December 09, 2019

How will China’s Belt and Road Initiative Change the World?

Stephen K. Pudner and Xeris Gregory

In 2013, China announced a plan to fund and construct a global transportation and infrastructure network known as the Belt and Road Initiative (“BRI”). BRI projects have since helped China rival the United States and the European Union on the geopolitical scene. They have also allowed Chinese companies to close the gap with Western counterparts in the global construction, engineering, advanced-manufacturing, and logistics sectors. However, increasing global concerns have forced the Chinese government to take some first efforts to convince the world that the BRI is positive for the countries where its projects are located and for the global economy. Many questions remain, including whether Western companies risk being left behind their Chinese counterparts, and whether China’s massive undertaking has more risks than potential benefits. 

What is the Belt and Road Initiative?

China started the BRI to replicate and expand the old Silk Road trading route, to develop global markets for Chinese goods, and to strengthen China’s global influence. While the name is a bit confusing, “belt” refers to rail, road, and other land transportation projects, and “road” refers to sea transportation projects. Despite the confusing name, the scope and pace of BRI projects are remarkable. Since the announcement, more than 130 countries have signed deals or expressed their interest. Countries have jumped at opportunities to secure BRI projects, which have potential to curry favor with China and come with billions in funding.  The plan presently extends to 65 countries and 4.4 billion people, and has generated more than $3 trillion in trade.

How Is the BRI Helping Chinese Construction Companies Compete?

BRI projects have allowed China to greatly expand the global reach of its construction and engineering companies. To support the massive undertaking, China injects capital into Chinese government-controlled public-financial institutions, which then allows them to lend cheaply to companies that work on BRI projects.  China often requires a borrower’s public assets to be pledged as collateral for loans, however, which provides China incredible leverage in the event a country defaults. This financing scheme allows China state-owned enterprises to offer competitive bids for projects against foreign companies.  Accordingly, Chinese state-owned companies receive nearly all the construction contracts for BRI projects.  Largely as a result, of the construction companies with the largest global revenue in 2019, the top 5 (and 8 of the top 12) were Chinese.  

Similarly, the BRI has spurred advancement of China’s domestic advanced-manufacturing industry, and Chinese companies have narrowed the gap with Western companies on perceived quality in these areas (e.g., new massive Chinese designed and manufactured tunnel-boring machinery and railroad-construction equipment has been used on BRI projects).  Output in China’s industrial sector, which makes up around 40% of the nation’s gross domestic product, grew 6.2% in 2018.   

BRI projects are being completed at a breakneck speed and connecting previously isolated and poor parts of the world to the global economy. This is despite serious safety, quality, and other concerns associated with at least some of these projects. For example, the Mombasa-Nairobi railway in Kenya has been called “the first railway outside China built to Chinese construction standards with Chinese machinery.”  Perhaps as a result of these exported standards, per a Chinese engineer working on this project, “On-site accidents are commonplace [and] ‘When they happen, they are almost always severe and often fatal.’”  

While such concerns may have slowed down or endangered similar infrastructure projects by Western governments or construction companies, they do not seem to have had any such effect on this project. Instead, it was deemed a success because it was completed 18 months ahead of schedule and shortened certain rail journeys from 10 hours to 4.  It is now seen as the first step of a much larger African rail network to be built through the BRI.

The breakneck pace of construction, albeit with lower safety and quality standards in the short term, make Chinese construction and engineering firms formidable challengers to more established Western competitors.

How Is the BRI Helping China’s Geopolitical Power?

It is no secret that China is not content to be the manufacturer for the world’s low-end consumer goods, but instead views itself as a geopolitical rival to the United States and the European Union on the world stage.  China has used and will continue to use the BRI to close the gap with challenge the global leadership of the United States and the European Union.

The BRI has also helped China greatly increase its geopolitical reach (e.g., China’s first overseas military base was established in Djibouti, Africa).  China’s attempts, however, have been met with mixed results. Initially, the European Union adopted a “wait and see approach,” which acknowledged that while the BRI promises development on a global scale, this “development” also comes with pervasive challenges, which may run counter to the EU agenda.  One day following an EU Council meeting in March 2019, however, the Italian government signed a Memorandum of Understanding with Beijing to become an official member of the BRI.  In addition to Italy, thirteen other EU member states have signed agreements with Beijing since 2012.

A new agreement with Italy represents an important strategic relationship for China in Europe; Italy is the largest EU economy to become a member of the BRI.  Italy is hoping to fund some of its infrastructure projects with money from China’s banks; however, there are concerns that the new situation will just add to the economic and political strings that come attached to Chinese funding of BRI projects.  At the same time, however, an EU response without one of its most important economic players may be unsuccessful against China’s attempts to establish itself as a geopolitical power. 

What Are the Downsides?

Several countries have had concerns with BRI projects, which include serious complaints of corruption, padded contracts, and a massive debt load.  Some of the most notable concerns are that BRI projects have suffered serious delays or cancellations and that Chinese lending has poor debt management and corruption.  The United States has recently taken more notice of the BRI and become increasingly loud in voicing its worries.

While China’s “no strings attached” style of investment is appealing for developing countries, it simultaneously enables corrupt governments to burden their countries with unpayable debts.   For example, Sri Lanka borrowed heavily to build a new port but could not repay the loans, so the country signed a 99-year lease to a Chinese company in exchange for debt relief.  Projects in countries like Pakistan and Myanmar have also scaled back considerably due to each country’s debt problems.  While attempting to renegotiate a $23 billion BRI deal for rail and pipeline, Malaysia cancelled the projects altogether.  Malaysia’s prime minister referred to BRI projects as “unequal treaties” and “a new version of colonialism.”  Most recently, Kenya halted construction on a power plant on a major tourist-destination island and ordered an environmental-impact assessment. 

Perhaps a more alarming concern, however, is the potential for China to use BRI projects as a way to extend its military presence beyond its borders.  Americans think the initiative could be an extension of the Chinese Communist Party’s idea to undermine security efforts on an international scale.  As an example, China plans to assume management of a port in Israel, which would mean that a U.S. Mediterranean fleet could not call on the port when needed.

In an apparent attempt to ease these growing concerns, in July 2018, China set up special Chinese-based courts to purportedly provide a venue for resolving BRI-related commercial disputes.  The Chinese government also hosted a forum in April 2019, whereby China announced it would exert more control over BRI projects and oversight in the future.  Chinese-owned companies are being told to increase supervision of overseas projects and to increase the scope of auditing. However, whether this public announcement turns into tangible results or whether these are even positive developments if implemented remains to be seen.

Conclusion

Largely as a result of BRI projects, Chinese construction, engineering, and advanced-manufacturing companies have closed the gap with their Western competitors on perception of quality, and the Chinese government has closed the gap regarding global geopolitical power. Amidst growing concerns of predatory lending tactics and the expansion of Chinese armed forces in foreign nations, however, concerns are growing just as fast as the BRI projects themselves. Whether the BRI is truly innovative or is a dangerous game remains to be seen.

 

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Stephen K. Pudner and Xeris Gregory

Baker, Donelson, Bearman, Caldwell & Berkowitz, PC Birmingham, Alabama