Posts Tagged ‘AIIB’

New piece for the Financial Times excellent Beyond BRICS blog, this time providing an evaluation of the links between the Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund and Xi Jinping’s ‘Belt and Road Initiative.’ A lot more on this general topic on my parallel China in Central Asia site. This aside, spoke to the Telegraph about the recent terror attack in Quetta, Pakistan.

China’s Development Lenders Embrace Multilateral Co-operation

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There has been much speculation on the role of the Silk Road Fund (SRF) and Asian Infrastructure Investment Bank (AIIB) in China’s outward investment push.They are both instruments created by Beijing to provide economic firepower and bring international credibility to the ‘Belt and Road’ vision that has become President Xi Jinping’s keynote foreign policy concept. But in reality they have both undertaken a series of investments that, while substantial and linked to ‘Belt and Road’ countries, pale in size next to China’s overall outward investments.

While the AIIB has quite clearly been subsumed into the ‘Belt and Road’ project, the SRF has so far largely focused on commercial projects which are focused on profit rather than national strategy.

AIIB has so far made two sets of project announcements. The first were announced on June 24, 2016 and included a $165m loan for a power distribution project in Bangladesh, a $216.5m loan co-financed with the World Bank for a national slum upgrade in Indonesia, a $100m loan co-financed with the Asian Development Bank (ADB) and UK’s Department for International Development (DFID) to finance the Shorkot-Khanewal section of the M-4 motorway in Pakistan and a $27.5m loan for the Dushanbe-Uzbekistan Border Road Improvement Project in Tajikistan, co-financed with the European Bank for Reconstruction and Development (EBRD).

A second set were announced in September, including a $300m loan for Tarbela 5 hydropower project in Pakistan, co-financed by the World Bank and a $20m loan to finance a 225 MW power plant in Myanmar, a project which is set to possibly receive a further $58m from the International Finance Corporation (IFC) and $42.2m from the Asia Development Bank (ADB).

Of these projects, the only one that is uniquely funded by the AIIB is the power grid project in Bangladesh. All of the others are co-financed, or more accurately, the AIIB has bought into existing projects. Another significant detail is that with the exception of the Indonesian project, all of the projects are ones that can be captured under the broader ‘Belt and Road’ vision – which has three principal strands pushing out across Eurasia: China-Pakistan Economic Corridor (CPEC), Silk Road Economic Belt (SREB), and Bangladesh-China-India-Myanmar Economic Corridor (BCIM).

Of the $829m the bank has invested so far, $400m has been invested into projects which fit under CPEC, $27.5m into SREB, and $185m into projects which could fit under the BCIM.

In other words, almost 75 per cent of the AIIB’s first projects have been steered towards existing Chinese economic visions. And in many ways, the Indonesian project could also be captured under this banner, given the fact that Indonesia fits into the under-developed 21st Century Maritime Silk Road concept as well (and was the country in October 2016 that Xi announced the concept in the first place).

There is very little distance between the AIIB and Beijing’s ‘Belt and Road.’ And in fact, the parts of the ‘Belt and Road’ it is feeding are those parts which are going to ultimately have a resonance on China’s most under-developed regions that are the ultimate focus of the ‘Belt and Road.’ It is therefore hard, on the basis of its first projects, not to consider the bank as a tool of the ‘Belt and Road’ rather than a new independent financial institution advancing general regional development goals.

The Silk Road Fund is a more obvious tool than the AIIB. With a total capital of $40bn, the first $10bn was made up with money from the Chinese State Administration of Foreign Exchange (SAFE), which accounted for 65 per cent of the initial funds, Export-Import Bank (accounting for 15 per cent), China Development Bank (accounting for 5 per cent) and the China Investment Corporation (accounting for 15 per cent).

Established specifically to ‘promote common development and prosperity of China and the other countries and regions involved in the Belt and Road Initiative,’ the Fund is a commercial entity that is focused on projects that will generate returns.

Having laid out this logic, the Fund’s first investments have followed these principles, starting with an investment of $1.65bn in April 2015 to build the Karot hydropower project in North East Pakistan.

In September 2015 it announced it would purchase 9.9 per cent of the Russian Yamal liquefied gas field for $1.2bn, and more recently it was revealed it had explored putting almost $2bn into buying Glencore’s Vasilkovskoye gold mine in Kazakhstan.

It ultimately lost that deal to another pair of Chinese buyers. Outside these obvious ‘Belt and Road’ deals, the Fund has also invested in ChemChina to purchase Italian tire maker Pirelli, invested $100m into the China International Capital Corp (CICC) a state investment bank that prior to its initial public offering (IPO) in November 2015 was seen as taking losses internationally, and finally pledging some $300m to the IPO of China Energy Engineering Corp (CEEC) an international power plant construction firm.

To understand the ‘Belt and Road’ logic of the CEEC-Silk Road Fund investment, it is instructive to look at Mr Xi’s visit to Serbia in June 2016, seven months after the IPO announcement. Mr Xi was present at the signing of an MOU between the CEEC, the Silk Road Fund, China Environmental Energy Investment Ltd and the Serbian Ministry of Energy and Mining. The MoU laid the foundations for CEEC to undertake further energy projects in Serbia, joining already advanced CEEC projects in Lithuania and Bosnia-Herzegovina.

Taken as a whole, the Silk Road Fund is a heavier investor in ‘Belt and Road’ projects than AIIB. While the AIIB’s announced deals add up to $829m, the SRF’s amount to at least $3.25bn (not including the Pirelli deal, the exact numbers of which are not immediately available). In addition, the Fund has been reported as considering an investment of between €5-10bn into the European Fund for Strategic Investments, or the so-called Juncker Plan.

But all of this pales next to China’s overall outward investment numbers. The Ministry of Commerce announced outward investment last year at $145.67bn and EY, a consultancy, has predicted that this year’s total will surpass $170bn.

Taken against this background, the SRF and AIIB are clearly minnows. But they are minnows which have focused on national interest, something that highlights the degree to which the broader ‘Belt and Road’ is aimed at advancing national interest rather than being a benevolent vision for Eurasia.

It also illustrates to outsiders that to properly understand how to connect with the ‘Belt and Road’, there is a need to understand China’s broader international ambitions under the vision.

Raffaello Pantucci is director of international security studies at RUSI, a think tank based in London.

Catching up on some old posting again now that we are closing in on Christmas, and first up is a short report with Sarah from a workshop we did in Almaty looking at the Silk Road Economic Belt’s economic dimension. Part of a bigger project we are working on at RUSI which is going to be a major priority in the coming year.

The Economics of the Silk Road Economic Belt

On 20 October 2015, RUSI held a day-long workshop in Almaty, Kazakhstan, in collaboration with KIMEP University and the Friedrich Ebert Stiftung (FES). The focus of the workshop was the economics behind the Chinese Silk Road Economic Belt (SREB) and its impact in Central Asia. The key areas of discussion examined the potential benefits that the SREB could bring to participating countries, the integration of the SREB with other economic projects and the various funding mechanisms through which the SREB will be financed. The workshop brought together participants from Almaty, Astana, London, Beijing, Shanghai, New Delhi and Russia, including representatives from academia, the private sector and think tanks.

The first session discussed the real benefits of the SREB to both China and participating countries along the road. There is a risk that the SREB will simply turn Eurasia into a set of transport routes emanating from China, aimed at increasing the volume of Chinese goods going to Europe. Other than transit fees, China has not made it explicitly clear as to what other value participating in the SREB can add to economic development. Special economic and free-trade zones are one opportunity, such as that of Khorgos on the border of Kazakhstan and China, or those planned for Pakistan. However, the extent to which these are benefitting Central Asia is still unclear, and those for Pakistan are still under discussion. Kazakhstan’s side of this free-trade zone is noticeably less developed than that of China’s, highlighting that not all of these projects are implemented to meet maximum potential.

Furthermore, China’s emphasis on connectivity as a key goal of the SREB runs the risk of over-emphasising railway development as an end goal, since not all goods are cost-effective to transport by rail. High-value goods are the ideal product: one participant from Kazakhstan noted that Kazakhstan Temir Zholy, the national railway operator, had begun transporting Apple products from China, cutting down delivery time from sixty days (by sea) to eighteen days (by rail). For the SREB project to be successful, therefore, both Xinjiang, the northwestern Chinese province, and the countries along the Silk Road route need to increase their high-tech manufacturing capacity to produce these high-value goods for transport, neither of which are currently visible.

Understanding  of  the  project  has  been  limited  by  Beijing’s  vagueness  on  practical implementation. The Chinese government’s ‘Visions and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road’ strategy paper, published by the National Development and Reform Commission (NDRC), emphasises the objectives of the SREB, such as connectivity and greater financial integration. However, it does not give practical detail on how this will be achieved. This approach of laying out a grand vision without detail is typical of the Chinese government. So far there is not even a formally government-endorsed map of the exact routes of the SREB.

The workshop discussion highlighted a potential explanation for this. China’s goal may not be to unpack the details itself but instead to seek ideas and engagement from SREB countries to determine where participation can provide most benefit to them. China does not want to limit its options or jeopardise the project’s ‘inclusivity’ by over-defining its approach. There is an opportunity, therefore, for countries along the SREB to provide proposals back to China. However, there are some practical questions that China will need to address. Although its open-
ended encouragement of connectivity is central to the SREB, certain political and geographical difficulties in implementing this are so far unresolved. Anyone who has travelled within Central Asia knows the difficulty of flying direct between most regional capitals, while land travel between the countries in the region is hindered by longstanding border disputes.

Although the SREB has broadly been received with enthusiasm by Central and South Asia, the lack of clarity around its planned implementation has led to some suspicion. India stands out as  the country in the region most apprehensive of China’s plans. As one workshop participant said, ‘there is no Indian perspective at the moment’, in part due to a perceived lack of information from Beijing. The suspicions relate to whether there is a broader Chinese geopolitical strategy behind the SREB and whether political strings will become attached to China’s infrastructure investment.

India’s concerns over a geopolitical strategy are mainly due to the maritime element of the ‘21st Century Maritime Silk Road’, which runs through the Indian Ocean. It covers ports in countries located around India, such as Sri Lanka, Maldives and Pakistan, but not India itself. This has raised alarm bells in New Delhi, who perceive China as encroaching on India’s waterways. China’s investment into the China–Pakistan Economic Corridor (CPEC), which cuts through the disputed areas of Kashmir as well as highlighting China’s strong connection with Pakistan, is also a challenge for India. There are areas where India and China can co-operate on this SREB project, such as the Bangladesh–China–India–Burma corridor or areas where both have interests, like Iran. However, India requires more detail and reassurances regarding China’s intentions.

A large part of the day’s discussion focused on the issue of integrating the SREB with other economic projects. Russia has recently voiced its desire to integrate the SREB with the Eurasian Economic Union (EEU) and Kazakhstan has proposed something similar with its ‘Bright Road’ (Nurly Zhol) policy. Although the Bright Road policy, which focuses on infrastructure development, is consistent with the aims of the Chinese project, SREB integration with the EEU is somewhat more complex. As one workshop participant pointed out, the EEU is an organisation with an institutional and regulatory framework, whereas the SREB is more of a ‘vision’ covering a variety of concrete projects. ‘Integrating’ these in practice may be difficult. A special economic zone may once again be an answer to this, and the EEU and China are currently exploring this idea. The EEU’s external tariffs may present an immediate barrier to increased trade with China, although one benefit is that once this barrier is overcome countries gain access to a significant economic space consisting of five countries. However, to facilitate trade, China and Russia will need to address a number of bilateral trade issues. For example, the Russian–Chinese border currently suffers from excessive bureaucracy that, in particular, prevents cross-border travel and trade.

The third key aspect of the discussions examined the means by which the SREB will be funded. A major tool will be multilateral and national institutions driven by Beijing. China has allocated $29.8 billion to the Asian Infrastructure Investment Bank’s (AIIB) overall $100 billion capitalisation and $40 billion to the national Silk Road Fund. Furthermore, the China Development Bank (CDB) is the lead financial body for the SREB, investing $890 billion into over 900 projects. There are also bilateral funding relations between SREB countries and Chinese provinces. For example, the recent Tbilisi Silk Road Forum held in Georgia was the first event on the SREB co-sponsored by the Chinese state held outside of China. The principals on the Chinese side were the provincial governments of Xinjiang and Shaanxi. On top of this, China is seeking to stimulate public–private partnerships to help progress the project finance, as well as exploring opportunities of collaboration with other international financial institutions like the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB).

Most participants agreed, however, that the predominant mechanism for SREB co-operation will continue to be bilateral agreements. As one workshop participant mentioned, China recently pledged $46 billion for the China–Pakistan Economic Corridor alone, a number that puts China’s commitment into context when it is compared to the total $100 billion capitalisation of the AIIB. This highlights the degree to which China is likely to continue to prioritise bilateral agreements over its multilateral financial vehicles. A note of caution was made regarding the enormity of some of the SREB deals announced. As one participant pointed out, it seems in reality that the CPEC deal included a repackaging – or at least a reinvigoration – of some historical agreements between China and Pakistan, such as the development of Gwadar port and the Karakorum Highway, projects that have been underway for years. This demonstrates a lack of clarity in the detail behind some of these enormous declarations of financial support.

A repeated theme that came up during this discussion related to the broader transparency and governance of the SREB, particularly in participating countries outside of China. One workshop participant highlighted the need for SREB countries to ensure necessary reforms are conducted in the domestic markets to provide a degree of security and flexibility and to avoid an over-reliance on Chinese investment. The slow-down in the Chinese economy may produce constraints on China’s ability to meet its ambitious investment programme. A lack of transparency as regards the relevant information has led to questions over China’s asset quality. One workshop participant stated that a ‘sudden large injection of external cash could exacerbate existing problems [in the domestic economy] rather than help’. Thus, SREB participants should ensure they protect and reform their own markets in preparation for any large investments from China to maximise returns and protect against a lack of transparency in the deals.

Another question mark surrounding China’s funding of the SREB projects is the value this produces for China itself. The divestment opportunities or returns China makes on its infrastructure development projects in, for example, Central Asia, remain unclear. Much of the historical bilateral projects have been funded through linked loans, where China provides the funding through loans that have stipulations attached to them, such as the requirement that Chinese companies implement the projects on the ground. In other cases where China’s Eximbank or CDB has provided loans to fund projects, it is unclear whether there are any short- or medium-term returns or even security on the investment. One workshop participant pointed out that given the dominance of the state in China’s economic policy and the government’s long-term vision of investments, China can afford more time to sit on these investments without requiring immediate returns. Moreover, another participant noted that some projects, such as when Eximbank loaned the money for the high-voltage power line recently unveiled in Kyrgyzstan, provide the Chinese government with foreign investment legitimacy and thus material return is not necessarily the priority.

It is clear that no one wants to be left out of China’s SREB initiative. However, questions remain over the implementation plan of the project. For some SREB countries, there are significant concerns over the project’s ultimate geostrategic goal as well as the detail of the various routes, both of which need more clarification from Beijing. However, it is clear that while China has ideas for how the SREB should develop, it is also seeking proposals from other countries about its development. This presents an opportunity for SREB countries to take ownership over the direction of their participation and to determine how best to maximise the benefits nationally.

Sarah Lain is a Research Fellow at RUSI. Sarah Lain’s research looks at Russia and the former Soviet states. In particular, she focuses on China and Russia’s relations with the five Central Asian states.

Raffaello Pantucci is a Senior Research Fellow and Director of International Security Studies at RUSI. His research focuses on counter-terrorism as well as China’s relations with its western neighbours.

Finally posting my second piece from last week around the SCO Summit, this time for the South China Morning Post. Focuses more on the China-Russia side of things. Beyond this, spoke to the Independent about the elusive Abdel-Majed Abdel Bary, the Daily Mail about ISIS and women, and Reuters about Chinese intelligence dealing with the counter-terrorism questions outside the country.

Russia holds the door to Central Asia open for China

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Raffaello Pantucci says to a region in need, the Chinese offer of funds and expertise is too attractive to resist, as agreements at the Moscow-hosted BRICS and SCO meetings show

PUBLISHED : Wednesday, 15 July, 2015, 12:05pm

Late last week, the leaders of almost half the world’s population gathered in Ufa, Russia. The collision of the BRICS and Shanghai Cooperation Organisation (SCO) summits was orchestrated by Russia to guarantee exposure and attention, and highlight to the world how many friends Russia has. Dig below the shallow surface, however, and the links between the countries of the two international organisations are barely skin deep, with everyone attending for their own reasons.

For China, the two summits provide another opportunity for global engagement, as well as helping Beijing advance two international financial institutions. A timid player in many ways on the international stage, Beijing has found that its capital is one lever that it can use without raising too many hackles, and the meetings in Ufa gave it another opportunity to flex these financial muscles.

Fixating on the slow path to SCO membership for India and Pakistan, the world largely missed the key takeaway from the summits: China’s growing financial domination of Russia and its immediate backyard.

In the wake of the first Ufa summit, greater clarity was cast around the BRICS development bank, a new financial entity to emerge from the grouping of Brazil, Russia, India, China and South Africa, with an initial market capitalisation of US$50 billion. The leaders also created a US$100 billion currency exchange reserve, of which US$41 billion was offered by China, while Russia, Brazil and India each gave US$18 billion, and South Africa contributed US$5 billion.

A day or so later, the SCO members agreed once again to try to advance the concept of an SCO development bank or at least a joint fund.

China has been pushing the idea of an SCO financial institution for some time.

Seeing economic engagement as its major advantage in Central Asia, many years passed before Chinese interlocutors first presented the idea of an SCO development bank.

However, the idea has never quite taken off, with Russia in particular concerned that the vehicle would simply leave the door to Central Asia wide open for Beijing.

We live now, however, in different times, and, rather than be concerned, Russia has opened the door to Beijing. Indeed, Moscow appears to be helping to hold the doors open as China uses its lever in Russia’s backyard. Already endowed with the Silk Road Fund (focused on China’s western partners in Central and South Asia) and the Asian Infrastructure Investment Bank, China’s external constellation of economic firepower has been further enhanced by Ufa.

Russia itself has further opened up its own economy to Chinese investment, offering Chinese state-owned firms majority stakes in its oil and gas fields.

Eager for foreign investment and unable to look west anymore, Moscow is reaching east and apparently willing to throw open not only its backyard, but also Central Asia’s.

The result is a further strengthening of China’s hand in Central Asia, as the country pours finance and infrastructure into a part of the world that is crying out for it.

While in the short term there is little to worry about this investment (these are infrastructure-poor countries that will benefit from China’s appealing combination of low-cost construction firms and cheap loans), over the longer term, Chinese leverage will certainly offer Beijing a grip over the region. The lesson from Ufa is that the region’s one great resistor, Russia, has largely lifted its objections and is now welcoming all the Chinese investment it can attract.

Raffaello Pantucci is director of international security studies at the Royal United Services Institute

This article appeared in the South China Morning Post print edition as Russia holding the door to Central Asia open for China