31 October 2019

Chinese Influence Grows as Result of Belt and Road Investment

The Belt and Road Initiative (BRI) is reported to be the most costly global infrastructure build-out in human history. China is building what they see as the new Silk Road. Numerous high-tech transportation projects are currently underway, and Chinese banks, construction companies, and citizens are working to make Beijing's dreams a reality.

While the ideas behind the BRI are noble, the implementation of the projects has been met with criticism. Other global powers, most notably the USA, have expressed concern over the scope of the BRI, while some nations who China has invested in are working to keep the deals fair for all involved.

Building Better Infrastructure

There are many places in the world that have a hard time attracting investment capital from traditional sources. Despite being Indonesia's fourth-largest city, Bandung has limited access to the nation's capital, Jakarta. Currently, the trip from Bandung to Jakarta takes five hours by road, but a new Chinese-basked $6 billion USD high-speed rail project will cut that time down to less than an hour.

According to Xiao Songxin (via a translator), who is leading the consortium Chinese and of Indonesian and interests behind the new rail line, “The two countries' companies can complement each other, support each other, and develop together. It's fundamentally a win-win project.”

The new rail line from Bandung to Jakarta is a small part of a much larger push to create a new network of Chinese-controlled infrastructure that spans from Siberia to Rotterdam. While the nations that host the new projects are given some say in their development, large amounts of debt are used to keep the projects in China's pocket.

China's New Global Market

While nations like Indonesia take on massive amounts of debt, China's state-owned companies are getting most of the rewards from the BRI projects. The construction companies that build many of the BRI projects are Chinese and bring a managerial class with them to train some local workers, who are kept in subordinate roles.

There is no doubt that places like Bandung could take advantage of new transportation options, but servicing the debt load that China has extended to Indonesia may prove challenging.

In other nations, China has insisted that local laws are changed to protect its investment, and if debt repayments aren't made, China will be able to take possession of infrastructure that Chinese companies built with Chinese labor.

The equipment and raw materials for BRI projects are also coming from China. China has become a world leader in high-speed rail technology, and when Chinese companies build a new rail line, they use Chinese made components, and rail from Chinese steel manufacturers, like state-owned Baosteel.

A Closed Loop, Ending in China

Baosteel is responsible for producing as much steel as the USA on an annual basis. In fact, the company produces so much steel it has a hard time finding a market for its products domestically. The BRI provides a perfect outlet for Chinese overcapacity, while at the same time giving China de-facto control over the largest infrastructure network ever built.

Huang Weiliang works at Baosteel, where he directs strategic planning and technology. He commented that (via a translator), "For the steel industry, the Belt and Road Initiative will generate direct demand for steel products. With the economic development in those Belt and Road countries, their people's living standards will improve, and thus the demands for durable consumer goods will increase.""

The problem is that in many nations, like Cambodia, the money from new Chinese projects hasn't helped many in the local population. The same dynamic recently became public in Malaysia, where the now infamous 1MDB scandal has embroiled the Malaysian Government and many international banks.

The head of the office in the Chinese Ministry that oversees the Belt and Road Initiative, Xiao Weiming, told US media that (via translation), "We encourage Chinese companies to go out of China to enhance their production capability. In return, we can use the increased government revenue to improve the income level of some poor areas. This is important.""

In Kuantan, Malaysia this goal of Chinese companies expanding overseas turned into a nightmare for anyone involved in the construction of an industrial park and port. The former Malaysian Prime Minister is facing criminal charges that are related to his alleged embezzlement of Chinese development funds, and banks like Goldman Sachs have been subpoenaed over the same potentially illegal acts.

Mahathir Mohamad, 92, the Malaysian Prime Minister (PM) from 1981 to 2003 came out of retirement to oust former PM Najib Razak, and renegotiate numerous BRI projects that span Malaysia, many of which he described as "predatory".

Prime Minister Mahathir Mohamad commented, "Everything (for BRI projects) is imported, mostly from China. Workers were from China. All of the parts and the materials were from China. And the payment for the contracts were also to be made in China. That means that Malaysia doesn't get any benefit at all...When you start borrowing huge sums of money and asking foreign countries to develop, and then you cannot pay, then, obviously you're going to lose that part of the country.""

China has made deals for the BRI across the planet, and many of them use debt to ensure that China will win no matter what happens. If a country is able to pay, China will still have access to the infrastructure, and revenues from maintenance and support services, if the country defaults, China will own the infrastructure outright.

Sri Lanka has already opted to turn over a BRI project to China when the debt became unsustainable, and Kenya has ceded its sovereignty over East Africa's largest port for access to Chinese development funds.

Concern Over the BRI Grows

Senior leadership in the USA has been voicing concern over the BRI, and what some view as corrupt dealings with poor nations. US Vice-President Mike Pence stated, "We don't drown our partners in a sea of debt. We don't coerce or compromise your independence. The United States deals openly, fairly. We do not offer a constricting belt or a one-way road.""

The 1MDB scandal isn't the only situation where Chinese-backed companies have found themselves accused of corruption. The US alleges that the China Communications Construction Company, a state-owned company, has been involved in corrupt dealings in at-least four nations.

The US is also worried that China may be building a series of international ports that could one day be used for its budding Naval fleet.

Last year Secretary of State Mike Pompeo stated, "When China shows up with bribes to senior leaders in countries, in exchange for infrastructure projects, then this idea of a treasury-run empire build is something that I think would be bad for each of those countries, and certainly presents risk to American interests.""

The US is forming a $60 billion agency that will launch this year, in hopes that it can compete with the Chinese BRI. The amount of money behind the agency has yet to be disclosed, and it may employ deals with nations like Japan to expand non-Chinese development options in emerging markets.

China is Willing to Deal

Although some of the specifics of BRI projects have been criticized, for Malaysia, Chinese development has been able to continue. The new PM was able to renegotiate some of the agreements that the previous administration had made and put Malaysia into a better position.

After the negotiations with the new Malaysian PM concluded, China was willing to reduce the price for construction by 30% and hire additional Malaysian workers. According to Prime Minister Mahathir Mohamad, who was responsible for the new agreements, "They (China) are willing to listen to our views, and, in the end, they accommodated our problems.""

Chinese officials insist that there is no preference given to Chinese companies in BRI projects, despite the fact that most of the labor and materials come from Chinese companies.

Xiao Weiming commented (via a translation), "Chinese companies won the bidding, and other foreign companies didn't win. And the reason is simple. Foreign companies and workers are not as hardworking as the Chinese...I cannot say it's the Chinese government's support. China's financial institutions will provide financing only if they deem the projects are profitable. We do not make investments blindly. We Chinese are not stupid.""

For the moment it would appear that Chinese-backed infrastructure projects are unmatched by any other nation. Whatever the USA has planned as competition will face adversity, as many nations have already cemented ties with China. Some officials in emerging markets also point out that the US is difficult to deal with, while China has made doing deals easy.