Uncovering China's Belt and Road Initiative

In 2013, Chinese President Xi Jinping launched the Belt and Road Initiative (BRI): a massive investment project, initially known as the One Belt One Road (OBOR), aimed at connecting China's economy with African, Asian and European countries. The name of the initiative reflects the main investments the Chinese government intends to develop. The \belt" consists of a network of roadways, railways as well as gas and oil pipelines which will link Central Asia with Russia and Europe passing through the Caspian and the Black Sea. The \road" involves the construction of ports and maritime routes that will connect China with India, South-East Asia, Africa and Europe. BRI follows naturally in the process promoted by Xi-Jinping to open up the Chinese economy. China's Communist authorities defined BRI as a \win-win" opportunity for those countries facing big challenges in their development, slow growth or a weak recovery [1]. The road infrastructure is indeed expected to foster mutual trade between China and partner countries, thus increasing the economic activities of both underdeveloped and weakly-growing areas such as many European countries [2]. BRI has been defined as the \largest development plan in modern history". According to the Economist's estimates, the project can potentially affect 65% of the world population, as well as requiring 75% of the overall energy supplies and 40% of world GDP, [3]. The magnitude of the initiative can be observed in Figure 1, from Herbert Smith Freehills.

Figure 1: Belt Road Initiative, Herbert Smith Freehills

The Chinese government is promoting the Belt and Road initiative for several reasons. Firstly, the economic growth of the country is starting slowing down, as can be seen by the following graph from the World Bank. The slowing down of the Chinese economy can surely be attributed to the toughening trade tensions with the US. However, the Wall Street Journal stresses that China's growth is no longer driven by manufacturing and exports, as services and domestic consumption represent now the main factors behind GDP growth. This is an important issue for China, where 85% of the 109 companies listed on the Fortune Global 500 are SOEs (State-Owned Enterprises) [4]. As a result, the Chinese economy suffers from the lack of flexibility of its main corporations, and this has led to high levels of unemployment. According to WSJ estimations, urban surveyed unemployment in August 2019 was close to a record high over 5.25%.

The Belt and Road Initiative is expected to increase the number of tied loans, i.e. loans where the borrower is required to favour Chinese companies. Chinese SOEs will likely benefit from such BRI projects and more Chinese workers will be needed abroad, thus alleviating the unemployment issue. Moreover, BRI's projects involving tied-loans are reminiscent of the successful Chinese business model which involves providing conditional low-interest loans to countries with poor credit ratings (that hinder their ability to obtain credit from international markets) but rich in commodities [15]. This modus operandi has been renamed the \Angola Model" after the USD 10.5 billion oil-backed loans the Chinese Eximbank provided to the Angolan government between 2004 and 2010, which eventually allowed the Chinese oil company Sinopec to acquire several oil blocks. This model has been repeatedly adopted by the Chinese government in the past and allowed Chinese companies to seize African resources for an estimated USD 14 billion [16]. Therefore, it is possible that BRI may allow Chinese SOEs to eventually take ownership of some of the new BRI's projects.


Furthermore, China's growth has not been equally distributed across its regions, but it has been generated by a few (eastern) regions which have massively benefited from the export-oriented strategies. Figure 2 clearly shows the economic differences between the richest regions (Guangdong, Jiangsu and Shandong) which have been highlighted in blue and the poorest regions in the west (Qinghai and the autonomous region of Tibet) which are coloured in brown. Therefore, the Belt and Road Initiative is also an opportunity for the Chinese government to foster growth in those regions which hitherto have not benefited from international trade.

Figure 2: Differences in Nominal GDP across Chinese regions, Wikipedia Commons.

Secondly, the expected increase in trade between China and partner countries resulting from Belt and Road Initiative will foster the international use of the Renminbi (RMB), contributing to the utilisation of the RMB as a global currency and undermining the role of the US dollar as the most widely used currency in international markets. Even though China's financial market and capital flows are still tightly regulated, the Renminbi started being promoted as an international currency by the Chinese authorities in 2009 when they allowed cross-border trade settlements in offshore RMB. The international use of the Renminbi is beneficial for the Chinese economy for a number of reasons [5]:

  • Interest rates on RMB-denominated financial assets are expected to drop as the yuan increases its international role.

  • Chinese importers and exporters would face lower exchange rate risks by using their national currency for transactions and long-term contracts.

  • Chinese export companies would be less affected by fluctuations in the value of the USD if their long-term contracts are settled in RMB.


The Belt and Road Initiative has not just been developed to face an economic slowdown, and the Chinese authorities have put forward many other measures to stimulate growth. For example, the People's Bank of China (PBOC) has reduced repeatedly the Loan Prime Rate [6] (the interest rate banks charge to first-tier customers), see Figure 3, has cut reserve ratios for banks and has injected liquidity through reverse-repo operations to stimulate the economy [7][8]. This has led to a depreciation of the Renminbi against the US dollar and other major currencies, thus stimulating Chinese exports [9]. Fiscal policies have also been adopted and public debt increased extensively exceeding 50% of national GDP in 2019.

Figure 3: PBOC’s Loan Prime Rate, TradingEconomics.

Finally, the US Department of Defense outlined in a report for the US congress the potential military purposes behind the Belt and Road Initiative [10]. In particular, the US Defence fears that China could require military access to some of the ports which are to be built for the new Maritime Rout. The document reports that China has already opened a military base in the recently expanded Doraleh port in Djibouti. \The base includes barracks, an underground facility, a tarmac and eight hangars for helicopter and unmanned aerial vehicle (UAV) operations, but it currently lacks a dedicated naval berthing space, requiring PLA (People's Liberation Army) ships to dock at the commercial port", the report says. For the US defence, the construction of new ports is an opportunity for the PLA to partly dislocate its presence abroad, reducing its vulnerability from regional turmoils and serious natural disasters. Peter Cai for the Lowy Institute for International Policy also highlights that the China-Pakistan Economic Corridor -promoted by China as it would allow its energy supplies to reach the Port of Gwadar without passing through the Strait of Malacca- also allows Chinese submarines and aircraft carriers to be stationed permanently in Pakistan, close to the Indian border [11].


It is no surprise that BRI received mixed reactions from international leaders. On the one hand, trade relations with China have brought significant gains for partner countries and deepening the economic integration seems for many leaders the way forward. The European Union alone traded in 2018 an average of over EUR 1 billion a day and the Italian and UK governments have already given positive signals for the project [12] [13]. On the other hand, other EU governments follow the Trump administration asking for stricter measures to contrast Chinese aspirations and complaining about the secondary purposes of BRI. Moreover, concerns about the unfair trade practices operated by the Chinese government are oftentimes mentioned. In this regard, the European Commission stresses that China is shielding its domestic market from international competition by subsidising both state-owned and private companies, enforcing localisation requirements for data, favouring domestic operators in the protection and enforcement of intellectual property rights and limiting access to government-funded programmes for foreign companies. The European Commission concludes that \in the last decade, China's economic power and political influence have grown with unprecedented scale and speed, reflecting its ambitions to become a leading global power." [14]



References

[1] PRC’s State Council: Action plan on the belt and road initiative, 2015


[2] P. Ferdinand: Westward ho—the China dream and ‘One Belt, One Road’: Chinese foreign policy under Xi Jinping. International Affairs, 92(4):941–957, 2016


[3] Time: China says it’s building the new silk road. Here are five things to know ahead of a key summit, C. Cambell, 2017.


[4] World Economic Forum: Explained, the role of China's state-owned companies, A. Guluzade, 2019.


[5] Windsor and D. Halperin: RMB internationalisation: Where to next? Reserve Bank of Australia, Economic Bulletin, 2018.


[6] CNBC: China may have a new way of boosting its economy. Here’s what the central bank just did, Y. N. Lee, 2019.


[7] CNBC: China’s PBOC cuts reserve ratio for banks as economy stalls, M. Clinch, 2019.


[8] Wall Street Journal: China’s Central Bank Liquidity Injection Boosts U.S. Stocks, L. Borodovsky, 2019.


[9] Wall Street Journal: China Targets Economy, Not Trump, With Weaker Yuan, L. Wei and S. Vaishampayan, 2018.


[10] US Department of Defense: Military and security developments involving the People’s Republic of China, Annual Report to Congress, 2018.


[11] P. Cai: Understanding China’s Belt and Road Initiative, Lowy Institute for International Policy, 2017.


[12] Al Jazeera: Italy joins China’s Belt and Road Initiative, C. Mitchell, 2019.


[13] Reuters: Britain calls China's Belt and Road Initiative a \vision", B. Goh, 2019.


[14] European Commission: EU-China, A Strategic Outlook, Joint Communication to the European Parliament, the European Council and the Council, 2019.


[15] J. Hurley, S. Morris, and G. Portelance: Examining the debt implications of the Belt and Road initiative from a policy perspective,

Journal of Infrastructure, Policy and Development, 2019.


[14] European Commission: EU-China, A Strategic Outlook, Joint Communication to the European Parliament, the European Council and the Council, 2019.


[16] Brookings: China’s aid to Africa: Monster or Messiah? Y. Sun, 2014.



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Lorenzo Persano Adorno