FocusOSA #17: China: Foreign Affairs

Filling the gap left by the West: Chinese infrastructure investments overseas

Beijing’s economic diplomacy continues to focus on acquiring infrastructure, stakes in logistics and shipping companies and expanding ports overseas. In this regard Chinese private and state-owned enterprises operate under the umbrella of the Belt and Road not only because they are required to execute a top-down imposed plan. On the contrary, in this way they try to obtain central authorities’ financial support for their projects and be in line with the priorities of the economic policy of the state. The Belt and Road is such a broad and neutral concept that it may include practically every entity of the local administration (provinces, cities, districts), a state-owned enterprise or a private company in order to obtain institutional and capital support of the Chinese state. Xi Jinping’s flagship concept, introduced nearly five years ago, has proved particularly beneficial for political-economic entities from central and western areas of the People’s Republic of China, which till the end of the 1990s had to give priority to acquisition of resources for modernization and expansion by east coast provinces. The example of the development of China-Europe Railway Express between Chengdu and Łódź, being constantly extended  by new connections, including land-sea route (ASEAN countries, Mediterranean and  Black Sea countries) is very instructive. According to foreign policy guidelines, emphasised by Xi Jinping at the 19th Congress, mutually beneficial cooperation between China and other countries is aimed at building a “community with a shared future for mankind”.

As China Daily reports, recently Chinese state-owned enterprises managed to take control over ports and terminals in Belgian Zeebruge, Spanish Valencia, Greek Pireus, Australian Darwin, Sri Lankan Hambantota and Brazilian Participacoes. In 2017 expenditure in this respect amounted to USD 20 bn (nearly twice as much in comparison to the previous year). Supporters (most of all, authorities in Colombo) of handing over the port of Hambantota to Chinese enterprises claim that it stimulates economic development and tourism. Critics warn against the threat to Sri Lanka’s sovereignty, referring to Chinese policy of tightening control over its debtors as ‚debt-trap diplomacy’. For the same reasons, in November authorities of Pakistan, one of the closest allies of China,  withdrew from the construction of Diamer-Bhasha dam, to be built for USD 14 bn within the framework of China-Pakistan Economic Corridor,  since the Chinese side demanded ownership and management rights. The authorities of Kenya face a similar dilemma as the country’s financial obligations to Beijing doubled in years 2014-2017, from USD 2.2 bn to USD 4 bn. In order to service its debt Kenya will give Chinese authorities, Exim Bank and China Development Bank USD 1.45 bn in next four years. In order to finance the construction of SGR Mombasa-Nairobi railway and its Navasha-Malaba extension, Chinese institutions will lend the total of USD 10 bn, which will increase Beijing’s pressure on the government in Nairobi and as a result enable the Middle Kingdom to obtain economic and political concessions. The Maldives, which signed a free trade agreement with the People’s Republic of China in December, are another example of dependence on Chinese loans. Although the present government of the insular state emphasises economic rationale underlying the agreement, the former president Mohamed Nasheed points to political reasons since 70% of the external debt is in China’s hands and debt service exceeds 20% of the state’s annual budget. In Europe authorities of Montenegro may face a similar dilemma since in 2014 they signed an agreement for the construction of Bar-Boljare motorway for 809 m euros, 689 m of which is financed by Chinese Exim-Bank. At that time the cost of the project accounted for nearly one quarter of Montenegro’s GDP.

Acquiring assets by Chinese partnerships when debtors are not in a position to meet their payment obligations is understandable although it evokes neocolonial associations and may be considered controversial.  China simply replaces the United States on the map of global development offer. Nevertheless, one should differentiate between financial resources granted by China as non-refundable assistance, and those granted as loans (with lower interest rate than commercial loans, though) which debtors will have to pay or grant the creditor economic and political concessions. In this way, twenty-four hours after Donald Trump’s New Year tweet, accusing Pakistan of supporting terrorists and ingratitude towards the USA for   granting USD 33 bn assistance in the last 15 years, the authorities in Islamabad sent a clear signal to Beijing: trade with People’s Republic of China will be conducted in yuan in place of American dollar. Tightening relations between Pakistan and China is the result of loans and grants lavished by Beijing, exceeding Washington’s financial involvement six-fold. Therefore, despite Islamabad’s withdrawal from Diamer-Basha project, plans of building a Chinese military base near the port in Gwadar which is a key element of economic-political corridor, connecting Kashgar with the Arabian Sea (the Indian Ocean), financed by the People’s Republic of China, should not come as a surprise. Consequently, Pakistan would become second, after Djibouti, overseas foothold for the PLA Navy.

China takes advantage of the historic moment when its efforts to play a more significant role in the world coincide with the USA limiting its foreign activity in accordance with “America First” policy. Washington’s withdrawal from global obligations (climate agreement, the TPP, radical cutback of federal budget resources for development assistance, financed by the World Bank, among others) has undermined the USA’s credibility among allies, creating a gap which in a natural way is filled by Beijing, which at the same time promotes – as in the case of next year’s elections in Cambodia – its own economic and political solutions.