Big Read: China's road to the future

By South China Morning Post, Bloomberg, AP

China's vision for a new global economic order also had another goal: boosting Xi's own grip on power at home. Photo / File
China's vision for a new global economic order also had another goal: boosting Xi's own grip on power at home. Photo / File

Cash has been committed, promises have been made and leaders' hands have been shaken.

But for all the buzz in Beijing about China's "Belt and Road Initiative", scepticism still dogs the vast trade and infrastructure programme.

The initiative, unveiled by President Xi Jinping in 2013, is touted as a visionary scheme to build infrastructure and expand trade throughout Asia, Africa and Europe.

At the Belt and Road Forum for International Co-operation last weekend, Xi said China was committed to globalisation and free trade. He also pledged to inject more than US$100 billion ($145b) in extra funds into countries along the routes.

The One Belt, One Road scheme aims to create two trade links between China and Europe.

One - the "Belt" - would be a sea link between China's east coast and Venice in Italy, taking in ports in southeast Asia, India, Sri Lanka, Africa and the Mediterranean.

The other key route would be a new "Silk Road" - a road and rail corridor between Xian in northwest China and Rotterdam in the Netherlands.

In all, the scheme aims to link more than 60 countries.

While cash-starved developing nations welcomed China's largesse, Beijing's rising political influence has generated concern among other powers, including the United States and India.

Sameh El-Shahat, head of consulting agency China-i, says the initiative's biggest challenge is that people along the routes barely understand China and its values.

"Today's world was created by Western institutions, like the World Bank, the International Monetary Fund and the United Nations ... And the world is used to the old colonial countries like the US and Britain but the world is not accustomed to China," El-Shahat says.

"China says it will treat other countries as family and friends, but many countries don't trust [those words]. They think the Chinese say so because they want to buy [their resources]. China is the world's second-largest economy but many people have no idea about Chinese values."

President Xi's pledge to invest via its state funds and banks to finance projects in the Belt and Road Initiative is more of a seed fund than a credit pipeline for the ambitious plan.

The fund's size, though large at face value, is tiny compared to China's grand plan. Asia alone needs to spend US$8 trillion on infrastructure by 2020, the Asian Development Bank estimates. It also says Asia needs to spend US$26t by 2030 to maintain growth, reduce poverty and respond to climate change.

Huo Jianguo, former chief of the Ministry of Commerce's research institute, says the promised fund is just a sign of China's commitment to help develop the countries that are in the plan and more capital is needed, from other multilateral lenders and the private sector.

Whether enough money will follow Xi's initiative to finance ports and roads in the world's most dangerous territories will largely decide whether China's economic ambition materialises.

Chinese President Xi Jinping attends a summit at the Belt and Road Forum in Beijing, China. Photo / AP
Chinese President Xi Jinping attends a summit at the Belt and Road Forum in Beijing, China. Photo / AP

In his keynote speech on Sunday, Xi promised the 29 state and government leaders, as well as delegates from more than 100 countries, that China would increase the Silk Road Fund by another 100b yuan, ask the China Development Bank to add 250b yuan in special overseas loans and the Import and Export Bank of China to add 130b yuan, as well as encouraging Chinese banks to set up overseas funds worth about 300b yuan to help Belt and Road funding.

Meanwhile, Xi said a "stable, sustainable and safe" financing safeguard mechanism was needed to seek new financing methods and to improve co-operation between public and private funds.

British Chancellor of the Exchequer Philip Hammond said Britain was ready to offer financing services to facilitate projects along the route.

"It is my belief that Britain, lying at the western end of the Belt and Road, is a natural partner in this endeavour. Britain has for centuries been one of the strongest advocates of an open global trading system," he said.

Construction of infrastructure such as roads, harbours, hydro-electric power stations and power grids is a core part of the initiative's push for regional connectivity - and also very costly.

The Beijing-based Asian Infrastructure Investment Bank has granted US$1.7b in loans for nine projects since it started substantial operations last year, while the Silk Road Fund, under China's central bank, has lent about US$4b of funds, including money for a dam project in Pakistan.

China Development Bank has granted US$168.2b of loans for more than 600 projects since the initiative was first brought forward four years ago. It was followed by about US$100b from the Export and Import Bank of China.

But, even for deep-pocketed Beijing, its financial resources are not limitless. Its foreign exchange reserves have dropped to US$3t from a peak of nearly US$4t three years ago, and China is taking measures to curb "irrational" outbound investment to curb capital outflows.

One Belt, One Road is the biggest in a series of initiatives launched by Beijing in the past decade in pursuit of global influence to match its economic success.

Starting in 2004, the communist government opened Confucius Institutes with universities in Asia, Europe and the Americas to teach Chinese language and culture. After the 2008 global crisis, Beijing lobbied successfully for more voting rights in the US- and European-dominated World Bank and International Monetary Fund.

Chinese officials reject suggestions that One Belt, One Road is a power play by Beijing.

"The Chinese government has never wished to control any other country's government," says a Cabinet official, Ou Xiaoli. "We feel in contacts between countries, we need to talk about studying benefits, studying mutual profit."

The bulk of Chinese financing is to be as loans, which Ou says will be mostly on commercial terms based on "market principles". That might add to debt burdens in countries where dealing with Beijing can be politically sensitive.

China is often the only entity willing to finance big projects in poor countries. That gives Beijing leverage to require the use of Chinese builders and technology.

In 2015 the state-run China Development Bank announced it had set aside US$890b for more than 900 One Belt, One Road projects across 60 countries in gas, minerals, power, telecoms, infrastructure and farming. This year, the government's Export-Import Bank of China said it would finance 1000 projects in 49 countries.

Chinese President Xi Jinping, right, speaks with Russian President Vladimir Putin. Photo / AP
Chinese President Xi Jinping, right, speaks with Russian President Vladimir Putin. Photo / AP

Beijing will provide only part of the financing and wants projects to attract private investors, Ou says.

"We must consider economic viability," he says.

China is far from alone in promoting infrastructure investment.

Japan has given southeast Asian governments tens of billions of dollars in grants or low-interest loans. The Asian Development Bank lent US$32b last year.

South Korea launched its "Eurasia Initiative" in 2013 to develop rail, trade and energy links across the two Koreas and Russia to Europe. That stalled last year due to trade sanctions imposed on North Korea over its nuclear weapons development.

American allies Britain, South Korea, Australia and New Zealand signed on as founding members of the Chinese-led Asian Infrastructure Investment Bank (AIIB), launched in 2015 to finance roads, ports and other projects. The US and Japan have so far stayed away.

Ou says the AIIB will operate separately from One Belt, One Road and any loans made by the bank will be decided independently.

In Pakistan, the proposed US$1.3b effort to expand the Karakoram Highway is part of the China-Pakistan Economic Corridor, which involves dozens of projects including power plants, roads and railways spanning the length of the country. It links China's far western region of Xinjiang with the Chinese-built port of Gwadar on the Indian Ocean.

One Belt, One Road could help China's exporters by encouraging countries to adopt its industrial standards for railways and other products, locking buyers into sticking with them for repairs or additional technologies. China's Premier has cited the promoting of Chinese standards abroad as one of Beijing's goals.

Chinese rail technology is poised to make inroads into the European Union, with a plan for state-owned companies to build a high-speed line from Budapest, capital of EU member Hungary, to Belgrade in neighbouring Serbia.

The US$2.9b project, financed by Beijing, faces obstacles after EU officials said they would look into whether Hungary broke trade bloc rules by agreeing to the Chinese deal without competitive bidding.

In Pakistan, officials say much of the Chinese money for power projects is investment, not loans. They have given few details, raising questions about whether other projects can pay for themselves.

"China is giving most contracts for energy projects to its own companies without even consulting Pakistan," says Azeem Khalid, a lecturer at the Commission on Science and Technology for Sustainable Development in the South, a non-government group in Islamabad.

"I feel that our several generations will have to repay these Chinese loans for decades."

In Indonesia, the Chinese effort could fit with President Joko "Jokowi" Widodo's "Maritime Axis Policy" to transform the country into a sea power. China muscled aside Japan in 2015 to win a contract to build a US$5.2b high-speed rail line from the capital, Jakarta, to the city of Bandung.

But Indonesian leaders also are wary of a backlash in a country where resentment of ethnic Chinese billionaires simmers.

"The Jokowi government must balance its desire for capital and expertise with a need to guard against a populist, anti-Chinese backlash," says Hugo Brennan, an analyst at political risk firm Verisk Maplecroft.

A joint statement by the leaders appeared to be crafted to defuse fears Beijing is trying to create a China-dominated bloc and rewrite global trade rules.

"We endeavour to promote a universal, rules-based, open, non-discriminatory and equitable multilateral trading system with WTO at its core," the statement said.

Xi acknowledged the initiative is in its early stages and faces daunting obstacles.

"One single feather does not make a bird fly high," he said.

China is the biggest trading partner for all of its Asian neighbours and a growing investor. But other Asian governments are uneasy about Beijing's ambitions, especially after it built artificial islands and military bases in the South China Sea to enforce its claim to most of the region.

Asian governments that want to use ties with Washington to offset China's growing dominance have been thrown off balance by President Donald Trump's decision to withdraw from the Trans-Pacific Partnership, a proposed regional trade pact.

Beijing has promoted itself as a champion of free trade in response to pressure in the United States and Europe for restrictions on imports, despite complaints by its trading partners that China is the most closed major economy.

The Belt and Road is Xi's signature foreign policy initiative. The two-day meeting gave the Chinese President a platform to promote his image as a global leader and free trade advocate in contrast to Trump, who has called for import restrictions.

Xi called for regional co-operation in finance - a field where China's huge state-owned banking industry and US$3t of foreign currency reserves would make it the dominant player.

"We should establish a sustainable financial system that keeps risk under control," said Xi.

China's vision for a new global economic order also had another goal: boosting Xi's own grip on power at home.

Greater prestige may help Xi put supportive officials in place during a twice-a-decade leadership reshuffle that will determine his ability to enact a politically difficult economic overhaul.

London v Hong Kong - which will rule the road?

Hong Kong and London locked horns at a high-level forum in Beijing over which city is best placed to be the finance hub for China's global trade and commerce strategy.

At the Belt and Road Forum for International Co-operation, Hong Kong Chief Executive Leung Chun-ying insisted the city was "the preferred destination" for capital flows from the mainland.

Leung cited the city's status as the largest offshore settlement centre for yuan trade and its title as the world's No. 1 stockmarket for new listings last year. However his bid was swiftly challenged by the British Chancellor of the Exchequer, Philip Hammond.

Referring to the sheer scale of funding required for China's "Belt and Road Initiative", which promises to be in the trillions of US dollars, Hammond said Leung's pitch was "elegantly made", but "London is not an alternative to Hong Kong".

The Chinese initiative aims to open trade along two key corridors: the land-based old Silk Road across the north and a 21st century maritime Silk Road in the south.

A key challenge facing Beijing's ambitious trade strategy is establishing financial connections among more than 60 countries along the trade route, and funding the infrastructure projects involved, many of which have already proven too high-risk for some private investors.

Leung said Hong Kong was both China's international financial centre and "the world's China financial centre".

"Hong Kong is the preferred destination of capital from the mainland," he said.

He said the Hong Kong Monetary Authority last year set up an office to facilitate the financing of Belt and Road investments.

The authority's chief executive, Norman Chan Tak-lam, said the office had already allied dozens of "like-minded stakeholders".

"There is a big cluster of equity and debt investors for belt and road projects," he said.
Hammond, however, said London remained the world's financial centre and had the skills and capability needed to deliver China's trade initiative.

He said the biggest challenge in financing investments in belt and road countries - mostly developing nations - was ensuring projects were structured in a way that was internationally "bankable" or with investment grades.

"We have the skills and capability in London to make infrastructure projects attractive to private investors," he said.

- AP, Bloomberg, South China Morning Post

Get the news delivered straight to your inbox

Receive the day’s news, sport and entertainment in our daily email newsletter

SIGN UP NOW

© Copyright 2017, NZME. Publishing Limited

Assembled by: (static) on production apcf04 at 30 May 2017 17:16:35 Processing Time: 1135ms