China’s Belt-Road Initiative (“BRI”), costing more than 1 trillion US dollars[2], is the project of the century[1]–the creation of a new trade and investment superhighway modelled after the Silk Road of ancient times.
While being touted by China as a project that results in a positive sum game for all participants,[3] doubts have arisen over the true nature and effect of the BRI.
In particular, South Asia is the region in which the true effects of the projects are starting to see the light of day as it has taken some time for the true effects to reach maturation. As the hub where the land route and maritime route meet, South Asia acts as the nexus of different infrastructure projects–the economic corridors like the China Pakistan Economic Corridor (“CPEC”) and the Maritime Silk Road.
Such effects reveal that the Chinese narrative of economic prosperity for all who participate in the BRI does not hold true. South Asia is beginning to realize that the BRI serves to advance a Sino-centric agenda and create a new global economic order in the region, where the China is at its center.[4]
This paper utilizes South Asia as a case study to review the economic, geopolitical and security issues that underlie the initiative and further inquire how the BRI leads to China creating a hegemony in the region.
BRI’s economic rationale
China’s BRI has been widely praised as the economic plan designed to plug the existing infrastructure gap that exists within the region.[5] China states that the BRI is meant to increase connectivity, enhance trade and investment flows and stimulate investment growth in participating countries, [6] which will be financed by loans from Chinese institutions like the Asian Infrastructure Investment Bank (“AIIB”)[7] and the Silk Road Fund (“SRF”) [8] in facilitating infrastructure projects including key installations such as ports, highways, railways and power plants across participating nations.
This debt financing coupled with the lack of transparency of the bidding process, have been alleged to have created opportunities exclusive to Chinese corporations.
Understanding this argument requires a closer scrutiny into the Chinese construction industry, which has, until recently, been one of the key drivers of Chinese economic growth through the infrastructure and construction boom. However, as the infrastructure boom reached its maturity, China was hit with two problems: an oversupply of industrial materials[9] and a stagnation in its previously stellar growth rates. Naturally, China realized that it needed to look outwards for opportunities to rectify the problems in hand, and the BRI is invariably an exportation of the economic model that made China an economic success, primed and ready to fulfil this goal.
For instance, the Gwadar port, under development in Pakistan with Chinese funding do not create economic benefits for local companies, communities or even the Pakistani Government, as the corporations and the labour force involved in the project is predominantly Chinese. This effectively prevents local businesses from capturing any value from the capital inflow from China.
Similarly, Sri Lanka’s Hambantota’s port faced a similar fate. The port was constructed by the China Harbor Engineering Company[10] and was operated by a joint-venture that is 70% owned by China Merchants Port Holdings,[11].
It is clear that China seems to be exporting their model of growth overseas, but do not wish to share in the value created by such investments, but instead create Chinese enclaves in host countries of the BRI and mandate that Chinese companies, equipment, and labour are to be utilized.[12]
Accordingly, whatever value created from the investments is essentially captured by Chinese companies and repatriated back to China allowing a lions’ share appropriation of the returns on capital.
This extractive economic model is successful in this region due to the confluence of the following factors:
a. First, the lack of transparency and inability for non-Chinese companies to bid for projects;
b. Second, the lack of skills, capital needed to build, and operate such projects in host countries such as Sri Lanka and Pakistan; and
c. Third, the massive debt incurred by host countries when they receive Chinese funds which all the former to fall into a debt trap
Transparency
The lack of transparency in the very first processes of the BRI preserve China’s objectives in extractive economics. For one, bidding processes[13] for BRI projects are dominated by Chhinese companies, as information asymmetry prevents companies outside of China to participate in projects [14]
The lack of transparency also maintains the balance of power between China and the host country receiving the funds by ensuring that non-Chinese companies that may have the necessary skilled labour or capital to participate in the BRI are unable to participate.
Skills, capital and labour
A majority of the nations desiring China’s aid are economically underdeveloped, that more often that not do have the necessary skills, capital, and labour to undertake such projects on their own.
In other words, the playing ground is unlevelled in the first place, yielding an asymmetrical balance of power in favour of China, which is further reinforced by the inability of Western countries to participate in BRI[15]. Thus, countries like Sri Lanka, Pakistan, and Maldives are beholden to China without other choices.
Type of capital
Chinese investments under the BRI are not in the form of grants or equity capital, but in the form of debt capital–loans from the Chinese government.[16] In a typical agreement under the BRI, the host country receives a loan from China to undertake an infrastructure project.
Often the infrastructure project is undertaken as a joint venture between a Chinese company and a host country’s company or government.[17] Debt financing of infrastructure has proven to be problematic as often the loans balloon, either due to interest accumulated or due to ratcheting up of loans as the expenses of the project exceed the initial projections, into an unsustainable amount.[18]
At this point, the host country is unable to pay back the loan amount and to escape this, host countries enter into debt for equity swaps[19] – where host countries agree to let Chinese companies (usually state-linked) to operate the infrastructure projects under a long-term lease.
Sri Lanka’s Hambantota’s port is an instantiation of such a debt-equity swap.[20] It was proposed that the Chinese company China Merchants Port Holdings was to be provided with a 99-year lease to operate in return for said company to pay off the Sri Lanka loan to China.[21] Given that most of these companies are state-linked, providing these companies with control over key infrastructure projects may be perceived as an encroachment of host countries’ sovereignty.[22]
In addition, to the above factors, China contracts with host countries to mandate the use of Chinese labour, equipment and even impose tax exemptions for Chinese businesses. This cauterizes any economic benefit that may go to local communities or even the Government via taxes. For example, the China Pakistan Free Trade Agreement allows only Chinese businessmen to invest in the economic zones around Pakistan and also includes tax exemptions for Chinese companies.
This lends more strength to the argument that the BRI is not a positive sum game, but rather a means to create economic vassals in South Asia by creating market dependencies in these countries,[23] supporting the notion that China is seeking to establish a new economic order by hardwiring connections with other South Asian states and making itself the center of this new economic order.
However, China’s ambition to create a new economic order via the BRI does not merely stop at creating economic connections, it also takes a geopolitical dimension as well. This geopolitical dimension has been noted by India in considering China’s BRI as a ploy to redefine the regional power lines in South Asia by creating a containment policy of India.[24]
Geopolitical rationale
In order to establish a new economic order in South Asia, China must spread economic dependency in the region and in doing so, China invariably had to disrupt the sphere of influence of a regional player in South Asia: India.
However, disrupting the dominance of India is no mean feat. The BRI would have to morph into a project that has geostrategic implications that is designed to erode India’s dominance in the region.
South Asia has functioned like an island for many years[25] with low connectivity with other regions[26] and India as its anchor. The BRI is aiming to blanket South Asia with economic corridors, at the top of India and simultaneously surrounding India at its tip, with the creation of ports around the region in the strategy of encircling India.
By stimulating the economies of India’s neighbours, this creates a convergence of fortunes between India and its dependents, thus purportedly reducing the dependency that these countries have on India
China’s political influence will convert into Chinese support for nations willing to challenge India’s regional influence. In the case of Pakistan, Beijing’s mounting relationship with Islamabad, affords Pakistan the opportunity to function under a Chinese security blanket and threaten India without fear of ramifications. This is the same with Nepal, Bangladesh and Sri Lanka; countries that were once heavily dependent on India for security and trade no longer have to do so.
Thus, China’s outreach via the BRI encroaches on India’s political clout as it reduces the latter’s role in the region. Furthermore, as China is investing heavily in Pakistan’s growth, it would be inevitable that Pakistan would develop militarily, politically and economically, as such China is molding Pakistan into a counterweight to India. Thereby, possibly exacerbating the tensions that already exist due to their historical rivalry.
China is aware that in South Asia, India is the only country that can challenge its putative hegemony, and China’s plans for hegemony crucially depends on limiting India’s political clout by reducing dependence from other South Asian countries, and creating a power vacuum in the region, which China aims to occupy. This will allow China not only to create market dependencies between the countries, but also forge political ties.
Security – Encirclement of India
The building of ports at geostrategic points around the Indian Ocean raises the concern of encirclement of India. At the moment, it would seem that the South Asian ports built or being built as part of the Maritime Silk Road are purely commercial in nature, but India fears the risk that these ports may be repurposed as naval bases.
India’s fear of these dual-use facilities stems from the nature of the BRI itself. As mentioned above, debt financing and the low-absorptive capacity of the countries surrounding India make these countries more susceptible to the debt-equity swaps; similar to the case of Sri Lanka.[27] Therefore, if these ports fall under China’s control, the risk of militarization greatly increases, obfuscating India’s security calculus and thereby reducing India’s sphere of influence. [28]
The BRI allows China to consolidate its presence in the Indian Ocean, thereby reducing India’s sphere of influence. China is already capitalizing on India’s foreign policy failures with its neighbours to foster greater friendship and is using its economic power via the BRI to enhance its leverage on countries in South Asia.
Taken in totality, the CPEC and the ports around the neck of India provides China with a foothold in the western Indian Ocean where the Gwadar port is located. Gwadar port, located near the Strait of Hormuz, possesses great geostrategic value, and Chinese access and control over the Straits will grant them access to the key regional maritime trade routes and its industrial implications.[29]
For instance, India’s sources more than 60% of its oil via these Straits and may suffer from energy security concerns as a result of Chinese control. This vulnerability was fleshed out when it was discovered that Chinese warships and a submarine have surfaced in the Strait.[30]
Hence, it may be deduced that China, by gaining a foothold in the Indian Ocean, is seeking to diffuse India’s military and naval strength, while disrupting India’s energy security by gaining access and control over the trade routes that carry India’s oil supplies. Thus far, China’s efforts in South Asia have not affected India’s position and inuence, although it has successfully heightened the tensions in the region and has forced India to react to Chinese stratagems. India has proceeded to form its own version of the BRI together with Japan. [31]
It remains to be seen which project will prevail and whose influence will wane.
Conclusion
South Asia is rapidly unfolding out to reveal a tug-of-war between China and India. India has always been the dominant regional player. The BRI is not what it seems to be. This project is multilayered and its economic narrative does not tell the full story. The BRI’s economic model is wholly Sino-centric with very little positive after-effect for the host countries. Thus, its economic story falls short of its target and leaves in its wake more questions than answers.
These questions directly highlight that there are other motivations behind its play in South Asia. These motivations have premised on geopolitical concerns and security concerns. The BRI’s non-economic purpose seems to aim at getting a stronger foothold in the South Asia. The strategy in South Asia can be split into two: reducing India’s influence & raising its own influence. In reducing India’s influence, it seeks a containment policy and in doing so, it is creating a vacuum in the region that it can capitalize upon and thereby raise its own influence.
Overall, China’s ambition is to create a new global economic order and in the South Asian region, it knows that only India has the potential to be an impediment, and that a disrupting network of existing dependencies is crucial. The BRI provides such an opportunity for China.
[1] Saran, Samir. 2018. "India Sees The Belt And Road Initiative For What It Is: Evidence Of China’s Unconcealed Ambition For Hegemony | ORF". ORF. https://www.orfonline.org/research/india-sees-the-belt-and-road-initiative-for-what-it-is-evidence-of-chinas-unconcealed-ambition-for-hegemony/.
[2] Smith, Colby. (2018). “Belt and Road, or debt trap?” Financial Times. Available at https://ftalphaville.ft.com/2018/07/24/1532410200000/Belt-and-Road--or-debt-trap-/
[3] Thandi, Shinder. 2018. "Will CPEC Bring Political Stability To South Asia? | Global-E". 21Global.Ucsb.Edu. http://www.21global.ucsb.edu/global-e/may-2018/will-cpec-bring-political-stability-south-asia.
[4] Rodríguez, José Alamá. 2018. "The Belt And Road Initiative: A Geopolitical Approach". https://skemman.is/bitstream/1946/29434/1/Jos%C3%A9%20Alam%C3%A1%20Rodr%C3%ADguez.pdf.
[5]Nicolas, David. 2015. "Chinese Infrastructure In South Asia: A Realist And Liberal Perspective". Master’s thesis, Naval Postgraduate School.
[6] Panda, Ankit. 2018. "If India Won't Put Up With The Belt And Road, Why Is It The Largest Recipient Of AIIB Funds?". The Diplomat. https://thediplomat.com/2018/03/if-india-wont-put-up-with-the-belt-and-road-why-is-it-the-largest-recipient-of-aiib-funds/.
[7] Nicolas, David. 2015. "Chinese Infrastructure In South Asia: A Realist And Liberal Perspective". Master’s thesis, Naval Postgraduate School.
[8] Ibid.
[9] Jie, Yu. 2018. "China’s Belt And Road Plan Hobbled By Ironies And Mismatches | Financial Times". Ft.Com. https://www.ft.com/content/26280f16-9a53-11e8-9702-5946bae86e6d.
[10] China’s Acquisition Of Sri Lankan Hambantota Port Highlights 'Debt Trap' To Gain Influence Around World, Says Report-Firstpost". 2018. Firstpost. https://www.firstpost.com/world/chinas-acquisition-of-sri-lankan-hambantota-port-highlights-debt-trap-to-gain-influence-around-world-says-report-4599911.html.
[11] Yamada, Go, and Stefania Palma. 2018. "Is China’s Belt And Road Working? A Progress Report From Eight Countries". Nikkei Asian Review. https://asia.nikkei.com/Spotlight/Cover-Story/Is-China-s-Belt-and-Road-working-A-progress-report-from-eight-countries.
[12] Kaura, Vinay. 2018. "Understanding India’s Response To China’s Belt And Road". Atimes.Com. http://www.atimes.com/understanding-indias-response-chinas-obor/.
[13] Sweet, Rod. 2018. "EU Criticises China’s “Silk Road”, And Proposes Its Own Alternative-Trends-GCR". Globalconstructionreview.Com. http://www.globalconstructionreview.com/trends/eu-criticises-chinas-silk-road-and-proposes-its-ow/.
[14] Hurley, John, Scott Morris, and Gailyn Portelance. 2018. Examining The Debt Implications Of The Belt And Road Initiative From A Policy Perspective. Ebook. Washington DC: Center for Global Development. https://www.cgdev.org/sites/default/files/examining-debt-implications-belt-and-road-initiative-policy-perspective.pdf.
[15] Hurley, John, Scott Morris, and Gailyn Portelance. 2018. Examining The Debt Implications Of The Belt And Road Initiative From A Policy Perspective. Ebook. Washington DC: Center for Global Development. https://www.cgdev.org/sites/default/files/examining-debt-implications-belt-and-road-initiative-policy-perspective.pdf.
[16] Kaura, Vinay. 2018. "Understanding India’s Response To China’s Belt And Road". Atimes.Com. http://www.atimes.com/understanding-indias-response-chinas-obor/.
[17] "Chinese Firm Pays $584 Million In Sri Lanka Port Debt-To-Equity Deal". 2018. Thomson Reuters. https://www.reuters.com/article/us-sri-lanka-china-ports/chinese-firm-pays-584-million-in-sri-lanka-port-debt-to-equity-deal-idUSKBN1JG2Z6.
[18]Wright, Chris. 2018. "Belt And Road: The Debt Threat". Euromoney. https://www.euromoney.com/article/b17t73c8rtfgwd/belt-and-road-the-debt-threat.
[19] Lal, Deepak. 2018. "China’s Belt And Road Initiative Is Becoming A Massive Debt Trap". The Nassau Institute. https://www.nassauinstitute.org/chinas-belt-and-road-initiative-is-becoming-a-massive-debt-trap/.
[20] Kapoor, Sanjay. 2018. "How The China-Backed Hambantota Port Project Is Changing The Politics Of Sri Lanka". Scroll.In. https://scroll.in/article/850907/how-the-china-backed-hambantota-port-project-is-changing-the-politics-of-sri-lanka.
[21] Ibid
[22] Ibid.
[23] Nicolas, David. 2015. "Chinese Infrastructure In South Asia: A Realist And Liberal Perspective". Master’s thesis, Naval Postgraduate School.
[24] Kaura, Vinay. 2018. "Understanding India’s Response To China’s Belt And Road". Atimes.Com. http://www.atimes.com/understanding-indias-response-chinas-obor/.
[25] Brewster, David. 2018. "Dangers Of China Building The Belt And Road Into South Asia: David Brewster For Inside Policy". Central Tibetan Administration. http://tibet.net/2018/01/dangers-of-china-building-the-belt-and-road-into-south-asia-david-brewster-for-inside-policy/.
[26] Ibid.
[27] Shrestha, Sudhir. 2018. "Belt And Road Initiative (BRI) And The Least Developed Countries (Ldcs)". Cadtm.Org. http://www.cadtm.org/Belt-and-Road-Initiative-BRI-and.
[28] Pant, Harsh. 2018. "India Challenges China’s Intentions On One Belt, One Road Initiative | Yaleglobal Online". Yaleglobal.Yale.Edu. https://yaleglobal.yale.edu/content/india-challenges-chinas-intentions-one-belt-one-road-initiative.
[29] Ibid.
[30] Ibid.
[31] Chaudhury, Dipanjan. 2018. "India, Japan To Develop Ports To Counter China". The Economic Times. https://economictimes.indiatimes.com/news/politics-and-nation/india-japan-to-develop-ports-to-counter-china/articleshow/64377787.cms.