China’s Belt and Road Initiative: Plan for domination or strategy for crisis?

Four international initiatives have been associated with China during the last few years: the Asian Infrastructure Investment Bank (AIIB), the New Development Bank, the Regional Economic Partnership Agreement, and the Belt and Road Initiative (BRI). While all 4 have drawn attention, it is the BRI, for which Xi Jinping has announced a commitment of $1 trillion, that has been interpreted by some as Beijing’s boldest gambit in its drive for global power.  

Drawing on the historical image of trade routes from China to Europe – one the overland “Silk Road” via Central Asia, the other the “Maritime Silk Road” that had southeastern China as the starting point – Beijing has offered to finance a plan of infrastructure building across regions that it claims will lead to collective prosperity. 

For the White House Office of Trade and Manufacturing Policy headed by Peter Navarro, arguably the most influential economist in the US today, the BRI is “a Chinese strategy to dominate much of the infrastructure, resources, and trading routes of the world” that is one dimension of Beijing’s strategy of “economic aggression.”

BRI and the overcapacity problem

To some other analysts, however, the BRI is really an effort to place a superficial image of order to crisis and chaos.

The crisis is the overcapacity problem that is now the key drag on the Chinese economy, forcing balance sheets of state owned enterprises (SOEs) into the red, and making their survival dependent on the permanent infusion of funds from the state banks, resulting in even more massive indebtedness.

Indeed, owing to massive overcapacity, many enterprises now can’t make a profit on the domestic market. Utilizing China’s surplus capacity to produce for foreign markets in order to make its industries profitable is the key drive behind the BRI. As analyst Lee Jones puts it, the BRI “is not some new invention of Xi Jinping…[It] is really a rebranding exercise, or a fresh spur, to a process of externalization of surplus construction capacity that has been happening for well over a decade.”

Interestingly, there are Chinese academics close to the government who do not hesitate to claim that overcapacity is a central driver of the BRI and the AIIB. “It is not true that China is simply altruistic,” writes Xiao Ren. “At present, the overall Chinese economy is undergoing a restructuring process. As its economy slows down and evolves, the country needs to find new markets for its capital goods.” Thus, infrastructure projects promoted by the AIIB “will help to transfer the overcapacity of production.”  

Looking more closely at the surplus capacity problem, the essential cause lies in the main features of economic decision-making in China.

One is the fragmentation of authority, or the dispersal of authority multiple, overlapping, agencies, ministries, and regulators.

Another, according to Lee Jones and Jinhang Zeng, is the “decentralization of power, resource control, and policy-making and implementation, particularly to provincial governments, creating a ‘de facto federal’ state,” whereby “subnational governments can ‘adjust’ national policies to local circumstances, producing constant multi-level bargaining around, and substantial non-compliance with, central initiatives.”

A third is the “internationalization” of formerly domestic actors, such provincial authorities and local SOEs that come into contact and establish relations with foreign governments and international agencies separate from the relations of the central government with these bodies. 

BRI rhetoric and reality

The upshot is that while Xi articulated BRI as part of his vision for the “rejuvenation” of China, the content of BRI was filled with projects by provincial authorities, SOEs, and national ministries competing for funds and bureaucratic power. Rather than the top-down planning that was the image of the BRI in the West, the process was actually a competitive and often disorganized bottom-up affair.

After Xi gave his Silk Road speeches in 2013, bureaucrats tried to outdo each other in sycophantic praise of him even as they launched a battle of resources for their local governments, SOEs, and ministries. This struggle for resources resulted in the haphazard inflation of the BRI, until the point was reached in 2015 when, as Jones put it, “BRI was opened up to every country on Earth. There was no longer one belt and one road, but rather 3 land routes (to Europe via Central Asia/Russia; to the Middle East via Central Asia; and to India via Southeast Asia); two maritime routes (to Europe via the Indian Ocean, and to the South Pacific via the South China Sea); and 6 ‘corridors’ (the New Eurasian Land Bridge, China-Mongolia-Russia, China-Indochina, China-Central Asia-West Asia, China-Pakistan and BCIM).”

Even some government officials and intellectuals saw this as a bit too much, with one influential scholar, Xue Li, decrying the expansion of the BRI’s mandate to the whole world, arguing, “If you put it everywhere, it becomes nothing.”

Not only does BRI threaten to become meaningless. It’s become very costly. For instance, the BRI’s vision of Eurasian “connectivity” resulted in an explosion of railway traffic from China to Europe as local governments maneuvered to get themselves on as railway freight stations to gain visibility to the party leadership and thus access subsidies provided under BRI.

This uncontrolled competition has resulted in virtually empty freight trains running hundreds of thousands of kilometers across the vast Eurasian land mass, with one particularly scandalous case involving transporting 40 empty containers and just one full container all the way to Europe. One commentary noted that the China-Europe railway “confirms what some observers have suspected all along: that China’s central government lacks the ability to keep the BRI strategically tight and coordinated.

Sub-national stakeholders, as they do in other policy areas, have the incentives to bend the initiative to their own narrowly defined interests and in the process undermine the overarching strategy, if such a strategy indeed exists at all.”

Not helpless pawns

In assessing the impacts of the BRI, it must be pointed out that participating countries are not helpless pawns, as those promoting the grand design theory would like to portray them, though some governments, of course, find it harder than others to stand up to Beijing.

For instance, within weeks of each other in 2017, citing concerns about their national interests, Pakistan and Nepal cancelled multibillion-dollar big dam projects that were part of the BRI, as pointed out earlier. Pakistan objected to conditions that would have given China ownership of the Diamer-Bhasha dam in return for assuming costs of operation and maintenance and a pledge to build another dam. In Nepal, the deal to build a dam between a previous governing coalition and the China Gezhouba Group Corporation was reversed owing to the lack of competitive bidding during the old regime, according to the new government. 

Pakistan is a close ally of China while Nepal borders China, but, as in the case of the suspension of the Myitsone Dam by Myanmar, both countries cancelled the deals with no apparent fear of Chinese retaliation, something that would be inconceivable if it were western companies that were involved. 

The list of governments showing their independence of Beijing goes on: Prime Minister Mohammed Mahathir threatened to cancel the corruption-ridden East Coast Rail Link project with a Chinese corporation made by the previous government, then successfully brought down the cost of the project from $16 billion to $11 billion in renegotiations.

In the Maldives, the electoral defeat of a pro-China president in favor of the more critical Ibrahim Mohamed Solih has resulted in the renegotiation of BRI-related debt, while in Sierra Leone the cancellation of a planned Chinese-funded airport in the capital, Freetown, marked the first termination of a BRI project in Africa. What these examples show is that Beijing is not some all-powerful force that dictates the terms of participation in the BRI to developing countries but a distant center that is enmeshed in local elite struggles with its state enterprises, which creates problems for their projects and for China once local power changes hands.

‘Debt trap diplomacy?’

One of the accusations against Beijing is that it is engaged in “debt trap” diplomacy via the BRI. As laid out by the White House Office on Trade and Manufacturing Policy: “China uses a predatory ‘debt trap’ model of economic development and finance that proffers substantial financing to developing countries in exchange for an encumbrance on their natural resources and access to markets.

These resources range from bauxite, copper, and nickel to rarer commodities such as beryllium, titanium, and rare earth minerals.” Moreover, China then uses indebtedness to get countries to yield territory that is used for strategic purposes, that is to project Chinese military power. The case cited by some western observers is that of the Hambantota Port, which it acquired from Sri Lanka (with a $1.12-billion investment for an 85% equity share) on a 99-year lease because the government had a difficult time servicing its debt on a Chinese loan for the project.

The problem with this claim is that of the more than 3000 Chinese-financed projects tracked by the prominent Johns Hopkins University expert Deborah Brautigan and her team, only Hambantota appeared to fit the alleged pattern of indebtedness being turned into strategic military advantage. When it comes to Hambantota itself, a detailed analysis by Lee Jones based on interviews with people intimate with the details of the deal lends more credibility to the counterargument that the outcome stemmed from China’s trying to find a solution to a deal that was badly conceived from the beginning, and that this was, in fact, more unfavorable to it than to the host country.

In this telling, the former Sri Lankan president, Mahinda Rajapaksa, who was a native of Hambantota, was the prime mover. Seeking to solidify his hold on his constituency, he resurrected an old plan, and convinced China to finance it and to fast-track its lending. When the port began operations, however, revenue intake did not match the original grandiose projections, saddling Sri Lanka with a debt servicing problem. Instead of a renegotiation of the terms of repayment, Sri Lanka and China agreed to the lease arrangement, which, on superficial view, benefited China but actually saddled a Chinese SOE with managing an unprofitable operation.  

In short, the reality was that “far from a realization of China’s cunning plans,” the solution actually reversed China’s recently adopted policy to relieve the problems of its indebted SOEs by shifting the burden of repaying loans to China’s banks from the Chinese enterprises to the recipient governments.  Owing to its transferring the debt load to the Chinese SOE, a Chinese government analyst concluded that the outcome for was “a trap for Chinese firms, rather than the Sri Lankan government.”

Developments also contradicted the claim that China plotted to seize Hambantota to use as a naval base since the lease agreement specifically prohibited this, and in July 2018, the Sri Lankan navy’s southern command was instead relocated to the port. “Far from a case of skillful ‘debt trap diplomacy,'” Jones concludes, “this is a case study of Chinese ineptitude,” with an attempt to export surplus capacity and capital creating a “debt trap” for the Chinese state.

The Rhodium Group also looked at charges of Chinese seizure and found that “actual asset seizures are a very rare occurrence. Apart from Sri Lanka, the only other example we could find of an outright asset seizure was in Tajikistan, where the government reportedly ceded 1,158 square km of land to China in 2011. However, the limited information available, and the opacity of the process makes it difficult to determine whether this specific land transfer case was in exchange for Chinese debt forgiveness, or (as some observers argue) part of a historical dispute settlement between the two countries.” Other investigators found that similarly unfounded were reports that in return for debt relief, China was taking over Zambia’s electricity grid, or that in exchange for rebuilding Mogadishu’s seaport it was getting “exclusive fishing rights” off Somalia’s coast.

After sifting through available records, one research agency concluded that “despite China’s size and growing international economic clout, its leverage in some of these cases remains quite limited, even in disputes with much smaller countries.”

Mismatch between ambitions and resources

Even if one were to grant that global hegemony rather than a desperate effort to externalize China’s surplus capacity is the main goal of BRI, one must ask where China has the resources to sustain its ambitious reach.

Some of those who see BRI as a grand plan appear to think that Beijing is an inexhaustible piggy bank.  The reality, however, is that China’s growth is slowing down, the export markets from which it derived so much of the profits that it channeled to the global expansion of its SOEs are stagnant, and the severely indebted SOEs that are also key actors in BRI cannot be maintained indefinitely on life support on the backs of the ill-rewarded savings of China’s consumers that are funneled to them by state banks.

At some point, something has to give.

Indeed, instead of providing a way to make indebted Chinese SOEs profitable, the BRI, as the Sri Lanka example shows, may merely compound China’s problems by taking on customers that would be hard put to repay their loans, thus worsening the balance sheets of both the SOEs and the state banks that are keeping them alive. As economist Kevin Gallagher has pointed out: “Like those from Western-backed development banks in earlier years, Chinese loans now face default by countries that have long been branded ‘serial defaulters.’ China has provided massive loans to Pakistan, Sri Lanka and Venezuela, and it is not clear the Chinese will be paid back in full.” 

There is, in fact, some indication that Beijing is now having second thoughts along this line: In 2017 and 2018, Chinese-led investment in BRI countries declined, meaning China could be tightening up its financing. 

China has entered a time of economic troubles. BRI is an attempt to solve the country’s economic contradictions by externalizing them. In fact, it may end up exacerbating them.

Exporting environmental crisis

This brings us to the biggest problem with the BRI.

The BRI, we have said, is not a grand plan for domination but a desperate effort to export Chinese industry’s surplus capacity. It may also be seen as a way to export China’s domestic political contradictions, by providing an ostensibly “win-win” solution to the competing factions in the party-state leadership, the “maritime silk roads” for the coastal export lobby and the “overland silk roads” for the inland provinces lobby and the infrastructure lobby, with all the competing SOEs associated with these groupings.  

To these dubious exports must be added a third, the export of China’s environmental crisis brought about by the wasteful, duplicative, and environmentally harmful activities of these same competing political and economic actors.  

A great number of BRI projects are focused on dam-building and creating coal-fired power plants, whose negative environmental impacts are already widely known. Some are most likely to be in extractive activities like mining and oil, where China has financed ventures in Africa and Latin America.  While some advances have been made in terms of having environmental impact assessments accompany dam and other infrastructure projects in China, environmental guidelines such as the Ministry of Environmental Protection of China’s (MEP) Guidance on Building the Green Belt and Road “are non-binding and hardly implemented” in BRI projects. 

It has been reported that over 1,700 critical biodiversity spots and 265 threatened species will be adversely affected by the BRI, one of these being Sumatra’s Batang Toru forest highlands, one of Indonesia’s most biodiverse regions, where a $1.6-billion hydroelectric power plant poses a danger to the rare Tanapuli orangutan and the critically endangered Sumatran tiger and Sunda pangolin.

In the Philippines, according to another account, the BRI-funded Kaliwa Dam in mountainous Eastern Luzon island is projected to displace some 20,000 indigenous peoples living in 230 hectares of dipterocarp forests well as pose a threat to rare species of flora and fauna in the area, “including several species of rattan, a valuable palm used in the manufacture of furniture and balls used in the kick volleyball game Sepak takraw,” as well the white-winged flying fox, slender-tailed cloud rat, civet cats, wild boar, Philippine eagle, and Philippine deer.

Chinese officials boast of the “connectivity” among countries that will be triggered by the BRI.  However, another kind of connectivity, a more sinister one, might actually be one of the greater outcomes. According to one study, BRI’s network of roads, railways, and pipelines could introduce more than 800 alien invasive species – including 98 amphibians, 177 reptiles, 391 birds and 150 mammals – into several countries along its many routes and developments, destabilizing their ecosystems.

BRI as gigantism

The BRI is actually not so much a grand plan for domination but a grandiose anachronistic transference to the 21st century of the technocratic capitalist, state socialist, and developmentalist mindset that produced the Hoover Dam in the US, the massive construction projects in Stalin’s Soviet Union during the 1930s, the Three Gorges Dam in China, the Narmada Dam in India, and the Nam Theun 2 Dam in Laos. These are all testaments to what Arundhati Roy has called modernity’s “disease of gigantism.” Others have called this “neodevelopmentalism” while yet others have called it “extractivism.” This mindset cannot be said to be associated with capitalism alone, since it has had an appeal across ideological lines, with Fordist capitalists, Soviet socialists, Chinese planners, and progressive Latin American governments such as the government of former presidents Rafael Correa in Ecuador and Evo Morales in Bolivia.

Technocratic and top-down in planning and execution, driven by the needs of China’s infrastructure construction complex, marked by incoherence and duplication, and insensitive to popular democratic control, the BRI is the ultimate gigantistic program and it is inviting a transborder ecological and social disaster – that is, if it does not first run into a crisis triggered by fiscal and financial overreach.

Incoherence

In sum, rather than a grand plan, the BRI is better seen as:

1. a not too coherent package of infrastructure building;
2. clothed with high-flying visionary rhetoric;
3. meant to externalize China’s surplus capacity crisis;
4. driven by competition and conflicts among local authorities, SOEs, and national ministries that spill over into the international arena; and
5. one that exports not only China’s surplus capacity but its factional political contradictions and its environmental crisis.

Marked by contradictions, BRI is a grandiose remnant of 20th century technocratic imperialism that is, like many of its predecessors, likely to fall flat on its face. – Rappler.com

 

This is the 6th of 7 articles on China’s political economy based on the study titled “China: An Imperial Power in the Image of the West” published by Focus on the Global South and authored by Walden Bello, retired Professor at the University of the Philippines and currently the Adjunct Professor of Sociology at the State University of New York at Binghamton. The study can be accessed here. The author can be contacted at waldenbello@yahoo.com.