Part 3 China’s Belt and Road initiative
It is not only important to understand the changes in China within the context of its recent history, MIC25 and Beijing’s restructuring of its healthcare sector, but also against the backdrop of China’s ambitious “Belt and Road” (B&R) initiative. Unveiled by President Xi Jinping in September 2013, it has become the centre of Beijing’s ambitions for a new world order predicated upon a modern-day Silk Road connecting China by land and sea to Southeast Asia, Central Asia, the Middle East, Europe and Africa. It is a bold model of economic development, which Xi has called, “the project of the century”. The initiative is supported by the new Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund. Some estimates suggest that Beijing has already invested US$900bn in the project. Overall, it is expected to cost US$8trn and take three decades to complete. At its core are 6 economic corridors, which connect 65 countries, about 65% of the world’s population, involve some 40% of global trade and 33% of global GDP.
Belt and Road’s 6 economic corridors
- The Eurasia-Land-Bridge economic corridor is developing rail transportation between China and Europe through Kazakhstan, Russia and Belarus
- The China-Mongolia-Russia economic corridor aims to develop trade between China and Mongolia by modernizing transport, telecommunication and energy networks to make Mongolia a hub between China and Russia
- The China-Central Asia-West Asia economic corridor connects the Chinese province of Xinjiang to the Mediterranean Sea, through Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Turkmenistan, Iran and Turkey
- The China-Indochina-Peninsula economic corridor aims to strengthen cooperation among states of the Greater Mekong sub-region and support trade between China and the 10 nations of the Association of Southeast Asian Nations (ASEAN) that are already bound by a free trade agreement since 2010 to facilitate economic growth
- The China-Pakistan economic corridor connects Kashgar in the Chinese province of Xinjiang to the port of Gwadar in Pakistan and includes the construction of railways, highways, optical fibre networks, and the creation of an international airport in Gwadar as well as the establishment of special economic zones
- The Bangladesh-China-India-Myanmar economic corridor links Kunming to Kolkata (Calcutta) via Mandalay and Dhaka to strengthen connections between China and various economic centres of the Gulf of Bengal in order to increase interregional trade by reducing non-tariff barriers.
China’s neo-colonial strategy
China’s B&R initiative is based upon an interpretation of colonialism, which is significantly different to Western interpretations. While Western nations struggle with a sense of guilt associated with their past colonial rule and feel responsible for the abject economic failure, widespread poverty and erosion of governance in post-colonial independent states, Beijing believes that there are lessons to be learned from colonialism, which are relevant today and necessary prerequisites to stimulate trade, economic growth and domestic employment. Beijing’s B&R initiative is best understood as a neo colonial strategy to strengthen China’s slowing economy, enhance its industrial capabilities and improve its geopolitical standing by driving economic growth in some of the least developed regions of the world, which are neglected by the West.
The lessons of Singapore
China’s neo-colonialist policies are influenced by Singapore, an island city-state located in Southeast Asia off southern Malaysia. The country gained independence from Malaysia in 1965 and has become a global financial centre with a multicultural population and a multi-party parliamentary representative democracy with a President as head of state and a Prime Minister as the head of government. Although China is 14,000-times bigger than Singapore, has 1bn more citizens and its GDP is US$14trn compared to Singapore’s US$300bn; China views Singapore as an object lesson of political stability and prosperity predicated upon aspects of its colonial legacy, which Beijing believes can be replicated in under-developed regions of the world. These include basic infrastructure, improved administration, widened employment opportunities, female rights, expanded education, improved public healthcare, taxation, access to capital, independent judiciary, and national identity. Such factors China views as benefits of colonialism and necessary prerequisites for trade, economic growth and prosperity. Singapore has a colonial history, but today is a rich country with a GDP per capita of US$55,235, (higher than that of the US: US$53,128) and where Asian culture is intact and Western knowhow is harnessed for economic growth and prosperity for its citizens and is where China would like to be in the future.
The AIIB comparable to other development banks
In 2013, when Xi Jinping first proposed creating the Asian Infrastructure Investment Bank (AIIB), Washington was against it and campaigned rigorously to persuade potential donor countries not to participate. The US expressed concerns that the AIIB would undermine the World Bank, and the Asian Development Bank (ADB), which operate in Asia and lend to China. Washington also believed that the AIIB would unfairly benefit Chinese companies and argued that China would not adhere to international banking standards of transparency and accountability. Today, the AIIB is up and running as a medium-sized regional development bank with capital of US$100bn and lending at around US$4bn. It is broadly comparable with other development banks and Washington’s concerns appear unfounded.
Systematically migrating low-tech manufacturing to low-cost locations
An important role of the AIIB is to assist the B&R initiative to open up and create new markets for Chinese goods and services, to stimulate exports and to provide low-wage locations, to which China can migrate its light manufacturing industries. Beijing no longer sees its country’s economy as competitive on the basis of low wages. China’s labour costs are rising faster than gains in productivity and cost estimates of outsourcing production to China will soon be equal to the cost of manufacturing in the US and Western Europe. China is adjusting to rising real wages in its domestic markets by systematically migrating its low-tech industries to less-common low-wage production operations in new locations in Africa such as Ethiopia.
A rationale for this strategy is provided in a 2017 paper from the Center for Global Development, which suggests that “Ethiopia could become the new China” as, “the cost of Ethiopian industrial labour is about 25% that of China today”. This suggests that migrating Chinese low-tech manufacturers might leap-frog middle and lower-middle income developing countries in favour of the poorest countries such as Ethiopia, which is included in China’s B&R initiative. African countries view B&R as a platform to promote global cooperation based on win-win strategies. Speaking at a conference in June 2018 in Addis Ababa, Tan Jian, the Chinese ambassador to Ethiopia said, "We are working closely with Ethiopia in advancing the Belt and Road Initiative. Ethiopia is a very important partner in this regard. We have been doing a lot of projects here in Ethiopia: infrastructure, policy dialogue, trade, financing and people-to-people exchanges.” At the same conference Afework Kassu, Ethiopia's Minister of Foreign Affairs, said, “the Belt and Road initiative is an advantage for African countries for infrastructure development and for economic growth”.
Concerns about China’s neo colonialism and debt management
Despite these good words, China's B&R initiative is not free of criticism mostly from Western nations and international institutions, which suggest Beijing’s motivation is a retrograde strategy that employs globalization to service its domestic economy, and many of the concerns are about China’s potential economic predominance.
A March 2018 Center for Global Development (CGD) paper suggests that because China’s record of international debt financing is not good, and the B&R initiative follows China’s past practices for infrastructure financing, which entail lending to sovereign borrowers, then the initiative runs the risk of creating debt distress in some borrower nations. The paper identifies 8 of the 68 B&R borrower countries as “particularly at risk of debt distress”. Pakistan is the largest country at high risk with the development of its Gwadar deep-sea port, which is part of the B&R China-Pakistan Economic Corridor. China is financing about 80% of this endeavour, which is estimated to cost US$62bn. Other countries mentioned in the CGD paper to be at high-risk of debt distress from the R&D initiative include Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan. The concern is that these at-risk nations could be left with significant debt ‘overhangs’, which could impede their ability to make essential future public investments and thereby challenge their economic growth more generally. Recently, public concerns from within China have been raised over the costs of the initiative. There is also concern that debt problems will create “an unfavourable degree of dependency” on China as a creditor. Several US Senators have expressed similar concerns and suggest that potential defaults could have a deleterious economic impact more generally. In addition to B&R loans, which have been questioned, it has been rumoured that Beijing has lent Venezuela US$60bn and also extended significant credit to Argentina. Venezuela is in economic meltdown and Argentina has applied to the IMF for a bailout.
China’s mounting debt
China’s increasing exposure as a significant creditor to economically weak developing nations is compounded by its mounting debt and triggers concerns about China’s future stability. A popular Washington view, endorsed by President Trump’s chief economic adviser Larry Kudlow, is that China’s mounting debt and slowing growth mean that its “economy is going south”, and the recent imposition of tariffs on Chinese exports to the US will accelerate the nation’s demise. However, there is a view that Washington’s imposition of punitive tariffs is an over-reaction because the Chinese economy is nowhere as strong as that of the US economy. Notwithstanding, China is an important trading partner for the US and American companies should find a way to engage with China.
Since the 2008 financial crisis, China’s debt has been a concern in Beijing because it was a driver of the country’s economic growth. In 2016, Vice-Premier Liu He, President Xi’s top economic adviser, conscious of the potential national security risks of China’s mounting debt, took steps to de-risk the country’s financial sector. More recently, Liu has accelerated infrastructure investment and taken steps to avoid a banking crisis by ensuring that the renminbi does not fall too rapidly against the US dollar. Over the past 5 months the renminbi has weakened about 10% against the US$ and could weaken further if the currency becomes politicized. Despite Liu’s efforts to reign-in and control China’s debt, which some estimates put at about 260% of GDP, it is not altogether clear how successful these efforts will be especially if China’s debt challenges are considered in conjunction with its loose credit conditions.
Changing world economic order
Putting aside these concerns, it is instructive to note that a 2017 study by Price Waterhouse Coopers (PwC), suggests, ceteris paribus, that within the next decade China’s economy will be bigger than America’s and within the next three decades India’s economy will overtake that of the US. The study argues that the US will rank 3rd in the world and in 4th place could be Indonesia. The study suggests that China will have an economy of US$59trn, while India’s will be around US$44trn and America’s will total $34trn. Significantly, Japan (US$6.7trn), Germany (US$6.1trn), the UK ($5.3trn) and France (US$4.7trn), key markets for Western MedTech companies, are expected to fall respectively to 8th, 9th, 10th and 12th in the list. They are expected to be replaced by Indonesia (US$10.5trn), Brazil (US$7.5trn), Russia (US$7.1trn), and Mexico (US$6.8trn), which climb to 4th, 5th 6th and 7th positions respectively. This signals some significant economic shifts likely to take place over the next two to three decades and underlines the importance of emerging economies in the medium-term strategic plans of Western companies.
The world is on the cusp of some significant economic changes and the two nations most likely to affect those changes are the US and China. Beijing’s policies and global aspirations are helping China to step into a leadership void created by Washington’s current rejection of multilateralism. However, it is still not altogether clear whether China will be able to sustain this new position, and the uncertainty this causes presents a significant strategic dilemma for Western companies seeking growth outside their current markets in the developed world. China is too big to be ignored by Western companies, but China’s conditions for engagement are onerous and its long-term stability remains in doubt.