New Measures to Lessen Negative Aspects of Belt and Road Initiative
Photo Credit: South China Morning Post
By Henry Hing Lee Chan

New Measures to Lessen Negative Aspects of Belt and Road Initiative

Jun. 01, 2017  |     |  0 comments


China convened the first Belt and Road Forum for International Cooperation (BRF) on May 14–15, 2017 in Beijing. The meeting drew 29 foreign heads of state and government, representatives from more than 130 countries and 70 international organizations. It was the highest profile international event on the Belt and Road Initiative (BRI) since China started the program in 2013 under the name One Belt One Road (OBOR).


At present, there are 65 countries in the BRI, accounting for about 60 percent of the world’s population and 30 percent of global GDP. Chinese President Xi Jinping described the BRI as the “project of the century” and the Los Angeles Times published an article titled “Globalization 2.0: How China’s two-day summit aims to shape a new world order.”


In the forum, China announced the following measures to scale up support for the BRI:


Table 1. New Measures Announced in BRF

Measures

Compared with existing set-up

Contribute RMB 100bn to the Silk Road Fund

36 percent of the previous fund of USD 40bn. The fund has committed USD 4bn.

Contribute RMB 250bn special lending scheme to China Development Bank

33 percent of end-2016 loan of USD 110bn to more than 600 projects to the B&R countries.

Contribute RMB 130bn special lending scheme to China Exim Bank

21 percent of end-2016 loan of USD 90bn to 603 projects to the B&R countries.

RMB 300bn overseas RMB fund by financial institutions

New

RMB 100bn (RMB 10bn initially) by National Development Reform Commission (NDRC) for China-Russia Regional Cooperation Development Investment Fund

New

RMB 2bn emergency food aid to developing countries along the BRI

New

USD 1bn capital injection into South-South Cooperation Fund

New

USD 1bn capital injection to relevant international organizations promoting beneficial cooperation projects for Belt and Road countries

New


The Chinese Ministry of Commerce also announced the following targets in the next five years:


Table 2. New Economic Targets Announced in BRF

Targets

Compared with current performance

USD 2trn import from BRI countries by China

Average modestly higher than RMB 2.4trn (USD 350bn) in 2016

USD 8trn total merchandise import by China

Average the same as USD 1.59trn in 2016

USD 750bn outbound Foreign Direct Investment (FDI) by China

Average 12 percent lower than the reported USD 170bn in 2016 but higher than the actual USD 110-120bn in 2016

More than 500 million outbound Chinese tourists

Average 18 percent lower than 122m in 2016


During the BRF, China signed cooperation deals with 68 countries and international organizations, and these yielded 270 deliverables in areas such as policy coordination, infrastructure building, trade, investment, finance, as well as people-to-people exchanges.


There are two core economic issues under the BRI. The first is to promote trade. China signed more than 30 economic and trade cooperation agreements during the BRF, including a free trade agreement with Georgia; and energy deals with Saudi Arabia, Azerbajian, and Russia. The second is to promote development through cooperation on infrastructure projects, including concessional financing to support countries in need.


The list of countries attending the BRI and the official level of their delegations serve as a barometer of their economic and geopolitical relationships with China. There were seven heads of state and government from ASEAN nations who attended the forum, and Thailand sent a five-minister delegation even though its Prime Minister was absent. Most of the European countries sent their economic or trade ministers to attend. The US upgraded the level of representation just a few days before the forum, and the head of the US team was changed from Eric Branstad, a Commerce Department advisor and son of the US ambassador-designate to China, Terry Branstad, to Matt Pottinger, a senior director in the White House. The Japanese delegation’s announcement was also at the last minute and it was led by Toshihiro Nikai, Secretary-General of ruling Liberal Democratic Party, and former PM Yukio Hatoyama.


The presence of some countries not in the BRI is interesting. Argentina, Chile, Kenya, the Swiss Confederation, Fiji, Greece, Italy, and Spain are not among the BRI countries, and their attendance at the BRF may signal interest in the expansion of the geographic scope of the BRI. According to Argentina’s El Cronista, the Argentinian President brought with him an extensive list of infrastructure projects, including dams and the upgrade of railways, with the aim of obtaining financing support from China.


The notable absence from the BRI was India. The country’s external ministry confirmed the country had received an invitation from China, but declined to attend because the USD 46 billion China-Pakistan Economic Corridor (CPEC) passes through Pakistan-occupied Kashmir — a territory in dispute between India and Pakistan but under Pakistani control since 1946. India also raised the issues that the BRI projects do not follow internationally-recognized norms of good governance, rule of law, openness, transparency, and equality. They also charged that BRI projects did not follow principles of financial responsibility that ask loan-granting countries to avoid projects that would create unsustainable debt burdens for the recipient communities. India cited the case of Sri Lanka to support its claim. Numerous infrastructure projects negotiated by former President Mahindra Rajapaksa saddled the country with debt estimated at some USD 8bn and the country has negotiated a USD 1.2 bn debt-to-equity swap of the Hambantota Port project. Indian also insinuated that the Pakistan’s CPEC will probably suffer the same fate.


Russian President Vladimir Putin was asked to comment on the charge that BRI only serves the interest of China and that recipient countries will suffer from unsustainable debt burdens even though such financing carries concessional interest rates and is long term in nature. It is understood that China’s infrastructure loans are normally priced at 2-2.5 percent p.a and run for 20-25 years. President Putin stated that infrastructure loans from China are subject to bilateral negotiations and that Russia will not proceed with projects that are not financially sustainable. One should not blame China for the failings of the project.



The new approaches of separating aid from project loans, getting more financially sound countries to participate in the BRI, and turning the initiative towards greater multilateral participation, are all signs to greater transparency and internationally-recognized rule-based norms.


The charges against the BRI caught the attention of the Chinese government. These are new measures that aim to minimize these negative aspects:


1. Expanding the number of countries actively participating in the BRI will allow China to cherry-pick financially sound projects in countries with strong current account positions. This will not only ensure the external sustainability of foreign currency loans of the recipient countries, but also future repayments of the loans to China. The active involvement of ASEAN countries and other economically developed countries is a good sign, as they are financially stronger in their external accounts and readier to translate physical infrastructure into economic growth and exports. The problematic countries have weak external current account positions. The relatively small increase in capital and financial commitments shown in Table 1 and the modest economic targets shown in Table 2 indicate that China has realized that it is time to consolidate the BRI, and not keep in an expansion mode.


2. The cooperation agreement signed between China and international agencies with experience in finance and infrastructure, such as the IMF and World Bank, will greatly enhance future governance issues with BRI projects.  The slow process of turning the BRI into a multilateral undertaking from the bilateral infrastructure development aid model will enhance the long-term prospects of the BRI.


3. The setting up of a coordination office in the US embassy in Beijing to facilitate the participation of US companies in BRI projects is the first concrete support of the US to the rationale behind the BRI. The high-profile meeting highlighted the importance of infrastructure as both a counter-cyclical economic measure and a tool to enhance future national development. The widely circulated Asian Development Bank report of the USD 22.6trn infrastructure investment requirement until 2030 in developing Asia-Pacific countries means the cake is sufficiently big for all participants in infrastructure enhancement. The refusal of many European countries to sign off on the final declaration because the issue of bid transparency was not mentioned in the document should not be taken as a sign of Chinese insistence on selecting domestic Chinese infrastructure builders in BRI projects.


4. The institution of separate funds for food aid for countries in need, the South-South Cooperation Fund, and international cooperation, indicates the separation of projects under two separate categories of aid and financially-viable infrastructure projects. For poor members who propose projects that are not financially viable, the BRI can channel their needs to aid-type funds under people-to-people initiatives, while a much bigger financial pool will concentrate on handling the requirements of financially-viable projects.


Aside from the doubts raised by India and some commentators on the long-term viability of the BRI, there are also persistent domestic doubts on the viability of the BRI. China was the fastest growing economy in the last 38 years since the economic reforms of 1978, and now ranks number two in nominal GDP terms. The per capita income of the country is estimated at USD 8900 in 2017 and ranks number 74 in the world. Chinese citizens now worry about the safety of loans extended overseas. The new approaches of separating aid from project loans, getting more financially sound countries to participate in the BRI, and turning the initiative towards greater multilateral participation, are all signs to greater transparency and internationally-recognized rule-based norms.


China was clearly pleased with the results, and President Xi announced on May 15 that a second Belt and Road Forum will be hosted in 2019.

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