China’s Belt and Road: Meet the New Problems, Same as the Old Problems
By Ysi Ru-Shin Chen
In the years following the announcement of what was then known as the One Belt One Road Initiative in 2013, Xi Jinping’s China seemed to spare no expense in ensuring that its premier foreign policy project – eventually renamed the Belt and Road Initiative (BRI) in 2017 – had all the resources it could possibly want from an economy that seemed like it was still going strong. Beijing vowed to finance projects under the BRI umbrella with at least a grand US$1.4 trillion, empowering a wide array of mechanisms to redirect their considerable financial firepower, including the CITIC Group Corporation (China International Trust Investment Corporation), the Bank of China, the China Investment Corporation, the China Development Bank, and the Export-Import Bank of China.  Memorandums of understandings (MOU), investments, infrastructure projects, and trade deals were hashed out not only with neighbors in South and Southeast Asia, but also with Africa and Eastern Europe. So pervasive was such Chinese influence – through investments and projects ostensibly under the BRI umbrella – that Greece and Hungary, both recipients of Chinese money, have placed roadblocks before attempts by the European Union to criticize China’s human rights record and unfair trade practices. In a way, the BRI has come a long way over the last five years, transforming from an academic curiosity on scholarly publications to an item of active mainstream media interest, going so far as to warrant an investigative piece from the New York Times pertaining to the BRI’s effects in Sri Lanka.
Yet in recent years, the BRI seems to be running into some serious obstacles. Elections in Sri Lanka and Malaysia have pushed out political leaders that signed deals with China that are now being scrutinized by their successors. In Sri Lanka’s case, the country’s inability to make a return on investment has resulted in their flagship project in the BRI, Hambantota Port, being transferred under China’s control for ninety-nine years. In Malaysia, newly-elected Prime Minister Mahathir Mohamad’s diplomatic engagement with China did nothing to prevent him from calling off a major high-speed rail BRI project. There is an increasing number of reports on the BRI where Chinese money failed to materialize, where projects proved to be non-performing with no real promise of returns. Trade, investment, and lending under the BRI decreased significantly in 2017, and although it has inched back to a recovery by late 2018, the initiative is still under pressure. While it is possible that the BRI is moving into a more sustainable and balanced investment pattern five years in, what is more worrying for the initiative are the reports that suggest even Beijing does not have the full picture of where, exactly, BRI money is ending up, suggesting that the BRI is affecting the Chinese economy enough to warrant scrutiny from the government.
The BRI was conceived as a necessary high-risk foreign policy to solve domestic dilemmas, particularly economic-industrial problems./div>
Hambantota Port, Sri Lanka at first glance. (Source: Google Maps)
Much of this is unsurprising. The BRI was handed down politically from the highest echelons of power in China, its implementation on the ground spearheaded by a combination of state-owned enterprises (SOE) and state-owned banks (SOB). Both components of this Chinese vanguard are known for political loyalty rather than economic reliability; both are thusly plagued by a reputation for corruption, mismanagement, and unsound policies and practices. The BRI required relevant institutions to spend funds and resources in a manner Beijing dictated, in ways that caused the Asian Development Bank (ADB) to balk at its sustainability and personages in India to decry the BRI as a form of exploitative neocolonialism. The bulk of its investments were in unreliable, undeveloped, and often corrupt economies along the Belt and Road in which most investors saw little to no potential in returns. In this sense, very little of this is new about China’s practices in the BRI either. While the current Chinese administration under Xi is attempting to enact economic reforms, the truth is that for SOEs, much of this is business as usual, as many of these development strategies were implemented in China’s own economic miracle, which now sees a significant slowdown even as its economic foundations remain questionable. Now that domestic manufacturing demand in China has dried up, the SOEs are attempting to reapply these strategies abroad, often with irresponsible practices and haphazard results.
Hubris, or at least carelessness, likely played a part in the BRI’s present situation; modern China has a habit of throwing money at a problem – money from an economy that has grown by leaps and bounds within decades, a point of pride for the Chinese Communist Party (CPC) – and hoping matters will resolve itself. It is not difficult to imagine that Beijing overestimated its influence and capabilities. What is difficult to imagine is that Beijing would be so arrogant as to not even consider the likely risks with the BRI, the potential areas where blowback was probable. Also, difficult to imagine is that China would be so short-sighted as not to see the long-term problems, problems it now faces.
What is more likely is that Beijing has always been aware of the possibility and general nature of potential blowback, but that despite these existing concerns, the BRI was conceived as a necessary high- risk foreign policy to solve domestic dilemmas, particularly economic-industrial problems. If it was not the BRI, then it would have been another project attempting to address the same issues. Yet if old habits die hard, then it increasingly seems as if China has not taken any of the lessons it is learned through the 21st century to heart; it is just handing the baggage to someone else. Only this time, people are trying to say no, as can be seen in the cases of Malaysia and Sri Lanka. Even Pakistan, a traditional Chinese ally, has been showing concern over potentially unsustainable BRI projects. 
The Chinese Model
Any further assessment requires, of course, a clear-eyed look at the objectives of the BRI, something that has been shrouded in mystery, ambiguity, and speculation for years. This is in part because the BRI is often vaguely defined, described by the Chinese Ministry of Foreign Affairs as “just an idea for cooperation” and an “open-ended platform”.  To observers, it is largely characterized as a project emphasizing infrastructure development and connectivity, comprised of economic corridors that stretch from Asia to Europe and Africa. Relevant literature has suggested possible goals of the BRI that can be divided into four general categories: Geopolitical, diplomatic, security, and socioeconomic. The specific goals in question seem like a grab bag of Chinese ambitions: Realignment of influence in the eastern hemisphere to favor China, a response to the Obama-era Rebalance to Asia (and, nowadays, the Trump-era Free and Open Indo-Pacific Strategy), the fostering of closer diplomatic ties through investments, a guarantee of China’s energy security through infrastructure and military readiness, power projection through a blue-water navy, the alleviation of Chinese industrial overcapacity in areas such as steel, economic reforms that involve wealth distribution to the restive inland regions and creating a more sustainable growth pattern, and so on.
Possible goals of the BRI that can be divided into four general categories: Geopolitical, diplomatic, security, and socioeconomic.
All the above are concerns that China’s leaders have long held, and there is no convincing reason why the BRI was created to address only one of these concerns, or even only one of the four aforementioned categories. However, while much has been written about Xi Jinping being the most overtly ideological and nationalistic Chinese leader since Mao Zedong, what is less publicized – perhaps because it is not particularly exciting – is that when it comes to policy, the fifth-generation leadership’s focus seems to be primarily socioeconomic, as are the most important of the BRI’s goals, if only in the sense that it is the category that carries the greatest urgency. In a way, this should not have come as a surprise. Putting aside the BRI, major projects and policies such as the Chinese Dream, Made in China 2025, the Two Centenary Goals, and the Four Comprehensives are dominated or significantly informed by socioeconomic concerns.
The Belt and Road Initiative would transform the economic-social environment in which nations operate and develop in the regions. However, there are significant challenges to their politics, economies and policies. (Source: World Bank)
In this the fifth-generation leadership is not particularly unique. After all, they and their predecessors are, to a certain degree, riding on the coattails of wave of economic growth that began with Deng Xiaoping’s economic reforms back in 1978. Third-generation premier Zhu Rongji decided SOEs were too corrupt and bloated, and subsequently put his own personal stamp on Chinese economic reform in the 1990’s by firing forty million SOE employees. Fourth-generation secretary- general Hu Jintao presided over the global financial crisis, which factored into his re-empowering of SOEs as part of an attempt to weather the worst effects of the crisis. Managing China’s economic growth is not only a point of pride for the Chinese leadership, it is a major component to its national legitimacy.
What is unique about the fifth-generation leadership, however, is that they are presiding over a pronounced slowdown to what has been an economic miracle decade in the making. The two fulcrums of credit and cheap manufacturing created the Chinese economic miracle in the first place but has also left in its wake a troubled economic structure built upon bad credit and an unsustainable “factory of the world” model. The structure is already beginning to creak. In this, China’s current predicament is reminiscent of Japan’s not so long ago: An economic miracle fueled by inflated stocks, rapid manufacturing growth, overinvestment in real estate, increased non-performing banking loans, a depreciated currency, and low domestic consumption. Japan’s failure to manage these factors led to the collapse of the asset bubble in the 1990’s, creating a slump that the country has yet to crawl out of. This resemblance was not lost upon last year’s news cycle, which persistently asked whether China could avoid a “hard landing."
Fortunately for China, not only is the government in a position to learn from Japan’s mistakes, but it also has both greater control and a great willingness to exercise that control over its economy and industry. Beijing has plans to enact “supply-side structural reform” to curtail excess production, to enact controls over the expansion of credit, to transform China from export-driven to consumption- and service-driven, from “factory of the world” to “world manufacturing power.” In this vein, the BRI is part of this economic reform toolbox. Although Beijing is no longer able to downsize SOEs at will in the way Premier Zhu did in the 1990’s – China is too entangled in the globalized market to do so, and an increasingly wealthy Chinese population along the richer coastal regions will not tolerate such a shock to the economy and to their standards of living – investments abroad into BRI projects provides a pressure valve for the bubble created by industrial overcapacity and bad credit, creating breathing room for the necessary reforms and the shuttering of zombie enterprises without bursting China’s own economic bubble. It connects China with economies that are not only receptive to exports that China no longer wants, but are also in a position to provide China with resources useful to its economic reform (the most evident example being rare earth materials from Central Asia, particularly from Kazakhstan, useful in the Chinese technology innovation sector).
There are also social considerations involved as well. It provides an outlet for a low-skilled labor force that China intends to push out with its transformation into a tech manufacturing and services powerhouse, pacing the downsizing of SOE employees with China’s aging demographics, thus preventing a massive wave of unemployment. Little wonder, then, that Chinese-funded infrastructure projects, even those outside the purview of the BRI, are helmed by Chinese construction companies staffed with Chinese workers, a sore point for the residents of host nations that China is not bringing any employment or economic benefits for the locals. And with western China being the country’s primary land-based BRI hub, it is clear that the Chinese leadership intends to further economic development in China’s poorer, less developed inland regions, which is hoped to go some way in quelling civil unrest with regards to the wealth disparity between the coastal and inland regions, to say nothing of minority unrest.
If the BRI is not explicitly a tool for exporting the costs of Chinese economic reform, then they at least share a codependent relationship: Chinese economic reform is necessary for the BRI to sustainably fund foreign infrastructure projects, and Chinese exports and trade in the BRI are necessary as an outlet to help mitigate the dilemmas facing economic reform. And codependence is a dangerous setup for major policy; the failure of one will almost certainly mean the failure of the other.
Of course, once again, none of this precludes the possibility that the BRI can be used – and is being used – for geopolitical, security, and diplomatic endgames. Likely, Beijing formulated the BRI with this full spectrum of objectives in mind, perhaps in a gambit to ensure that at least some, if not all, of its goals would be met in this ambitious project. Reaping potential geopolitical and diplomatic benefits that come from these investments and projects abroad are hardly out of the
question. But the BRI is the brainchild of the fifth-generation leadership, and Xi came into power well after Chinese economic growth slowed down to single-digit percentages, heralding tougher times to come. China is aware not only of the fact that this is an existing problem, but that it is an impending crisis with a ticking timer that will not just go away on its own. Chinese energy security, naval power projection in the surrounding maritime territories, and the creation of its own sphere of influence are doubtlessly important projects that Beijing considers vital to its national survival. It is not out of the question for national leaders to address these concerns as quickly as they can, but they are responses to hypothetical or potential threats and crises, not impending ones. There is presently no ticking time bomb in terms of threats to Chinese energy imports from the Middle East, maritime territory disputes and rivalries with near-peer navies, or any severe loss of influence or political capital in even U.S.-led international power structures. These crises may one day come, but they are not here yet, or at least not in a way seriously threatens China. The sails of China’s economic challenges, however, are not just on the horizon, but drawing closer to firing range.
The Imperfect Solution
Even if the governments and researchers alike remain uncertain as to whether China’s endgame is strategic, economic, or otherwise, it has always been evident to them that the BRI is fundamentally a plan by China and for China. To a degree, this is not surprising; all states look out for their own national interests. But there is increasingly the view that China’s investment practices in the BRI are almost predatory and neocolonialist in nature. The point has been to create sufficient demand to solve China’s excess supply, and the idea that China is a benevolent investor in regional infrastructure projects is clever marketing. There have been some successful projects along the Belt and Road, but whether because China did not know or did not care, many others have been economically unviable from the very beginning and have created unsustainable amounts of debt for some host countries. This debt is hardly going to be conducive to China’s current credit problem, but some of the pressure can be alleviated if the Chinese yuan becomes the common currency along the Belt and Road.
Of course, these suspicions have long existed before the cases of Sri Lanka and Malaysia, so why have countries signed onto the BRI? A major reason is simply because these brittle, developing, regional economies are not simply passive entities being preyed upon by a strong Chinese economy, they are polities with their own projects and plans for infrastructure expansion that may encourage economic development in their countries. Most existing investment institutions dominated by the West expect feasibility studies in ascertaining the viability of any investment into these economies, and these investments often come with the stipulation that the host countries abide by international norms and human rights, conditions that may be unpalatable for a national government. However, China’s “business is business” approach to investment offers a staggering amount of funding with – at least superficially – little to no political preconditions. Just as Xi has pushed the China Dream, the countries along the BRI have their national goals to pursue, only lacking the funding to do so; China’s offer of investment is therefore seen as too good to pass up. And it is hard to deny the power of the Chinese economic miracle, with developing states hoping they can replicate or exploit this Chinese model for themselves.
But if the BRI is not being regarded with increased suspiciousness, it is at least seen with increased wariness. Certainly, there is an increased perception that the BRI aligns with China’s geostrategic interests at a time when the People’s Liberation Army (PLA) is expanding its power projection capabilities, and that the benefits afforded to host nations are sometimes in doubt. Yet one does not necessarily need to go so far as to claim that China truly is creating a String of Pearls, developing strategic capability under the guise of economic development. What is far more likely – and probably equally alarming – is that China has simply not reformed or changed its business or economic practices, and now that the West increasingly adopts anti-dumping strategies against China, Beijing is exporting its bad credit and excess manufacturing abroad to new, more vulnerable markets. If mismanaged, host nations will almost certainly suffer financially and economically as a result; there is also no guarantee that the high-risk BRI can help China overcome its current problems in the first place.
While the BRI has always been plagued by obstacles, some of them involving negotiations and others involving loans, Sri Lanka and Malaysia have become if not a watershed moment, then at least a wake-up call. Amidst what could be at worst a growing backlash, Xi has found himself having to attempt to stay ahead of the game by insisting that the BRI is not simply a project to establish a “China club.” Indeed, he has found himself in tricky economic territory; when Xi first announced the existence of the BRI in 2013, he almost certainly did not expect that Trump would become president, leading to a chain of events that would result in a U.S.-China trade war that – if the rumors are true – is allegedly damaging Xi’s credibility even within the CPC. In a way, the BRI is necessary as an interim solution to immediate problems, but even if China’s great economic reform succeeds at the very end and averts a hard landing, it does seem like Beijing intends for someone else to pick up the mess.
Ysi Ru-Shin Chen is a Policy Analyst in the Division of Cyber Warfare and Information Security of the Institute for National Defense and Security Research.
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