies. Therefore, infrastructure built simply because Beijing is advocating a broader foreign policy vision will not necessarily substantially help economies at home or abroad. When speaking to an economics expert based in Bishkek, they reinforced this concern with the perception that at times China is ‘spending for spending’s sake’ through its external investments, when it could be thinking more strategically.
Good governance is another way not only to enhance effective fiscal management but also to attract other non-Chinese investment. This is certainly a two-way street, but China has the power to help mould good governance practices if it chooses through its investment. This could also help the commercial viability of some projects. For example, Khorgos is the best-known SEZ in Kazakhstan, serving as a transport and aspiring trade hub on the border with China. The development of Kazakhstan’s trading side has suffered not only from underinvestment but also corruption scandals. In September 2016, the head of Khorgos Immigration and Customs Control Zone, the free trade zone, Vasiliy Ni, was arrested for accepting bribes to award a hotel construction tender to Khorgos Tulpan LLP. Such scandals run the risk of tainting Chinese investment in the Central Asian region.
The BRI presents numerous risks for Chinese investment and partner countries. However, more work can be done to anticipate and try to mitigate such risks. This will improve the clarity of the project as a whole and, in turn, contribute towards the trust China desires amongst its partners.