Dream peddling of Belt and Road
China has turned down the rhetoric on its global ‘connector’ scheme to overcome criticism of the project’s intentions. Stevie Knight reports on the latest strategy
There is, according to Professor Hercules Haralambides of Erasmus University, some scepticism regarding China’s investment targets of its ubiquitous Belt & Road Initiative (BRI). Is it simply meant to optimise trade flows, or is it a grand master-plan to acquire strategic infrastructure around the world, pundits are asking.
Either way, one thing is certain: China is playing into the ambitions of those who want to believe in a better tomorrow and its investment choices have led to notable successes – some of which were initiated long before the BRI came into being.
Jason Chiang of RHDHV points out that Colombo’s China Merchant Port Holdings’ concession was one of the first. It was a Chinese and Sri Lankan port authority joint venture which started long before the BRI launch. Last year, Colombo International Container Terminals contributed 2.65m teu – 38% – to Colombo’s total 7m teu record.
In Piraeus, now the second largest Mediterranean port, China Merchant Port Holdings began with a 35-year concession to a pair of its container terminals in 2008 and in 2016 COSCO bought a controlling share in the port authority for $420m.
Now, any Chinese foreign investment is tied – whether formally or not – to the BRI project and questions of sovereignty and debt risk have come to the fore. The question of ‘who takes the hit if it doesn’t work out’ has been largely unanswered.
Loans, often tied to Chinese construction companies, have started to get a very bad press, says Mr Chiang. There have been some headline-hitting cases, like Hambantota in Sri Lanka, which was handed over on a 99-year lease after defaulting on repayments, and the term ‘debt trap’ started being bandied around.
Despite this, Mr Chiang says it’s not a ‘trap’ in the premeditated sense of the term. He says: “China has lent on terms less stringent than the World Bank, IBRD or IFC. Where they back away, China has said ‘yes’, but it’s a commercial enterprise. I’d say rather than being a ‘debt trap’, these are just more risky deals to start with.”
Prof Haralambides agrees: “Loans to Hambantota were made at the rather ‘concessionary’ 2% interest rate. Sri Lanka’s real issue has been borrowing from international capital markets to cover persistent fiscal deficits – a ‘payday loan’ problem.
Business or strategy
Still, while BRI might not be a covert plan to gain control of strategic assets, alarm bells have started to ring for developing regions.
The Kenyan government borrowed heavily from China, $3.2bn in all, to fund a standard gauge rail project. The dream is that it will both speed up cargo moves and lower freight costs, but there’s a sting in the agreement with China. According to Kenya’s Daily Nation newspaper, the terms state “neither the borrower [Kenya] nor any of its assets is entitled to any right of immunity on the grounds of sovereignty, with respect to its obligations”.
Not great, as the loans come to roughly 6% of Kenya’s GDP and the first year of operations saw a sizeable loss; some worry that if the repayments aren’t kept up, the Port of Mombasa – like Hambantota – may be surrendered.
Mombasa has other troubles. According to Kenyan media, project costs for constructing the Kipevu Oil Terminal inflated from the original $147.3m to $393.9m; it is also under investigation for flouting the World Bank’s blacklisting of the China Communications Construction Company (CCCC).
Some, however, are making it their duty to open up the discussion on future relationships, not least Malaysia’s prime minister Mahathir Bin Mohamad.
Malaysia suspended work last year on its China-backed East Coast Rail Link amid accusations that the previous prime minister Najib Razak’s high-priced $15.96bn deal had a large slice in it for him. However, the new administration has revised its agreement for construction of the project at a cut-down rate, just two-thirds of the original. Most importantly, China has also agreed to a 50-50 joint venture to operate the 640-kilometre line across Peninsular Malaysia which connects west-side Port Klang with Kuantan in the east before reaching north to Kota Baru near Thailand. This reduces the country’s risk burden, while reaping a larger slice of the profits.
Other nations have also started to kick back. Kyaukphyu deepwater port, another strategic Chinese investment in the Bay of Bengal, has been heavily trimmed from its original $7.3bn price tag. Now lead developer China’s CITIC Group appears to be settling for a $1.3bn initial phase.
This may be because the Chinese really want the asset. It promises direct access to the Indian Ocean which would significantly reduce Chinese energy dependence on the Strait of Malacca, Prof Haralambides points out. In fact, oil and gas pipelines already run from Kyaukphyu to China. “Energy security “is one of the main themes running throughout the BRI”, adds RHDHV’s Mr Chiang. Still, the ghost of Hambantota walks here too: locals worry that Kyaukphyu will also be handed over if payment terms aren’t met.
Still, there are signs that Chinese interest will work hard in the background to further develop important trade corridors. Turned down by the US, the Japanese and the World Bank, Gwadar in Pakistan is to become the lynchpin of a Middle East Gulf-western China corridor that has “drawn in big investment” including a free zone, says Prof Haralambides. It’s the old dream for Pakistan to have a pivotal role in bringing Central Asia’s oil and gas out into the world’s markets.
Gwadar’s development into a big $10bn refinery with assistance from Saudi Arabia might also further China’s energy plans: it, too, will have a pipeline running to China, shortening the Dubai oil route by almost two-thirds.
But there are still questions: Gwadar is on a 40-year lease to China Overseas Ports Holdings, which collects 91% of the revenues, so how exactly is the $55bn to be repaid? It’s a lot to expect, even if the poverty-stricken Baluchistan region’s economy starts to improve. Moreover, it’s been noted that the jobs aren’t going to the locals.
Despite the overt ‘take the loan and the consequences’ attitude, China isn’t above tilting the table when it suits them.
“The container train from China to Europe sees about 4,000 trips a year now,” says Mr Chiang. “The key is that its price is pitched at around $4,000, siting it between the longer sea route, which is just over $1,000 per box, and air – where it has taken market share – which has a price of $6,000 and up.”
He adds: “It has now become apparent it’s very heavily subsidised to keep it at this sweet spot. If it wasn’t, it appears the price would be very close to airfreight.”
There are also essential differences shaping the current picture compared with the early days of Chinese investment. “You could say the low hanging fruit has already been picked,” says Prof Haralambides.
Further, according to Mr Chiang, “people are beginning to say, ‘No, we won’t take your loan, but we’re happy to take your equity… so you build, you take responsibility’. That’s new.”
BRI is also being shaped by further moves into Europe.
Italy is the first western European country to jump onboard the BRI bandwagon with management deals between the China Communications Construction Company (CCCC) and the ports of Trieste and Genoa. Connectivity issues are also on the table, as well as an intermodal terminal linking Trieste and Slovakia.
It shouldn’t come as any surprise, according to Prof Haralambides. He says that the Chinese spotted the importance of the southern ports early on: “They started with Piraeus, then they took control of Valencia, Spain’s main container facility. Bilbao followed as it had links to Rotterdam and the North, and they also got hold of two distribution centres. They’ve been steadily moving from east to west.”
Chinese companies willing to take the leap could be getting a good deal from the region.
While there’s an infrastructure gap, as Prof Haralambides points out, it’s not as if it’s creating something from scratch: “If you put money into a place that’s already productive, you have a return straight away.”
However, the Chinese involvement is not sitting easily with the North Europe bloc. The UK’s Financial Times reported the outspoken French President Emmanuel Macron as saying: “The time of European naïveté is ended …. For many years we had an uncoordinated approach and China took advantage of our divisions.”
Germany too has become vociferous in its ‘beware China’ alerts, “despite being one of those that benefited most from Chinese deals”, says Prof Haralambides. He adds that Europe has recently started screening proposed foreign investment, “although it’s a lukewarm, advisory effort with no teeth”.
The US’ response has more bite: “It has a secretive Senate commission that looks into all foreign acquisitions,” says Prof Haralambides. Mr Chiang adds that US-based assets currently held by China “are being forced into an outright sale”.
Prof Haralambides explains: “China is getting more expensive, so like many Western countries, it’s looking at relocating some of its manufacturing.” Africa is very much in the frame, “with around 200 Chinese projects underway”.
Certain areas seem more than willing to roll over to make the most of the opportunities – and tip earlier incumbents out.
The brazen nature of China’s recent moves at Djibouti made a few audibly gasp. Strategically, it’s important to China, not least because of its geographical location, its vast oil throughput and a government that’s allowing military bases for all and sundry. “It was obvious that despite DP World’s investment in the Doraleh Container Terminal, they’d have to go to leave the ground clear for the Chinese,” says Prof Haralambides.
Fees and fines
Although following a court case the authorities have to pay DP World $358m, Beijing immediately stepped in with funding for the Djibouti International Free Trade Zones (DIFTZ) at a cost of $15bn.
Despite this, there are some signs that the Chinese are willing to improve their somewhat strained relationship with African host countries, hurt by much-needed construction jobs being outsourced to China. According to China Daily, “95% of the [SGR rail] stations are fully run and managed by local Kenyans …. With time, this will happen for all other departments”.
There is great potential for everyone to benefit, says David Mackay of NSM Shipping. “All large contracts could carry a significant CSR element, for example, ‘if you win this tender please outline in detail what your company will do to help develop and train our engineers, architects, pilots, seafaring cadets etc’.”
On the naval front, both Colombo and Djibouti have had Chinese submarines turn up. Gwadar, being close to the sensitive Hormuz Strait, is in an excellent spot to support the Chinese war fleet. Despite public protests and an apparent softening – China no longer speaks so openly about its ‘String of Pearls’ ports willing to berth China’s military vessels – recent tactics against Taiwan seem to suggest that there’s a confident hardcore stance, bolstered by a growing presence in the Indian Ocean.
April’s US/Sri Lanka naval exercises at Hambantota were designed to remind China that the government retains sovereignty, business interests notwithstanding. Whether this works remains to be seen.
SWITCHING THE SOUNDTRACK
There are all kinds of pressures building on China to change its foreign investment tune, while a lack of inward investment is also drawing criticism.
“[China’s] economy is slowing – it will only make 6% this year and last year three million industrial workers became unemployed”, points out Erasmus’ Professor Hercules Haralambides.
The failures, too, are mounting up. According to RWR Advisory Group, 14% of 1,674 Chinese-invested infrastructure projects have encountered difficulties that run from labour to finances.
“Plenty of good opportunities exist – if the country borrowing the money does its homework,” says an industry source, but adds there are “allegations that the Chinese tend to be fairly relaxed about ‘private payments and incentives’: hence the need for a strong, robust tender system in the host country”. Still, he goes on to say: “There’s generally more sensitivity about obeying local rules and regulations than previously.”
“Public opinion is having an impact,” says RHDHV’s Jason Chiang. “In the last couple of years, the Chinese authorities went from believing that the BRI would change the world and China’s standing, to realising the connotations have become slightly negative. They’ve toned down the rhetoric a lot.” He concludes: “Investment is continuing, but everyone is a lot quieter about it.”
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