Deciphering what is fact and fiction when it comes to China’s Belt and Road Initiative.
Deciphering fact and fiction when it comes to China’s Belt and Road Initiative hasn’t always been easy since it burst onto the scene in 2013.
Work has begun on several projects, but there is more to the initiative than what is being built. The Belt and Road Initiative (BRI) is big. A report from credit ratings agency Fitch found USD 900 billion in projects were planned or underway with 68 countries having signed up.
This total has grabbed headlines, but it doesn’t mean the Chinese government has been spending recklessly on every single project out there. In fact, the approach from Beijing has been quite discerning.
“BRI isn’t as big or grandiose as people think, especially in places like Southeast Asia where there is already a lot of competition among foreign investors,” Mr Jason Chiang, Director at Royal HaskoningDHV explains. “There has been BRI investment, but for the government it has been about finding the right asset to invest in. The projects need to be commercially viable.”
The BRI is a development strategy that sees the Chinese government invest in seaports, airports high-speed rail lines and other infrastructure projects as well as industrial parks and economic zones. He notes Beijing is acting as a financing gap provider that supports funding for the global infrastructure projects. This is no different than the financing provided by development banks, but this is one of the only similarities the funding methods have in common.
“The difference between BRI and other development banks financing infrastructure projects is that China is taking equity. Banks don’t do this,” Mr Chiang states. “Additionally, the construction contracts are given almost exclusively to Chinese firms giving them opportunities to work overseas that may have not been available in the past.”
Mr Chiang admits that the amount being invested through BRI is impressive, but China understands the risk infrastructure investment can bring, especially in some of the countries BRI includes.
President Xi Jinping officially launched BRI in hopes that the major infrastructure investment would boost trade and stimulate economic growth across Asia. It also allowed China to utilise its foreign-exchange reserves which have been mostly tied up in American government securities.
“BRI is a very outward looking movement. It has been a platform to unify funding and resources and invest these overseas,” Mr Chiang says. “From a public relations standpoint, this is a story the media likes. But apart from the headlines and marketing of it, China has been investing overseas before BRI.”
This investment was something Mr Chiang saw first hand working at Royal HaskoningDHV. The engineering consultancy was working with Chinese companies on overseas infrastructure projects years before the government officially unveiled the BRI. The firm has helped clients look at different investments and provided them with a better understanding of the benefits and challenges they bring.
“Companies in the private sector are and will continue to be active investors abroad. The BRI can provide access to the various private and public infrastructure projects and help connect everything, but it is probably getting too much credit,” Mr Chiang points out.
The reality of BRI is that it does not cover all Chinese infrastructure investment overseas. But it has opened the door for the country’s construction
companies, port operators and investment funds to expand their presence globally. A number of state-owned enterprises have benefited quite a bit from BRI, both directly and indirectly.
For example, China Communications Construction Company ( CCCC) has built roads, bridges, seaports and railways in BRI regions, according to financial services firm Northern Trust. However, not all of these are BRI-related projects. Some of the USD 15.3 billion in overseas infrastructure contracts won by CCCC in the first half of 2017 have funding guaranteed by the China Development Bank and the Export-Import Bank of China, two major financiers of the BRI. Other contracts have no connection to the initiative apart from being in a country that is participating and have been financed from other sources.
BRI and Southeast Asia With its proximity to China and growing markets, many believe Southeast Asia would be a prime candidate for BRI investment. The region is important from a strategic sense, but BRI investment won’t be at the same level as other areas such as Central Asia.
“There is already a lot of competition among foreign investors for projects in Southeast Asia,” Mr Chiang notes. “There will be BRI projects in the region, but there are other countries also actively investing in infrastructure projects such as Japan. The increased competition makes these projects less attractive.”
Among the most notable BRI projects in the region will be high- speed rail lines that are going to provide a connection from Southeast Asia to China. Work on the rail links has already begun. Mr Chiang adds that the financing for the projects is there and with Chinese companies working on these, the likelihood of everything being built and completed is quite high.
There are three planned high-speed railway routes with all them originating from Kunming in southern China. There will be a central line going through Laos, Thailand, and Malaysia, an eastern route connecting the mainland to Myanmar and a western route linking China to Hanoi and Ho Chi Minh City in Vietnam.
There are also plans for BRI deep seaport projects in Malaysia with these set to be constructed in Kuantan and Port Klang. An oil pipeline between Kyauk Phyu in Myanmar and China has been completed. Another gas pipeline, this one between Gwdar, Pakistan and China, is under construction and the plan calls for the project to eventually extend all the way to Iran.
All of the projects show the clear focus of BRI. That’s trade. Improved land and seaports make it easier for China to ship its goods to the growing markets of Southeast Asia while power projects provide the country with an opportunity to import energy.
“Trade is what is driving BRI. The assets themselves aren’t as important for China,” Mr Chiang reports. “The US and China aren’t fighting an infrastructure war. They are waging a trade war. Trade makes the difference and this is what ultimately is driving BRI.” The Impact on Shipping The shipping industry has been trying to get a read on BRI since it was first announced in 2013. New ports and improved sea routes would be beneficial to most firms regardless of who controls them.
“It is hard to say what the overall impact of BRI on the shipping industry will be. The effect probably won’t be as large as some people in the industry think,” Mr Chiang says. “If there is an impact it will be because of trade flows and not necessarily the infrastructure being built.”
He continues, “Concern from shipping countries about China controlling routes and ports is overblown. Never has there been a company that could call all the shots for global shipping through controlling port infrastructure. There will always be an alternative. Someone will build a new port if terms are unfavourable.”
The new ports has allowed China’s port builders and operators a chance to establish themselves on a global stage. Cosco Shipping Ports and China Merchant Port Holdings are examples of Chinese port operators which have actively invested and are operating ports outside of China. Shanghai International Port Group (SIPG) has a 25-year lease to operate a private shipping terminal in Israel while China Harbour, a subsidiary of CCCC, has been heavily involved in port construction projects outside of China.
It is this global recognition that could ultimately be the legacy of BRI. Not just for the shipping industry, but in all aspects of the initiative. The reality of BRI is that it is allowing Beijing to contribute something meaningful that will also help it compete internationally.
“In 50 years time, the idea of BRI won’t be what remains. It is the legacy of these infrastructure projects that will live on. This is allowing China to show it can contribute on the global stage. This is providing them with a platform they may not have had otherwise,” Mr Chiang concludes.