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Signposts for the Silk Road

­­­China’s focus on Belt and Road seems as determined today as it was three years ago, when the policy was launched formally in Kazakhstan.

In October 2016, Xi Jinping turned up in Bangladesh for the first visit by a Chinese head of state for 30 years. His trip followed a similar routine to that seen in previous rounds of Belt and Road diplomacy, with the announcement of billions of dollars of loans pledged for new infrastructure including power stations, a port expansion, roads and railways.

There was no doubt that the funding was being offered as part of Beijing’s grand policy gambit. Xi made the point specifically, describing Bangladesh as “an indispensable partner for China to advance the Belt and Road initiative”.

Backers of Belt and Road view these kinds of commitments as a vivid demonstration of how China is rethinking its relationship with the rest of the world and a positive sign that it will use its commercial clout to foster global growth.

$24 billion

Chinese loan commitments made during Xi Jinping’s visit to Dhaka in October, according to Bangladesh’s finance ministry

In this reading, the policy is a masterstroke, pulling a host of countries more tightly into China’s economic orbit and underpinning its push for hard and soft power around the world. Rooted in finding new markets for Chinese goods, the plan is also showcasing the capabilities of the country’s leading construction firms, which are taking their expertise in transport and energy on a global roadshow.

All of this will be funded by a new ecosystem of investment and lending, anchored around Chinese capital, and configured in China’s currency.

Others see the policy rather differently, however. For them, Belt and Road is more about desperation than design, and it signals that the Chinese growth model – deployed for more than a generation – has reached its natural limits.

Knowing this, China’s leaders have ordered their state-owned firms into new markets and see it as a way of redirecting surpluses in industrial sectors crippled by overcapacity, like steel and cement.

For the naysayers these efforts are doomed to disaster, just as the Japanese failed with a slimmed down version of Belt and Road when they were suffering from similar challenges in the 1990s. China has too much surplus steel and cement for Belt and Road to make much difference, and too few of its companies have track records in the precarious markets along the route, where conditions will be very different to their domestic experience.

 

Risks and returns

Which of these diverging fates is more likely for the Belt and Road plan? It should be no great surprise that there will be winners and losers in an undertaking of such magnitude. Some projects will come to fruition, and others will fail. Some investors will profit fantastically; others will lose their shirts. For many parts of the world, Belt and Road looks like a once-in-a-generation opportunity. But there are valid reasons why huge investment in places like Pakistan is unprecedented, with warnings that Chinese firms are venturing where others fear to tread and will get burned.

Even Mother Nature has been conspiring against Belt and Road, it seems, with water shortages and soil erosion in Pakistan blamed for slowing construction and stirring tensions with local communities.

Astana, capital of Kazakhstan, a key Belt and Road beneficiary

Astana, capital of Kazakhstan, a key Belt and Road beneficiary

Nor has the reception always been rapturous in parts of the world where Belt and Road investment is already buoying the local economy. Speculation about changes to land laws has prompted protests in Kazakhstan on fears that the Chinese will swallow up local farmland, and there wasn’t much gratitude in Greece either, where dockworkers campaigned fiercely against Cosco’s investment in the port of Piraeus.

Even if the plan does proceed effectively, rival powers in some of the Belt and Road’s key arenas are treating it with suspicion, seeing it as more of a geopolitical land grab. Other beneficiaries in places like Bangladesh, Myanmar, Thailand and Indonesia have been bargaining hard for better terms from the Chinese and batting their eyes at alternative offers, especially from Japan.

However, political tensions or poor performance for some of the power plants, railways and ports shouldn’t preclude the possibility of net gains for the Chinese economy (and those of other countries) as the Belt and Road bandwagon rolls on. And while the returns on these investments will be subject to closer scrutiny as they move into operation, there has already been progress on some of the policy priorities in the shorter term. To name a few: the early achievements in putting together the AIIB, surprising some of the opponents of the bank; the tapping of Turkmenistan’s natural gas in meeting some of China’s goals for sourcing cleaner fuel and diversifying its energy supply; and the construction of railways, ports and pipelines in Southeast Asia, Sri Lanka and Africa to improve transport links, despite initial uncertainty around some of the headline deals.

 

A plan for all

Perhaps the key point: if Belt and Road is going to prosper, the benefits have to be felt by more than the Chinese.

In the same way that the plan means different things to its participants from China, its importance is going to vary in the countries that it touches. While investment has been welcomed in parts of Europe, particularly in transport and logistics, the larger countries there see the policy as a part of their wider relationship with China, rather than its driving force. But for other countries – particularly smaller, lesser-developed ones – Belt and Road is more of a defining feature for their bilateral ties with the Chinese, and a crucial trigger for trade and investment.

For Central Asian states like Turkmenistan and Uzbekistan, their role is mostly as a provider of a rising share of China’s energy. Kazakhstan is also serving as a transit corridor for the pipelines that transport the region’s gas and oil eastwards, and it is providing a transportation corridor for the rail routes linking the manufacturing cities of western and central China with European markets.

Sri Lanka wants to take on similar strategic significance for shipping crisscrossing the Indian Ocean and another hotspot is tiny Djibouti at the southern entrance to the Red Sea, which looks set for a more influential role on the route to the Suez Canal.

Both these countries hope that Belt and Road investment will be transformational, embedding them on the trading map. The spending on Djibouti’s port has been coupled to construction of a new Chinese railway into the interior, improving access to the landlocked Ethiopian market. Sri Lanka is in hock for billions of dollars to China, but has new trade zones and industrial parks.

Pakistan – the flag bearer for Belt and Road’s corridor-style investment – is counting on Chinese capital for a fundamental overhaul of its power grid. The Chinese also want the corridor to serve as a conduit for trade between South Asia and their western provinces, with Gwadar establishing itself as an entrepôt for more of China’s oil supply.

It will be years before all of these projects reach maturity. In the meantime, the challenge is how to track what is going on and whether the investment is going to be worthwhile. So what should we look for as leading indicators?

Uzbekistan: home to Central Asia’s longest railway tunnel, built by the Chinese

Uzbekistan: home to Central Asia’s longest railway tunnel, built by the Chinese

For Belt and Road financing, the performance of the first phase of loans from the AIIB and some of the early investments from the Silk Road Fund are going to be crucial in generating confidence among a wider range of investors.

In order to make it quicker and cheaper for Chinese products to reach European consumers, Belt and Road policymakers will be pushing for more deals like Cosco’s takeover of the port of Piraeus, where it is establishing a bridgehead for exports into southern Europe.

Chinese investment in railway lines will also pick up pace, with work on a new high-speed link between Hungary and Serbia already underway and construction on the Jakarta-Bandung high-speed railway between Jakarta and Bandung in Indonesia ongoing.

Work on the pan-Asia railway network envisaged for Laos, Thailand, Malaysia and Singapore has been mired in national-level negotiations for some time, although some of the projects are likely to proceed on a piecemeal basis rather than as part of a regional blueprint.

For the growth of freight traffic on the long-distance Silk Road railway routes, there will be more pilot journeys from Chinese cities to new destinations in Europe and the Middle East, and more frequency for the trains travelling the more established routes into the key European hubs.

Keep an eye too on nodal points like Khorgos on the China-Kazakhstan border and Manzhouli on the fringes of Inner Mongolia with Russia. Local governments on both sides of the frontier have high hopes for ‘dry ports’, with industrial parks springing up at the strategic spot the railway gauges changeover.

The critics counter that the realities won’t match the rhetoric and that plans like these are too ambitious for bleak parts of the world that are far away from major population centres.

But here, it might be worth going back to history. If the merchants of the past had taken similar views, the Silk Road may never have existed, nor the centuries of Chinese trade with the countries along its path.


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