RYAN MANUEL. Belt and road: less than meets the eye

Feb 10, 2017

The recent unravelling of world affairs has seen many argue that China may lead closer global economic cooperation. Xi Jinping’s recent speech to the World Economic Forum in Davos encouraged this rather surprising turn of events. Xi opined that protectionism, populism, and de-globalisation were increasing and that this increase would hinder closer global economic cooperation. His remedy was more economic development, closer links between countries and what he called the ‘Belt and Road’ initiative.  

Given that everyone wants more economic development and closer links, the meat in Xi’s sandwich is undoubtedly the “Belt and Road” initiative. But what is the Belt and Road? And what does it mean for Australia?

“Belt and Road” began life as a Xi Jinping remark made during visits to Indonesia and Kazakhstan in late 2013. It spans a range of activities, almost all foreign investment related. Formerly “One Belt, One Road” (although the Chinese has remained the same: 一带一路), Belt and Road has two geographic elements: a “Maritime Silk Road” linking China’s east coast to Australia, Europe and Africa via the South China Sea and Indian Ocean, and a “Belt” linking western and northwestern China to Central Asia, Russia, Iran, Turkey and Europe.

Belt and Road covers China’s investment in a number of multilateral banks and funds. These funds include a new Silk Road Fund and a number of state bank funds. It may also include previous commitments made to the Asian Infrastructure Investment Bank, the New Development Bank BRICS, and various ASEAN connectivity plans.

Conceptually, Belt and Road is to strengthen five kinds of ‘connectivity’ between China and participating countries.

Much Belt and Road rhetoric is grandiose. It will potentially involve an area that covers 55% of world gross national product, 70% of the global population, and 75% of known energy reserves. While around US$110 billion has been promised in public, other estimates go as high as US$300 billion by including infrastructure spending, while the Financial Times upped the ante to ‘more than (US)$900bn’. As of January 2017, the official line is that ‘Chinese companies have made over (US)$50 billion of investment’.

But Belt and Road is a constantly mutable thing. The numbers often change to suit the context in which they are presented. So when officials wish to promote the size and grandeur of Belt and Road — ‘China’s Marshall Plan’ — they reach for the largest number they can justify. Yet when officials wish to highlight the ‘rigorous nature of the project evaluation process’, the numbers shrink rapidly. Within this blizzard of bluster, we need to concentrate on the revealed facts: what has been done, what has been said, and whether there are any implications of these matters.

Belt and Road has been very successful institutionally. Many bureaucratic arrangements have been made in a short period.

To wit: Xi announced the belt and the road separately in two speeches in September and October of 2013. It was written into the overall Party strategy for the nation one month later, in November 2013. Following this, a number of government ministries and provincial governments prepared responses. A year later, a number of economic meetings were held at which Xi specified his goals for Belt and Road and announced the US$50bn Silk Road Fund. Banks were told to prepare to lend. In 2015, a workgroup was established in Beijing. The group quickly prepared an Action Plan (non-binding) while local governments prepared their own plans (these can be binding). Finally, the government released a coordinated policy statement in March, albeit one that can be overridden by more than 20 other types of decree. Throughout 2015 and 2016, various government departments, local governments and even courts added ‘Belt and Road’ sections to their policy documents and plans.

This flurry of activity creates a certain amount of institutional momentum. These arrangements are likely to last until the next Chinese administration — that is, the post-Xi administration — at least.  

But the institutional arrangements create, in essence, two Belt and Road schemes. One is run in Beijing, uses the central economic organs of the state and functions similar to many policy programs that are familiar to us. This Belt and Road is run by smart, well-trained bureaucrats familiar with modern cost- and project- management techniques.

The other Belt and Road is a moving feast created by local leaders. China has thousands of lower-level jurisdictions, some of which issued a Belt and Road plan. Xi Jinping’s interest in Belt and Road provides an incentive for any willing local leader to rebadge pet projects and call on local state-owned banks for funding, regardless of commercial merit. For some of these projects, Belt and Road is more slush fund than strategy.

While Belt and Road may be an economic strategy, it will undoubtedly have ramifications for geopolitical strategy. Some argue that Xi Jinping thinks that ‘development is the greatest form of security’. If this is true, Belt and Road’s potential to help other nation’s economic development may take on strategic significance.

Any project which purports to link 70% of the world’s population will always be subject to keen interest. And there have already been regional reactions to Belt and Road. Japan already has announced a $110 billion infrastructure fund for Asia and is prodding the Asian Development Bank to revise its disbursement rules and increase its lending capacity.

Of course, with Asia’s infrastructure deficit estimated to be in the trillions, some competition to build infrastructure is no bad thing. But reactions to Belt and Road have often ignored the economic benefits to focus on the strategic. Indian analyses of Belt and Road warn that ‘if there is one thing at which China’s leaders truly excel, it is the use of economic tools to advance their country’s geostrategic interests.’

While every country makes its own strategic calculations, it is essential to make clear that China does not treat Belt and Road as a foreign policy program. It is an economic program with some foreign policy implications. Belt and Road is not under the purview of China’s foreign affairs apparatus.

The economics policy area owns the central part of Belt and Road. It is under the control of Zhang Gaoli, who lacks a remit to conduct foreign policy. The office drafting Belt and Road documents is contained within the central economic development ministry (NDRC). Directives to officials describe Belt and Road as an ‘economic strategy.’ While the Ministry of Foreign Affairs is a joint signatory on official statements regarding the policy, it is outranked by its economic agency co-signatories. And local government’s Belt and Road plans have no foreign affairs input.

Even as an economic program, Belt and Road is not all that successful. This judgment is at odds with much of the rhetoric occurring outside China. Foreign law firm Dentons for example somewhat breathlessly argues that Belt and Road will ‘provide an outlet for the release of China’s vast amounts of economic capital and production capacity which have built up both domestically and overseas’.

But there have been very few Belt and Road deals, particularly given the scale of the rhetoric. Early projects were Kazakhstan, Kyrgyzstan, Tajikistan and Pakistan. The Kazakhstan agreements of 2014, by far the most substantial, appear a Belt and Road rebadging of already-concluded agreements. One Pakistan agreement, a US$1.6bn dam, required the Pakistan government to provide 10,000 troops and another 10,000 commandos to protect Chinese workers. The only Belt and Road project that has actually started work, a hydropower station in Pakistan, is around US$1bn in value. These deals are around .001% of China’s foreign exchange holdings as of January 2016. All the possible promised deals under the Belt and Road brand, should they occur, would be around 1.2% of China’s foreign exchange holdings.

Belt and Road is in many ways a solution looking for a problem. The issue is not a shortage of money but rather a shortage of projects that can overcome stumbling blocks on the ground. Local politics, environmental concerns and fears of foreign workers are all issues that money cannot solve. Crafty local elites can dwindle nearly any pot of money. National leaders fear being seen as selling out to China. The whole thing will need to be worked out slowly: country-by-country, project-by-project, deal-by-painstaking-deal.

So unbridled international support for Belt and Road is unlikely. Governments cannot appear weak in front of their own people, and foreign infrastructure deals are rarely popular. Foreign governments are unlikely to take deals that don’t make financial sense for them, as even China’s more nationalistic newspapers acknowledge. Even Chinese economists writing for a domestic audience note that Belt and Road ‘is a good international economic strategy, but for now it is certainly not an easy one.’

Belt and Road is not an easy strategy for domestic reasons. Namely, there are two forces at play within China: the first a desire to cut back on risky lending to developing countries, while the second is a wish to fulfil the Belt and Road mandate to increase lending to developing countries and diversify China’s foreign exchange holdings. The first force will usually win out — individuals can only be held accountable for bad investment decisions that they make, not for decisions they avoid making.

There are only so many bad decisions that China can afford — a billion here and a billion there and pretty soon you will end up with some real debts, not to mention some unhappy citizens who wonder why their school isn’t built but a foreign railway is.

In that climate, Belt and Road projects can appear hubristic. Chinese media reports that the Ethiopia-Djibouti railway for example (rebadged as a Belt and Road project after completion) ‘was rated impossible by foreign engineers’, but ‘localising Chinese standards (made) it not only feasible, but profitable and sustainable.’ Time will tell whether such confidence is warranted. Others have noted the failure of similar Japanese plans in the 1990s.

All of this makes it unlikely that Belt and Road could replace the global economic system underwritten by the US, even if it did want to. Beijing has form in announcing grand schemes — the Shanghai Free Trade Zone, for example —that quietly fade away. Belt and Road is likely to last a little longer, if only because of the institutional arrangements, but it is very unlikely to reach the Olympian heights predicted by some business firms.

For Australia, Belt and Road offers a number of opportunities. We are on the Road, for starters. While Australia is not a central part of the scheme, we have a number of areas for collaboration. Services are a possible boon area under Belt and Road, particularly given the China-Australia Free Trade Agreement (CHAFTA). While we have some limitations as a nation in terms of linguistic ability, we have extensive experience working throughout Asia in Belt and Road countries.

Working with China on Belt and Road would force some difficult choices. Namely, Australian firms would need to work with Chinese state-owned enterprises (SOEs), as SOEs have the inside running on all Belt and Road projects. Labour conditions and standards, national security, and cultural compatibility are all likely to be raised as issues.

But the bigger problem Australia faces is in how we characterise Belt and Road. The Australian Parliamentary Library for example writes that: ‘China clearly portrays OBOR (Belt and Road –ed.) as both being premised on and further validating China’s claims to the islands of the South China Sea… concerns relate to the longer-term aims of China, with the possibility that the OBOR agenda is aimed at creating a Eurasia-wide, China-led bloc to counter the US.’

If Belt and Road is a geopolitical tool, it is not a very good one. There is no form of institutional link between China’s defence forces and the many administrative bodies working on Belt and Road. As of writing, Belt and Road is also yet to be issued as an authoritative Party document, and thus lacks any form of standing within the Chinese system. So the Belt and Road institutional channels cannot affect foreign or defence policy. There is no evidence conflating China’s activities in the South China Sea with China’s Belt and Road activities.

Dr Ryan Manuel is a postdoctoral fellow at The Australian National University. He is currently finishing a book on the rules of the Chinese political system.

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