Posts Tagged ‘Belt and Road’

Some belated posting of which I have a bit to do, this one for the Telegraph about the furore around the Hinkey Power Plant deal and China-UK relations. A difficult topic which is still in a very complex phase. Been trying to finish some very delayed writing projects that is keeping me busy and has some angry editors after me. Apologies to them. A spate of China related material which reflects something there is going to be an increasing amount of over the next period.

How to avoid nuclear fallout and become equal partners with China

Last week’s announcement delaying the decision on the Hinkley C nuclear power plant project has turned into a running commentary on the changing nature of the UK’s relationship with China. While Downing Street has been at pains to highlight that the decision is not linked to Beijing, much has been read into statements through the public news agency Xinhua that seem to foreshadow a veiled warning about the UK’s “golden age” with China being under threat. These proclamations need to be tempered by reality, however, and a realization that China is a pragmatic actor which will continue to seek the best deal it is able to achieve rather than pursuing an entirely quixotic foreign trade and investment agenda.

This is not say that China is not prone to publicly punish countries that have displeased it. Norway has faced a barrage of mostly symbolic sanctions since in 2011 the Nobel Prize Committee gave an award to incarcerated dissident Liu Xiaobo. In the wake of David Cameron’s meeting with the Dalai Lama in 2012, the UK faced a similar slap-down with diplomats’ lives in Beijing made more difficult and the Prime Minister having a number of visits postponed. In 2010, a pair of German researchers undertook a study using UN data from 1991 to 2008 on the “Dalai Lama effect”, whereby they identified an 8.1 per cent drop in exports to China in the two years after a nation’s leader met with the Dalai Lama.

Yet these numbers do not appear to tell the whole tale. During the period of Norwegian “punishment” (which according to some accounts continues today), the majority government owned oil company Statoil was still able to explore shale gas projects in China, and opened a research center in Beijing. In the UK’s case, it is inconclusive whether there was a definitive drop in trade figures during this period, though it is noticeable that in the immediate week after the fateful meeting between the Prime Minister and the Dalai Lama, a deal worth £50 million was signed between the UK and China to export pig offal and trotters for consumption in China.

Some apparent attempts by China to impose economic punishments on countries that have displeased them have backfired. In 2010, there was a spat between China and Japan over a fishing boat captain whose ship crashed into Japanese vessels in disputed waters; China subsequently moved to make the export of rare earth minerals more expensive. It is a matter of speculation whether the point here was to support domestic industry over outsiders or whether this was specifically targeted at Japan, whose high tech industry relies heavily on rare earths which at the time were 97% controlled by China (or some combination of the two). Whatever the case, the result was that other rare earth sources became economically viable, destroying China’s previous market monopoly.

China is in fact a pragmatic actor in international affairs. When its companies have faced pushback due to domestic concerns, often they have continued forwards in other ways. China has quite rigid domestic restrictions about what industries outsiders can invest into, so finds it hard to overtly attack others for doing the same thing. Often the rhetoric does not match the action, and the new government in Downing Street would do well to understand this distinction and calibrate its response appropriately. The decision over a nuclear power plants is an important one with substantial national ramifications for years to come, and it makes sense the new government would want to take time to ensure they are happy with the deal. Going forwards, however, it is important to ensure that a productive relationship is maintained with Beijing, a power that is only going to grow in significance as time goes on.

In order to ensure a smooth engagement with China and Asia more broadly, a number of steps should be taken: first, the UK should be consistent and long-term. Wild oscillations in policy and approach are not appreciated by Beijing (or any other government). We should seek a relationship of working together as partners with China while setting parameters. Concerns over human rights should be raised – as they are already – and pushing back on China’s aggressive cyber activities should continue. As the United States has shown in its relationship with China, these issues can be raised whilst maintaining a productive overall relationship.

Second, it is important to realize why China likes to invest in the UK. As an open market, the UK is an attractive option for Chinese businessmen looking for opportunities overseas. According to figures published by the Mercator Institute for China Studies and the Rhodium Group, between 2000 and 2014 the UK attracted more FDI from China than any other European country. While the status of the UK market’s relationship with the EU is uncertain longer term, for the time being the UK will remain a major financial hub and discussions and deals continue. Reflecting this, the Financial Conduct Authority (FCA) and the China Securities Regulatory Commission (CSRC) met earlier this week to discuss how financial products can work between both jurisdictions.

Third, the UK should seek to engage with China in third markets like Pakistan, Central Asia or parts of Africa where the UK has strong historical economic and political interests and China is increasing its presence. In some countries in this category, Britain and China are competitors, but in others, there is an element of complementarity. Exploring these opportunities will help British business going global, as well as improving the quality and effectiveness of Chinese investments in parts of the developing world.

Fourth, the UK should raise its game and attention to East Asian security issues like the disputes in the South and East China Seas, or the ongoing difficulties with North Korea. Currently, Britain is seen as a part-time player, second fiddle to the US in this sphere. Establishing a distinct and comprehensive understanding of these questions, the relevant relationships, as well as expressing informed views about regional problems and backing them with diplomatic heft would go a long way towards balancing the UK’s approach to the region.

Handled badly, Britain’s relationship with China could suffer in the wake of the delay to the Hinkley Point deal. However, if care is paid to engaging China in ways that are of interest to Beijing and that advance British interests, it is possible to find a way forwards in which the UK can express its concerns while continuing to attract Chinese investment and trade. Beijing is seeking partners as much as the UK is, and in the current state of global uncertainty it would seem unwise to cut off relations with another G7 power. The trick will be to establish the contours of the relationship and make sure that both sides are telegraphing each other’s intent with clarity and with a view to the long-term.

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Catching up on some old posting, going to put out a few things at the same time. All looking at China in Eurasia, a topic that continues to be a major focus. Of course, all of my work on this is stored on the China in Central Asia site, and this particular piece is something that was undertaken with my excellent RUSI colleague Sarah Lain.
Proceedings of a workshop held in New Delhi in March 2016 to explore the challenges that China’s strategic Belt and Road vision to connect Central Asia hopes to address.

In March 2016, RUSI, in collaboration with the Vivekananda International Foundation (VIF) hosted a workshop in New Delhi to discuss the challenges of connectivity facing China’s strategic Belt and Road vision, which aims to connect Central Asia  and develop strategic economic corridors across the region.

The workshop covered the different economic corridor concepts initiated by China and India and their aim of enhanced connectivity in Central and South Asia, how such visions will be realised and how they could enhance the security and economic development of the region.

The report summarises these discussions and provides insights into co-operation between China and its regional partners.

And final catch up post, this time for a think tank I worked for a while ago, the European Council on Foreign Relations (ECFR), with whom I am still doing some things. This is a post for their site which focused on some of the issues of the ‘Belt and Road’ strategy and what they need to do to get greater European cooperation on it. This is a topic that is very rich and has lots of work in the pipeline around it.

This aside, to catch up on some media conversations, spoke to The Times, Reuters and La Liberation about the leak of ISIS documents, to Newsweek about al Shabaab targeting aviation and training Boko Haram fighters, to Buzzfeed about Brexit and national security questions, to The Independent about Prevent issues in the UK, to the Press Agency about the attacks in Ivory Coast, to the Associated Press about the latest round of talks in Afghanistan the Chinese are helping with, and a presentation I did recently in Washington on China-Russia in Central Asia got a write up in the Diplomat.

Building Support for the Belt and Road

Xi Jinping has laid out what is going to be the defining foreign policy vision of his leadership in the form of the Belt and Road. An all-encompassing initiative, it is something that repeated Chinese leaders have said they want to engage with foreign partners on, in particular with European capitals given the vision is one that starts in China and ends in Europe. Yet, there is still a lack of clarity around exactly what this initiative actually looks like and how it is that foreigners can engage with China on this project. Beijing needs to lay out more clearly what it needs and wants from the world to implement this vision.

Seen from the outside, the Belt and Road initiative is one that appears to in essence be about building economic and trade corridors emanating out from China. Through the development of transport links – be they rail, road, ports or airports – and the construction and rehabilitation of pipelines, markets, economic zones and more, China aims to open Eurasia while reconnecting China to Europe across the wide landmass they share. The potential impact is a game-changing effect on a wide swathe of Eurasia, something that has not gone unnoticed in Europe where policymakers spend lots of time thinking about how to develop their continent. Yet, connecting on the initiative has so far proven difficult. If China genuinely wants greater cooperation on this strategy, then a number of key things need to happen.

First, Beijing needs to clarify where the routes of the Belt and Road will actually go. At the moment, all of the maps that have been produced are ones that are done by enterprising journalists interpreting official statements. The National Development and Reform Commission (NDRC), the body responsible for the vision, has so far not expressed a view or produced a map. This is problematic as it means people are unable to know exactly which Beijing’s priorities are and what specific routes Europe should focus on developing to support and work with China’s plan. For example, generally it is clear that the Silk Road Economic Belt will pass through Central Asia, but which specific road or rail projects is China going to focus on first?

Second, China needs to understand that if they want to maximise external support on the vision, then Chinese led funding initiatives need to be open to foreign contractors. European investment structures like the EBRD or EIB (as well as international ones like the ADB) are very keen to work with China on this vision, but need to ensure that the subsequent project contracts to emerge from investments are put out to open tender. This ensures that the best possible contractors will undertake the projects and ensures that the vision gets carried through in the most effective way possible. This is something that extends beyond simple financing terms and contract procedures: it needs to be made clearer that there is a role for others in Chinese led projects. The key point here is that China needs to be open to working with others in very practical terms to try to advance this vision.

Third, China needs to find ways to discuss sensitive security questions with outsiders. Through the Belt and Road, China is going to increasingly find itself becoming one of the most consequential players on the ground in large parts of Eurasia. With such power will increasingly come a greater regional role, including on sensitive security questions where Beijing will find itself having to try to broker negotiations and agreements between sides in open conflict with each other. This is already happening in Afghanistan, and as time goes on Beijing will find itself ever more involved in such discussions across the continent. Europeans have some experience and understanding of some of these questions and would be willing to share their intelligence and experience with China if Beijing showed an equal level of openness in discussions. Genuine cooperation and deeper understanding come from a full and frank exchange.

There are clearly a great deal more detailed issues that need to be discussed, but these three overarching points need to be addressed before greater detail can be gone in to. China needs to understand that many in Europe are keen to cooperate on this vision, but they need some greater clarity to able to find practical ideas for what cooperation can look like in practice. By offering a more detailed outline of what this initiative physically looks like and what projects Beijing is prioritising, opening up to the idea of making joint investments, and being willing to participate in more frank and open security discussions, Beijing will find receptive doors across Europe. All of which will be essential to ensure President Xi’s vision turns into a long-standing foreign policy legacy reconnecting the Eurasian landmass along the old Silk Roads.

Raffaello Pantucci is Director of International Security Studies at the Royal United Services Institute (RUSI)

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.