INTERNATIONAL  INSTITUTE FOR SOCIAL AND ECONOMIC STUDIES 
Back to the list

BRI. China’s Real Intentions

01.05/2019

Almost two years after China hosted a well-attended and hugely touted conference to promote its One Belt, One Road (OBOR) initiative. it held the second summit last week. It is apparent that the grand design outlined at the first summit hasn’t quite shaped up as designed. Questions were asked about its real intentions, economic benefits and usurious tendencies. 


The Chinese have begun backtracking a bit. Already Malaysia has renegotiated the terms of the rail project with a much-reduced outlay, lower interest rates and increased local participation. It may be mentioned that the original deal was signed by paying the disgraced former Malaysian PM, Najib Razak, a sizeable bribe. Even Pakistan has begun questioning the terms of CPEC after deriving lessons from what happened to Srilanka when the birds came home to roost at Hambantota. 

The second edition of Belt and Road Initiative Summit got under way in Beijing last Thursday, China under this overhang. It seems India’s opposition to it might have also been addressed somewhat when the BRI map showing routes rather curiously shows entire Jammu & Kashmir and Arunachal Pradesh as part of India? Is this a signal or just artistic license? The map even portrayed India as part of BRI despite India having boycotted the summit for the second time. 

Typically, many Indian commentators have started seeing meaning in it. Maps be damned, we can see meaning in BRI only when the norms and terms conform to accepted international norms such as those of lending agencies like the World Bank. 

The BRI is seen China’s big play to seek world domination. Both the fears and the optimism are unfounded. The BRI is a project meant to very simply get out Chinese reserves invested in western banks into investments where it will fetch a higher rate of return; and to take up the slack from the huge over capacity problem that plagues the Chinese economy. 

Speaking at the first BRI (then OBOR) conference, President Xi Jinping announced that Beijing would advance 380 billion Yuan or $55 billion to support it. This was a far cry from the huge figures, sometimes as high as $750 billion to $ One trillion, bandied about. Exaggerating the size of the lollypop is an integral aspect of China’s economic diplomacy.

While economists are generally skeptical about China’s goals and intentions, strategists – mostly the garden-variety Indian military types – have endowed this project with sinister overtones. I was on a TV show when a prominent “security analyst” and the anchor raised the issue of the so-called “String of Pearls” (SOP). To them it seemed that every port or airport where a Chinese company is the contractor had a military purpose? Most of these folks have not progressed beyond Mahan and Mackinder, whose theories were fashioned in a much earlier era when coaling and oil refueling points were very critical.

The "String of Pearls" is a bogus idea. It was cooked up by consultants working for a CIA and US DOD tied company called Booz Allen Hamilton and was given much traction by some well known Indian "strategic thinkers." I was once in a conference where Admiral Dennis Blair former Chief of the US Navy and later Director of National Intelligence to President Obama was asked about it. He called it a stupid notion and said that no one who has run a large navy or held a responsible position in a navy will ever say an oceanside blockade is possible. He explicitly and loudly said to Indian strategists who harped on SOP that no navy could encircle a country with a few ports. 

The question that we need to ponder over a bit is as to how long will these "ports" survive after the outbreak of general hostilities? The IAF and IN have enough airpower at hand to sort them out, and our navy can effectively blockade hostile ports in the neighborhood. It may be noted that the IAF has operationalized an airbase in Thanjavur and will fly SU30 MKI's from there. The IN deploys MIG29K fighters as well as P-8i Poseidon maritime surveillance and attack aircraft and a formidable fleet of combat vessels. We have not been exactly sleeping or need to be overly worried. The same Sri Lanka that once hosted a Chinese Jinn class nuclear submarine ostensibly on goodwill mission last year turned away a PLAN conventional submarine wanting to pick up supplies.

Now to the economics of BRI. There is a reality most of our commentators do not see or understand. By 2013 China had accumulated foreign exchange reserves of about $ 3.5 trillion. The capital it claims it is prepared to subscribe for the NDB, AIIB and Silk Road Fund would amount to only around 7% of its total foreign exchange reserves invested in western banks. Since these China promoted institutions will be providing infrastructure lending rather than grants, the return on capital from these investments could be significantly higher than the returns China is getting from its foreign exchange reserves currently invested in low-yielding US government bonds. It’s very simple. China needs to get value for its money and also help its demand starved industries. And they have found a typically Chinese solution to it and are making a virtue of a necessity. 

Look at it from another angle. The US dollar is also steadily depreciating in the long term against other major currencies. With no interest and with depreciation factored in China’s huge reserves, accumulated by extracting surpluses in its sweat shops, are steadily shrinking in value. The question that Beijing seeks to grapple is this. One way is to put these funds to work in investment starved countries in Africa and Asia and assures themselves of returns for a long time to come. In some, the birds have come home to roost quite early. The grandiose Hambantota port project in Sri Lanka, which once had the same bunch of Indian “strategic thinkers” in a tizzy hosts no ships and doesn’t earn very much. China is now pressurizing the Sri Lankans to service the debt and is seeking to extract some more in lieu of that. Much of the Hambantota investment has already be recouped by China by way of material and labor supplied to complete the project. That’s why one prominent European commentator then called OBOR - One Belt, One Road and One Trap.

Like Sri Lanka, some of other intended beneficiaries have now begun to ask questions about the utility and intentions of OBOR. The Pakistani newspaper “Dawn” has said: “But the main thrust of the plan actually lies in agriculture, contrary to the image of CPEC as a massive industrial and transport undertaking, involving power plants and highways. The plan acquires its greatest specificity, and lays out the largest number of projects and plans for their facilitation, in agriculture.” This top Pakistani newspaper then questions the benefits that will arise from linking mostly dry and barren Xinjiang, and in particular the predominantly Turkestani Muslim Kashgar prefecture with its restive four million people to an increasingly water starved and already much troubled Pakistan? One time when a Pakistani interlocutor at a Track 2 dialog asked me what then would be the economic gains to Pakistan, I replied that they could sell tea and samosas to the traffic. 

Much is being made about the overland link between China and Europe by rail and road links. Most commentators seem to miss that the Trans-Siberian Railway line from Vladivostok to Moscow is almost a hundred years old. Its capacity can be beefed up. Yet overland freight costs will always be much more expensive than sea freight costs. Business is about cuttings costs and taking the least expensive options. No one with commonsense will prefer to shift by land what can be shipped. Others make much of the so-called Malacca dilemma. Well the Artic route is opening up and the real Malacca dilemma soon will be the rapid decrease in freighters through it. Then there is always the option of a canal for freighters across the Kra Isthmus, a project that will bring China and Japan closer to India.