All roads lead to Rome

The sentiment surrounding China’s Belt and Road Initiative (BRI) has soured sharply over the last 18 months with headlines about projects that haven’t materialised, loans that don’t look sustainable and recipient nations that want to renegotiate.

There were even murmurings of discontent on the sidelines of the Two Sessions parliamentary meetings this month, with suggestions from Ye Dabo, a former diplomat, that Premier Li Keqiang was stretching the truth in claiming “important progress” for China’s signature foreign policy.

“I think this evaluation may be a bit excessive,” Ye told the press. “We have achieved some results and some fast developments, but it also has problems.”

Some of these difficulties have smacked of the kind of imperial overreach that the plan’s opponents have always predicted. But the critics may have declared its demise a little too quickly, with signs of a comeback emerging from Italy, whose government is showing interest in Belt and Road infrastructure deals.

The news wasn’t welcome in Washington while the European Union is also uneasy, because it wants a more unified approach in responding to Chinese investment.

Yet the support comes at an opportune time for Xi Jinping, China’s leader, who is visiting Italy this week, and who will soon host the BRI’s second international summit in another bid to get the policy back on track.

What’s the background to Xi’s arrival in Italy?

Suggestions that Rome is ready to endorse the Belt and Road Initiative shouldn’t have come as a complete surprise, as the Italian government has been talking about sealing some kind of deal with the Chinese since last summer.

Michele Geraci, deputy secretary in the ministry of economic development, then confirmed at the beginning of March that there was a “good probability” of a memorandum of understanding (MoU) being signed.

The reaction from Washington was immediate, with warnings from the National Security Council that Rome was risking its reputation. “Endorsing BRI lends legitimacy to China’s predatory approach to investment and will bring no benefits to the Italian people,” it predicted.

The Chinese hit back that the American position was “laughable”, with Foreign Minister Wang Yi calling on the Italians to show their independence by signing a deal.

Giuseppe Conte, the Italian prime minister, has tried to reassure his traditional partners, telling parliament that a deal with the Chinese “does not remotely put into doubt our euro-Atlantic alliance”, but there were no indications that the Italians was backtracking on their interest in the BRI.

In fact, the mood looked more than accommodative as Xi arrived in Italy, with forecasts in the media that the Chinese were interested in partnering with more than 20 domestic companies including the gas pipeline operator Snam, the energy giant Eni, the shipbuilder Fincantieri and a number of the Italian banks. “Practically the entire system of the country is rushing to strike deals with China,” remarked Corriere della Sera, a local newspaper.

Why is it significant that Rome wants to join the BRI?

Other EU nations have already signed Belt and Road agreements, including the Czech Republic, Hungary, Greece, Poland and Portugal. But Theresa May frustrated China when the British prime minister refused to sign a written endorsement of the BRI when she visited Beijing last year (see WiC397). That means Italy would be the largest European economy yet and the first of the G7 powers to do so, validating the BRI in an unprecedented way as far as the Chinese are concerned.

Italy’s plan of action is still contentious at home, however, with differences of opinion between the ministry of economic development, which wants more investment from the Chinese, and the foreign affairs team, which favours a more cautious approach.

The leadership is split as well, with Matteo Salvini from the right-wing Lega Nord, who serves as Italy’s deputy prime minister, also calling for caution. He has been warning against “allowing the penetration in Italy of foreign powers” and demanding that foreign investment should be reviewed “not once but 50 times.” Luigi Di Maio, who leads the Five Star Movement in the coalition government and serves as the second deputy prime minister, as well as head of the economic development ministry, is more welcoming to Chinese investment, and so is Conte who wants to find ways to finance new policies such as a basic wage for the poor.

That has been helping the pro-China grouping to get the upper hand, led by the economic ministry’s Geraci – who spent a decade in China earlier in his career and who has been pushing hardest for a closer relationship

Where is this likely to have an impact first?

The disagreements within the Italian administration mean that the pro-China stance may not last for long. After all, this is the fifth government in Italy since Xi Jinping took power. However, the initial focus for investment is likely to be transport hubs like the port of Trieste on the Adriatic. There the Italians are hoping to replicate the success of Piraeus in Greece, which Chinese maritime giant Cosco has upgraded into a major transshipment point for the Mediterranean.

Proponents of the plan are hoping for €1 billion ($1.14 billion) in improvements, plus a newly opened freight railway that carries goods into northern Europe, as well as an improved network out to the east.

What’s also important is the way that the Italians are making the case for the investment. Opponents of the BRI have complained that projects like the port in Trieste are designed to make it easier for Chinese exporters to reach European markets. But Rome’s senior politicians are describing them more as a way of getting Italy’s goods to China. “Let it be clear that we are looking at the Silk Road towards China for our exports, it is not to strike a political deal with China but only to help our companies,” Di Maio, the second deputy prime minister, insisted.

That aligns perfectly with Belt and Road’s ‘win-win’ rhetoric about a two-way flow of goods and services, and not just a supercharging of Chinese exports.

Isn’t the EU trying to block Chinese investment in Europe?

It’s not just the Americans who are suspicious about Belt and Road’s motives. The EU also has reservations and it wants to take a tougher line with Chinese investment in general. In fact the European Commission has just published a broader set of recommendations that describes China as an “economic competitor” and “systemic rival”. It didn’t go down well in Beijing, and Lu Kang, the spokesman for the foreign ministry, was soon back in action, asking the Europeans to behave in an “objective, reasonable and unbiased way”.

Nonetheless the continent’s political leaders discussed a sterner line at a meeting of the European Council this week and France and Germany are known to be pushing for an agreement that blocks Chinese companies from bidding for business in the EU’s €2.4 trillion a year public procurement market.

Their frustration is that Europe’s top firms have been barred from similar opportunities in China’s domestic markets, although previous attempts to agree on a strategy of reciprocity have failed in the face of opposition from countries such as Britain and Sweden.

Italy’s government is yet to confirm whether it will back the proposals despite the European Commission’s argument that the Europeans will get better terms from the Chinese if they stick together. Instead Rome seems to be prioritising a bilateral deal with Beijing, although the Italian prime minister is trying to argue that this won’t be disruptive to unity because the terms will be “fully in line with the strategy of the EU”.

The EU will need convincing that this isn’t more of a case of divide and rule from the Chinese. Of course, it also highlights the key challenge for the EU in finding a common position that its member states will respect.

For instance, countries with innovative manufacturing sectors are going to have different concerns about reviewing investment than nations that depend more on sectors like tourism. There is a significant ‘north versus south’ split as well, reflecting the fiscal positions of the member states. Years of austerity have made countries like Greece and Portugal more desperate for Chinese capital and events in Rome suggest that Italy could be joining the same camp.

The EU’s suspicions about Chinese investment are likely to linger?

Following his trip to Italy, Xi Jinping will also make state visits to Monaco and France. All eyes will be on if the Chinese leader could inject new impetus into China-EU relations. And the debate about an investment deal will also continue at the annual EU-China summit on April 9, which will be co-chaired by Li Keqiang.

Next month’s summit comes at a time when European officials are already suspicious of China’s overtures towards members of the 16+1 forum of central and eastern European nations, which includes 11 of the EU’s member states. Beijing sees the group, which was established seven years ago, as a bridgehead to more prosperous markets further west. Investment there also helps the Chinese to make their presence felt on the EU’s fringes and to forge political relationships with nations that might eventually become members of the bloc.

In response the EU has put together a ‘connectivity strategy’ that provides loans with ‘rules-based’ standards, in what Federica Mogherini, the bloc’s diplomatic chief, has talked about as doing business with countries “interested in looking at the European way”.

Whatever their ambitions, the Europeans do not appear to have the financial firepower to match China’s efforts and they aren’t willing to back the same range of projects. Cases in point: the new highway being built with Chinese loans in Montenegro, which is being blamed for hiking its national debt to unsustainable levels; and the new railway linking Hungary with Serbia, which is another of the projects in the spotlight for its opaque bidding process.

Earlier this month, Reuters also reported that China’s Touchstone Capital has just signed a provisional deal on another key BRI project. The state-backed private capital group will help fund a $17 billion railway tunnel linking Helsinki with Estonia’s capital Tallinn and the planned 60-mile route could become the world’s longest undersea railway.

Recipients of similar loans in the Balkans say that they come with fewer strings than financial support from Brussels, and that deals can be struck in much shorter periods. Yet there are a signs of disillusionment from some of the 16+1 nations, the South China Morning Post is reporting, that the investment from China hasn’t been as beneficial for growth as they hoped.

What has been growing are some of their trade deficits with the Chinese, including that of Poland, one of the key nations in the group, which saw a tripling of its deficit last year on six years earlier.

These frustrations came to the fore in comments last year from the Polish consul general in Guangzhou, who said that BRI’s new railways were clogging up with shipments of Chinese goods but that trains were largely empty on their return journey.

Beijing’s response is that European companies need to do more to win over Chinese consumers. But opponents of the BRI will read it differently, saying there are lessons for countries like Italy about the real rationale for China’s investment.

But is BRI getting back on track, as far as Beijing is concerned?

Problems with the BRI were first reported in Sri Lanka four years ago (see WiC278) and the plan has run into trouble with governments from Myanmar, the Maldives, Pakistan and Malaysia as well. But there are signs that Beijing is turning back some of the tide of bad news that had threatened to engulf the BRI.

Allegations of ‘debt-trap diplomacy’ are being countered more confidently, including further denials this month that China is suffocating Pakistan with loans. Islamabad ran up most of its debts long before Belt and Road was even imagined, the vice-minister of commerce Qian Kemin argued, calculating that “only around 10%” of its loans could be attributed to the Chinese.

Wang Yi, the foreign minister, had a similar message at the Two Sessions meetings, promising to push forward with BRI despite the doubts of some of its opponents. It was “absolutely not a debt trap”, he insisted, comparing it instead to an “economic pie” that would be sliced up for the benefit of all the participants.

There are glimpses of a change of mood in Malaysia as well, where the government had said it would kibosh three Beijing-backed projects, including a $20 billion railway. After voicing hostility to Chinese investment for much of his initial return to office (see WiC417), Mahathir Mohamad is now sounding more emollient, saying that he prefers the Chinese to the Americans because “currently the US is very unpredictable as to the things they do”. Malaysians should “accept that China is close to us” and that “at this moment, economically, we would prefer China,” the veteran prime minister acknowledged, getting back into negotiating mode over the future of half-finished projects like the East Coast Rail Link, which seemed dead and buried just a few weeks ago.

This weekend the focus is on Rome, however, with a formal deal expected tomorrow. Michele Geraci, the architect of the BRI accord, celebrated it in an opinion piece in the Financial Times today, defending Italy’s right to do business with the Chinese.

“I hope President Xi’s visit will further strengthen the ties between Italy and China: two countries that, since Marco Polo’s time, have a long-lasting friendly commercial relationship, built and developed along the Silk Road,” he added, looking to history for inspiration.

He even insisted “the Italy-China MoU could be a template for other EU countries” as it “contains language and concepts that bring the BRI closer to EU best practice on issues of climate change, transparency and making sure the playing field is level”.

Should Italy sign up for BRI membership this weekend attention will next turn to the Belt and Road Forum in Beijing in late April where the Chinese will want to maintain the momentum of the last few weeks.

Mahathir is promising to show up in Beijing with an open mind, ready to hear what his hosts have to say, for instance, and Conte is likely to be there too, discussing what he describes as “an opportunity for Italy and for Europe”.

 

 

Keeping track, Jan 28, 2019: The Italian government held off pressure from Washington and Brussels to ink an agreement with Xi Jinping promising cooperation with China on his signature Belt and Road Initiative on Saturday (see our Talking Point in WiC445).

The arrangements included two port management deals between engineering giant China Communications Construction and the ports of Trieste in the Adriatic, and Genoa, Italy’s largest seaport.

The Chinese media was delighted with the news, reporting it to be a major diplomatic breakthrough. But it has done little to resolve tensions in the coalition government between the anti-establishment Five Star Movement and its right-wing partner, the Northern League.

Deputy prime minister Luigi Di Maio (from Five Star) celebrated Xi Jinping’s visit and the signing of agreements worth €2.5 billion($2.8 billion). Michele Geraci, the pro-China expert that pushed hardest for the memorandum of understanding on the BRI, was similarly enthusiastic, borrowing one of Beijing’s favourite phrases to proclaim it as a “win-win for Italy, the rest of Europe and China”.

But Matteo Salvini, the second deputy prime minister and the leader of the League, wasn’t so pleased. He didn’t turn up at the signing ceremony and talked instead about the limits to China’s free-market instincts. “Don’t tell me that China is a country where the free market prevails, where the state doesn’t interfere in the economy, in the legal system, in information,” he warned.

Italy’s leading partners in the European Union were none too impressed with Rome’s decision either, led by French leader Emmanuel Macron, who said that the “time of European naivety” on China was over. “For many years we had an uncoordinated approach, and China took advantage of our divisions,” Macron said, calling for stricter rules on Chinese investment.

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