3. Governing the Belt and Road
Those who insist on seeing the BRI in geostrategic terms may acknowledge these economic motivations, yet still claim that China is using ‘economic statecraft’ to pursue strategic ends. If ‘strategy’ is understood to mean a specification of the goals to be achieved, combined with a set of tactics describing how to reach those goals, clear directions for specific actors, and appropriate resource commitments, then China’s BRI does not qualify (Jones and Zeng, 2019). In reality, leaders and central agencies attempt to shape the overall direction of the BRI through (often vague) policy statements and broad commitments to particular countries or regions, but the institutional fragmentation of China’s development financing regime and its recipient-driven nature means that projects emerge in a piecemeal, non-strategic and bilateral manner.
China’s fragmented development financing regime
From the 1950s to the 1970s, Chinese aid served strategic purposes, funding sympathetic movements and governments in other countries. Since the 1980s, Chinese development financing has been explicitly reconfigured to support China’s own economic development. Accordingly, the vast bulk of development financing now comprises export credits and loans that effectively subsidize SOEs’ global expansion through tied ‘aid’ projects (Dreher et al., 2016). Hence, the China Development Bank (CDB) and the Export-Import Bank of China (EXIM) are China’s main ‘development’ financers, ahead of the far more widely discussed Asian Infrastructure Investment Bank (AIIB) (Hameiri and Jones, 2018).
Since the 1980s, Chinese development financing has been explicitly reconfigured to support China’s own economic development.
Officially, China’s development financing system works as described in the first column of Table 1. However, as the second column shows, there are numerous flaws in this system. Moreover, the formal process is often bypassed through ad hoc arrangements, as the case studies in this paper illustrate. Importantly, the process is dominated by economic agencies, not diplomatic, political or military ones – reflecting its orientation towards supporting SOEs’ overseas expansion, not towards geostrategic objectives. Moreover, the process is recipient-led and typically begins with requests from foreign governments. These are often initiated in the first place by SOEs prospecting for overseas business, who lobby foreign governments to seek funding for projects in the hope of winning related contracts. Accordingly, projects emerge in a ‘bottom-up’, piecemeal manner, evaluated on a case-by-case basis, not according to a top-down strategic masterplan.
Table 1: China’s development financing regime
|
Formal process |
Issues and problems |
|---|---|
|
1. Would-be recipient government applies to Chinese embassy’s economic office, staffed by MOFCOM officials. |
|
|
2. Request sent to MOFCOM, which discusses it with more than 20 other agencies. MOFCOM and NDRC must approve projects over $100–$300 million, depending on sector. |
|
|
3. Financial support is negotiated, typically with CDB or EXIM. The Ministry of Finance must agree to cover any gap between commercial and concessional loan rates. |
|
|
4. The project is awarded to the SOE and contracts are finalized. Chinese financiers dispense money directly to the SOE. Work commences. |
|
|
5. The SOE is regulated by MOFCOM, SASAC, the policy banks, functional ministries and industry associations. |
|
Source: Compiled by the authors.
Overall guidance from the government exists, but operates loosely, steering the system towards broad objectives rather than specifying detailed outcomes (Jones, 2019). Chinese leaders may announce spending initiatives, such as the commitment of $2 billion in assistance to the Pacific Islands in 2013, the pledging of a $60 billion package of grants, loans and export credits to Africa in late 2015, or the BRI itself. However, detailed, concrete plans to implement such initiatives are always made by other agencies (Jones and Zeng, 2019). Similarly, top leaders’ desire to strengthen bilateral relations with a particular country may encourage agencies to support projects there, easing permissions and funding, but specific projects are still determined on a case-by-case basis and bilaterally. Even where top leaders support specific projects, typically at foreign counterparts’ request, policy banks and SOEs may refuse or stall their participation if they cannot extract sufficient profit. For example, SOEs directed to build nuclear power plants in Romania as ‘flagship’ BRI projects have not done so, due to profitability concerns (Zhang, 2019). Similarly, a number of coal-fired plants proposed under the China–Pakistan Economic Corridor (CPEC) have been scrapped because SOEs could not secure their desired margins (Rafiq, 2017: pp. 17–19).
This highlights the fact that the SOEs – the key agencies involved in implementing (and sometimes initiating) Chinese development projects – are quasi-autonomous, profit-seeking firms, not simply instruments of economic statecraft (Jones and Zou, 2017). Theoretically, President Xi could order an SOE to undertake a particular project, but there is scant evidence of this actually happening. The agency that oversees SOEs, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), is primarily concerned with safeguarding and maximizing the value of state assets. Decisions on how to do that are delegated to SOEs themselves and, although SOE leaders are CPC appointees, their performance is primarily evaluated against economic targets. Consequently, SOEs are mainly profit-seeking entities; their overseas projects predominantly seek to expand their market share, secure future revenue streams, and help them climb the value-added ladder. SOEs thus resist unprofitable projects while harnessing national frameworks to subsidize others. CDB and EXIM Bank are also profit-oriented, explaining why Chinese loans are typically costlier than those from traditional development banks.
Finally, and crucially, this loose system of governance, and SOEs’ own inexperience in global markets, have facilitated many poorly conceived overseas projects. In 2006, only half of Chinese overseas investments were profit-making (Zhang, 2010: p. 161). By 2014, Chinese enterprises’ $6.4 trillion of overseas assets were still yielding a net loss (Lu et al., 2016: pp. 198–9). For example, surplus capacity and capital spurred Chinese enterprises to partner with Southeast Asian governments to establish many industrial parks after 2000, but they remain underutilized, loss-making, and dependent on Chinese loans to survive (Song et al., 2018). Thus, irrational investment and surplus capacity at the domestic level are often replicated internationally, creating ‘white elephants’.
The recipient side
China’s development financing system has always been recipient-driven, with projects being formally initiated through requests from foreign governments. Beijing frequently emphasizes this to distinguish Chinese development assistance from that provided by traditional donors. Accordingly, we must consider recipients’ agency in shaping the BRI, which is neglected – or implicitly denied – in simplistic accounts of debt-trap diplomacy.
Even if China had a global connectivity ‘master plan’, specifying all the projects it wishes to build to advance its geopolitical grand strategy, it could not force other nations to accept projects on their territory. Recipients must agree to allow Chinese SOEs to undertake projects, secure their operations, and agree the loans financing their work. Naturally, recipients will only support projects that serve their own needs and interests. China explicitly acknowledges this, emphasizing that the BRI should develop through bilateral dialogue, so as to ‘integrate’ Chinese business interests into the ‘development strategies’ of recipient countries (NDRC, MFA and MOFCOM, 2015: Preface). For this reason alone, the BRI simply cannot unfold according to a unilateral Chinese strategy. It can only develop gradually, through bilateral negotiations with over 130 partners; it is co-created through countless, fragmented interactions. If a secret blueprint existed, it would have to be revised constantly to reflect these negotiations. Accordingly, there is no blueprint, nor even an official map of the BRI; indeed, Beijing banned unofficial maps in 2017 (Narins and Agnew, 2019).
Other governments’ interest in participating in the BRI may be shaped by need, greed, or some combination thereof. Developing countries urgently require infrastructure development to generate economic growth and improve living standards, which, in turn, ruling elites often need to ensure in order to avoid social unrest and maintain domestic legitimacy. The World Bank estimates that $97 trillion of infrastructure investment is needed worldwide by 2040, with a projected shortfall of $18 trillion (Heathcote, 2017). China’s BRI therefore corresponds to a genuine need – one neglected by Western and multilateral development agencies for decades, in favour of ‘good governance’ programmes.
However, infrastructure projects also create opportunities to cultivate political support, feed patronage networks, and obtain financial inducements (kickbacks). Extensive research demonstrates that ruling elites frequently direct development spending and infrastructure projects towards their own ethnic or geographic base (see Burgess et al., 2012; Barthel et al., 2013; Do et al., 2016). Research on Chinese projects shows they are vulnerable to regional favouritism and can easily be exploited for political gain (Bräutigam, 2009; Mthembu-Salter, 2012; Dreher et al., 2014). Construction is a notoriously corrupt sector, with an estimated 10–30 per cent of project costs being misappropriated annually worldwide (Matthews, 2016). Ruling elites can insert their associates into megaprojects as subcontractors to maintain their loyalty and potentially extract kickbacks and bribes. Our case studies on Sri Lanka and Malaysia demonstrate both dynamics.
This need and greed, and associated political contestation, very often overwhelm rational development planning, generating projects of dubious economic viability with substantial negative political, social and environmental implications. Many developing countries have limited capacity to assess projects’ viability or ensure their appropriate governance, and bureaucratic niceties are often overridden by powerful interests. For example, Pakistani interest groups’ wrangling has repeatedly changed the route and scope of the CPEC, with many additional projects being added on, some of which appear commercially unviable (Rafiq, 2017: pp. 15–21). Plans for the development of facilities at the Pakistani port of Gwadar, for example, seem likely to generate surplus capacity, given stiff competition from the port at Karachi, also in Pakistan, and the Indian-backed Chabahar port in Iran (Rafiq, 2017: pp. 23–32).
Many developing countries have limited capacity to assess projects’ viability or ensure their appropriate governance, and bureaucratic niceties are often overridden by powerful interests.
Thus, rather than debt-trap diplomacy, bumps on the Belt and Road are typically caused by the intersection between powerful interests and associated governance shortcomings on the Chinese and recipient sides. Chinese SOEs’ desperate need for contracts, and weak governance of development financing, coupled with poor planning or venal interests in recipient countries, are generating badly conceived projects that replicate China’s surplus capacity crisis. For example, the 12,000-km China–Europe railway is reported to have up to 45 per cent surplus capacity on the return journey, rendering it loss-making without Chinese government subsidies of $1,000–$7,000 per container (Hillman, 2018). A $3.2 billion, Chinese-backed railway line in Kenya is also reportedly loss-making, while the $4.5 billion Djibouti–Addis Ababa line has encountered so many financial and operational difficulties that Sinosure, which insures Chinese outbound investment, has written-off $1 billion in related losses, its chief economist describing the due diligence process on the project as ‘downright inadequate’ (Pilling and Feng, 2018). The $62 billion CPEC has also been widely described as a ‘corridor to nowhere’, with fewer than a third of projects having been completed to date. At Gwadar, for example, the port is reportedly barely used; construction of an airport (which would have been Pakistan’s largest) has still not begun after six years of delays; and an industrial park sits empty (Prasso, 2020). Understandably, some recipients of Chinese development financing are experiencing cold feet. Tanzania has cancelled a $10 billion port project, Nepal, the construction of two hydropower dams, and Sierra Leone, a project to build a new airport at Mamamah, outside the capital Freetown; Kenya has suspended a $2.6 billion highway; and Myanmar has downsized the Kyaukpyu port project from 10 berths to two, cutting the cost of construction from $7.3 billion to $1.3 billion.
Chinese elites increasingly recognize these problems. In August 2017, Beijing tightened restrictions on outbound investment because, as the governor of China’s central bank complained, some SOEs’ investments ‘do not meet our industrial policy requirements […] they are not of great benefit to China and have led to complaints abroad’ (Feng, 2017). Real estate and entertainment investments, for example, had to be banned completely, amid fears that wealthy individuals were exploiting the BRI to facilitate offshore capital flight. In 2018, President Xi conceded that the BRI had operated only within loosely sketched guidelines and needed a tighter focus, better-quality projects, and a greater degree of party oversight (Zheng, 2018). Xi also established the China International Development Cooperation Agency (CIDCA) in March 2018, to improve inter-agency coordination. However, CIDCA’s ambit is limited to ‘aid’ projects, excluding the far wider development financing field. Moreover, it is only a coordinating body with around 100 personnel, led by an ex-NDRC official, suggesting a continued commercial orientation. Its impact is still unclear, with experts close to the process bemoaning a ‘half-done revolution’ (interviews, May 2018). Chinese officials have also intensified ‘soft power’ charm offensives to address increasing societal resistance to the BRI in partner countries (Rolland, 2019; Zou and Jones, 2019).
Having outlined the pathologies of Chinese development financing, which clearly vitiate the strategic use of economic statecraft and debt-trap diplomacy, we can now examine how these play out in two key BRI partner countries: Sri Lanka and Malaysia.