Belt and Road: How Mega Project of Six Magical Corridors Spurs Economic Growth
Chinese capital goes beyond Belt and Road
If Belt and Road needed a boost in momentum, it came in the middle of 2017 when the Chinese leadership met hundreds of representatives of foreign governments, including 29 heads of state, at a forum in Beijing to discuss progress and map the direction of the programme for the coming two years.
Addressing international concerns over the geopolitical implications of the scheme, which is now widely seen as the cornerstone of Chinese foreign policy, topped the agenda.
These concerns were summed up by India, which did not send a representative to the forum. The Indian government has made little secret of its displeasure over one of the most high-profile Belt and Road projects: the China–Pakistan Economic Corridor, including the development of the port of Gwadar. Explaining the south Asian power’s lack of attendance at the event, a government representative said, “No country can accept a project that ignores its core concerns on sovereignty and territorial integrity.”
Beijing used the forum to respond to negative reactions to Belt and Road infrastructure projects. Some of these developments are large enough to have deeply transformative impacts, including significantly raising China’s political influence in the countries and regions where they take place.
The sale of land at Hambantota in Sri Lanka for the development of a port city is perhaps the most high-profile recent Belt and Road deal to become mired in controversy. The Sri Lankan government’s proposal to sell the rights to Chinese state-owned interests on a 100-year lease stirred local sentiment to a level that threatened to completely undermine the project.
Hambantota is located about 250 km southeast of the port of Colombo. Export–Import Bank of China (China Exim Bank) originally provided a loan of more than USD1 billion for the development of the port, which is being constructed by China Communications Construction Company.
The Sri Lankan government said it needed to hand over the facility to China on an extended lease because debt instalments and interest payments on the original loan were eating up one-third of the revenue of the Sri Lankan Ports Authority.
Various local groups, including politicians and unions, objected to the deal, saying it effectively amounted to the creation of a Chinese colony in the country. However, the sale went ahead as planned, with Hong Kong-listed China Merchants Port Holdings (CMPort) acquiring an 85% stake in the port for USD1.12 billion.
In his opening remarks at the forum, the Chinese president, Xi Jinping, focused on the significant benefits of Belt and Road projects in terms of filling infrastructure gaps in developing economies. He introduced five basic principles of Belt and Road that stress the initiative as a driver of peace, prosperity, people-to-people contact, and cultural exchange, as well as being a catalyst for trade, investment, and digital innovation. More than USD12 billion in development aid for countries along official Belt and Road routes was promised, separate from funding committed for infrastructure projects.
The focus on the principles and the promise of aid points to a more sophisticated approach by the Chinese leadership to engagement with foreign governments and people, which makes some effort to accommodate political, social, cultural, and economic concerns. This is new territory for China and an area in which its Communist Party leadership has limited experience.
Despite challenges with certain projects, the forum clearly demonstrated the continuing high level of interest in Belt and Road. The heads of state who attended the forum included Russian president Vladimir Putin, Indonesian president Joko Widodo, Malaysian prime pinister Najib Razak, and Philippine president Rodrigo Duterte.
Outside the forum, an ongoing and sustained effort on the part of numerous governments around the world – and their maritime administrations and ports – to court Belt and Road funding and projects is evident.
Next to allaying concerns over the effects of the projects, Xi’s opening remarks made clear that the focus of the programme would stay with the development of infrastructure linking Belt and Road countries with China, including ports, maritime and inland water transport, railways, and roads.
Additional funding
An additional USD113 billion was announced in funding for projects. This included an increase of USD14.5 billion in the pledged capital of USD40 billion for the Silk Road Fund and an additional allocation of USD43.5 billion by domestic Chinese lenders specifically for Belt and Road projects. China’s two main policy banks, China Exim Bank and China Development Bank, also pledged new dedicated lending worth USD36.3 billion for ‘overland’ Belt and Road projects.
Much of the lending for Belt and Road projects only started in 2016 and the amount of Chinese capital that has actually made its way to these projects is still relatively small.
According to Washington’s Brookings Institute, the capital that left China by the end of 2016 went to less risky and more developed markets than those on the official Belt and Road list. A significant amount of funding is also going to less developed but resource-rich countries that are not on official Belt and Road routes.
“China is a very significant funder of infrastructure in the developing world, but it is happening everywhere, not just along the Belt and Road,” said Brookings Institute economist David Dollar. “There is significant Chinese investment in risky, non-OBOR [One Belt, One Road] countries such as Angola, the Democratic Republic of the Congo, and Venezuela. The common theme is that China has been willing to invest in risky environments in search of natural resources. So far, OBOR has not been an important factor in the allocation of [outward direct investment].”
The policy banks have also been lending heavily to non-Belt-and-Road markets, such as Latin America, and it is clear that the large port operators are not restricting their investments to Belt and Road routes.
CMPort, a major implementer of Belt and Road policy, recently outlined its intention to create a sizeable footprint in Latin America. In September, it purchased Brazil’s TCP group, which operates the container terminal concession at the port of Paranaguá. The port has an annual capacity of 1.5 million teu, which will be increased to 2.4 million teu upon completion of an expansion scheduled to finish in the second half of 2019.
“The acquisition of TCP will allow the group to expand its business to the Latin America region and further consolidate its position globally,” the company said in its statement announcing the deal.
“Furthermore, the investment will provide the group the opportunity to make use of the marine transport hub of TCP to develop its logistics network, export/import and industrial zone and potential residential projects, and related financial service platforms, allowing for greater commercial synergies within the group.”
The expectation is that funding for Belt and Road projects will gear up over the course of next year. Project lending by the three multilateral development banks that support the programme – the Asian Infrastructure Investment Bank (AIIB), the New Development Bank (created by the BRICS in 2014) and the Silk Road Fund – started in 2016.
The AIIB has a founding membership of 57 countries and financial firepower of up to USD100 billion and the New Development Bank has a total authorised capital of USD100 billion. Following the announcement at the Beijing forum, the Silk Road Fund has pledged capital of USD44.5 billion.
The Chinese government is keen to track and emphasise the global impact of the programme, and set up a series of indices to do just that in July. The Shanghai Shipping Exchange indices cover shipping and rail and include a trade volume index; a freight volume index; and a maritime Silk Road freight index that separately tracks coal, minerals, crude oil, and containers.
“The purpose is to track trade and investment activity between China and Belt and Road countries to help assess the effectiveness of China’s efforts to open up,” said Beijing-based Xu Yating, a China economist with IHS Markit.
Southeast Asia to benefit
From a geographic point of view, southeast Asia is one of the regions that has benefited the most from Belt and Road. This is particularly true in terms of Chinese infrastructure investment, notably in the ports and the shipping sector.
The strong focus of the programme on the region is due in large part to its proximity to China, rapidly expanding export sectors in several of its economies, and the strategic location of some of its countries close to the Strait of Malacca. The region’s strong natural resource base and favourable demographics are also important factors.
Seven out of 10 heads of government from the Association of Southeast Asian Nations (ASEAN) attended the Beijing forum. Many of these countries are in strong export growth mode and keenly aware that in order to reach targets and compete well enough to keep growing, they need to reduce logistics costs as a percentage of GDP. This means finding external sources of investment for logistics infrastructure, particularly ports, and links to industrial and consumer hinterlands.
At the end of 2016, China and Malaysia agreed to bilateral deals of about USD34 billion, including a USD13.75 billion 20-year low-interest loan to Malaysia to finance the East Coast Rail Link project. A visit by Philippine President Rodrigo Duterte to Beijing at the end of 2016 resulted in a USD24 billion package of investment and credit facilities.
“With bilateral trade between China and ASEAN having grown from USD9 billion in 1991 to USD346 billion in 2015, the Belt and Road initiative has become a significant geopolitical priority for ASEAN countries,” said Rajiv Biswas, IHS Markit chief economist for the Asia Pacific.
Major Chinese-invested projects in southeast Asia include the expansion of Kuantan Port, the development of Samalaju Port and the Melaka Gateway project, all in Malaysia, Tanjung Sauh Port at Batam Island in Indonesia, and Maday Island in Myanmar, where an energy terminal and oil and gas pipelines linking to southwest China’s Yunnan province have been put in place and a high-capacity container terminal and large industrial zone are planned.
A port alliance between 11 Chinese and Malaysian ports has also been set up to support bilateral co-operation in port operations and technology.
The combination of high GDP growth and decrepit port infrastructure in many countries, together with south Asia’s strategic location close to the oil-producing Middle East, makes the region a major destination for Belt and Road investment.
South Asia is home to the programme’s highest-profile project, the China-Pakistan Economic Corridor and development of the port of Gwadar. China has bilaterally committed to invest USD62 billion in Pakistan to fund the development of Gwadar and a road and rail network to effectively link China to the Arabian Sea. Developments such as industrial parks are also part of the project.
Elsewhere in southern Asia, Sri Lanka is a major recipient of Belt and Road investment, including the development of Colombo International Container Terminal – a facility that has filled a major infrastructure gap in terms of handling Indian transhipment cargo – and the much wider Hambantota port city development, also being undertaken by CMPort. New projects in Bangladesh are also expected.
Beyond these two key regions, east Africa, central Asia, and the Mediterranean and Balkans regions in Europe are prime targets for Belt and Road project investments. But despite publication of an official list of countries, finding the right conditions – such as suitable local partners – to support viable long-term projects is an important factor for Chinese banks and port developers to take on projects.
These firms are tasked with implementing the vision, but they also have commercial objectives that need to be met. It is not clear whether the tools and influence from the Chinese leadership are enough for lenders and developers to accept the financial and project risk premiums that accompany investments in poorer countries along the designated routes at the level needed to realise the full vision of the programme.
With the relatively limited amount of Chinese capital ending up on designated Belt and Road routes, it will be interesting to see how the map of projects develops ahead of the next Belt and Road forum in 2019.
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