Economic globalization with Chinese characteristics

Table of contents

List of figures and tables

List of abbreviations

1 Introduction

2 Research method

3 Belt and Road Initiative (BRI)
3.1 Contributing factors to the emergence of the BRI
3.1.1 The ‘Go West’ strategy
3.1.2 The ‘Go Out’ strategy
3.1.3 The ‘China Dream’ and Xi Jinping’s new leadership
3.2 Revival of the Silk Road
3.3 Information on the Vision and Actions Plan and 13th Five Year Plan
3.4 Chinese financing of BRI
3.4.1 Asian Infrastructure Investment Bank (AIIB)
3.4.2 New Development Bank (BRICS Development Bank)
3.4.3 Silk Road Fund
3.4.4 Chinese policy banks
3.4.5 Chinese commercial banks
3.4.6 Infrastructure investment demand
3.4.7 Conclusion on Chinese BRI financing
3.5 China’s motivation for the BRI
3.5.1 Developing China’s western provinces
3.5.2 Overcapacity
3.5.3 Fostering exports and moving up the value chain
3.5.4 Renminbi internationalisation
3.5.5 Enhancing energy security
3.6 Risks and obstacles
3.6.1 Security risks
3.6.2 Unstable governments, lack of skills and China’s future leadership
3.6.3 Cooperation of all countries along the Belt and Road
3.6.4 Financial feasibility
3.6.4.1 China’s financial situation
3.6.4.2 Assumptions about the BRI project’s economic feasibility
3.6.4.3 Consequences for recipients
3.7 Conclusion on the BRI

4 BRI influence on economic development and economic growth of participating countries
4.1 BRI influence on economic development
4.1.1 Definition of economic development
4.1.2 Economic development theories
4.1.2.1 Economic development theories between the 50s and 90s
4.1.2.2 Paul Romer’s new growth theory
4.1.2.3 Theory of coordination failure and the big push theory
4.1.2.4 Conclusion on economic development theories
4.1.2.5 Belt and Road Initiative and economic development
4.2 BRI influence on economic growth through infrastructure
4.2.1 Transport infrastructure’s influence on economic growth
4.2.1.1 Macro- and micro-economic effects of increased transport infrastructure
4.2.1.2 Empirical evidence and requirements for economic growth
4.2.2 Economic profitability of Chinese infrastructure projects
4.2.3 Conclusion on BRI’s transport infrastructure

5 Conclusion

6 Limitations and further research

7 Appendix

8 Bibliography VI

List of figures and tables

Figure 1. Routes of the Silk Road Economic Belt and the 21st Century Maritime Silk Road, and countries officially participating in or associated with the BRI

Figure 2. Share of China, China and official BRI partners and all countries associated with the BRI in the world’s total population, land area, GDP and household consumption (%)

Figure 3. Routes of economic corridors of the Belt and Road Initiative according to the Vision and Actions Plan and 13th FYP

Figure 4. Division of Chinese provinces into five groups according to their role in the Belt and Road Initiative

Figure 5. Share of China’s direct neighbours, countries associated with the BRI and the USA in China’s total import and export in 2015 (%)

Table 1. Key areas of cooperation mentioned in the Vision and Actions Plan

Table 2. Micro-economic drivers of transport infrastructure

Table 3. BRI countries population, land mass, GDP and household consumption

Table 4. Developing member countries of Asian Development Bank

List of abbreviations

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1 Introduction

“Unless both sides win, no agreement can be permanent.”

Jimmy Carter

The sleeping lion, as China was once described by Napoleon Bonaparte, should not be awakened, as it would shake the world. President of the People’s Republic of China, Xi Jinping stated that the “lion has already woken”. (As cited in Cohen, 2014, p. 2) China is a frequenter of global media’s headlines and is often mentioned in relation to its tremendous economic power, severe environmental and overcapacity problems and Chinese companies’ global acquisitions, as well as the simmering conflict in the South China Sea. In 2016, ‘Belt and Road’ was among the most frequently-used buzzwords in Chinese media, a term strongly correlated to the topics mentioned. (Xinhua, 2017a, n.p.) The Belt and Road Initiative, formerly One Belt, One Road, symbolizes how the lion intends to shake the world. In his speech at the Word Economic Forum in Davos in January 2017, the leader of the Communist Party of China (CCP), Mr. Xi Jinping emphatically advocated a liberal economic globalisation, environmental sustainability and abolition of protectionism. According to him, China will be a spearhead in defending economic globalization and promoting global economic development and opening-up. At the end of his speech, the president referred to the Belt and Road Initiative (BRI) which was launched in 2013 and pursues the goals of fostering cooperation, economic development and prosperity for all participating countries in a win-win manner. (Xi, 2017, n.p.) This initiative aims at nothing less than connecting Asia with Africa and Europe by establishing far-spreading transport infrastructure networks via land and sea, fostering trade, boosting economic integration and increasing cultural exchange. (Das Kundu, 2016a, p. 1) Since its launch it has attracted much attention, especially concerning its political implications and obstacles. Besides these political discussions, figures of projects usually worth billions of dollars are circulating; yet, there are no papers examining the initiative based on economic theories and specifically focusing on the initiative’s true capability to increase economic development in participating countries. The common assessment is that huge transport and other infrastructure projects are beneficial for developing countries as they may boost trade and economic growth. However, this simplistic assumption should not be accepted without evidence, as unproductive investments can have a huge negative impact on these economies; thus, this thesis will take a deeper look at the BRI’s economic characteristics and compare them to economic development theories as well as theories about the correlation of economic growth and transport infrastructure investments. In this way, it intends to clarify the potential impact on participating countries’ economic development. It will not be able to give a precise evaluation but will rather assess the theoretical feasibility of the BRI. The first goal is to convey an up-to-date introduction to the BRI, and China’s motivation as well as the risks and obstacles. Afterwards, the focus will be on economic development theories and how they measure up to the initiative. The following part will take a more specific look at transport infrastructure investments and how they could affect economic growth. Considering the claimed win-win outcome, the paper will end with a concluding chapter that will assess the initiative’s potential to benefit participating countries and recommendations for them.

2 Research method

A qualitative narrative literature review has been chosen as the research method. Quantitative research approaches to this topic are hardly possible due to lack of data, the complexity of the related economic factors and the still rather young age of the policy. Qualitative narrative literature reviews are useful to gather information from a large amount of sources and present a broad perspective on a topic. (Adams/Green/Johnson, 2006, p. 103) Based on several competing theories, it is possible to discuss and evaluate the BRI from various points of view. This discussion will be based on several relevant economic development theories published since the 1950s. Additionally, the knowledge of theories and studies about transport infrastructure’s economic growth effect will be used. This research method is not able to give a specific result or empirical evidence but is able to analyse the BRI on the basis of several theories and thus find general possible contradictions and weak spots. These can be used in further, more specific research projects and as springboard for improvements. However, narrative literature reviews possess the risk of biased view, as the selection of theories and other sources is subjective. (Adams/Green/Johnson, 2006, p. 104) This paper has tried to avoid this by referring to several different and also opposing theories and considering all their main arguments as well as criticisms of them. Additionally, it has avoided taking specific information about the different theories from only one source. The main selection criterion for theories, studies and reviews was their up-to-dateness. Concerning information about BRI, the goal was to be as neutral as possible.

3 Belt and Road Initiative (BRI)

This chapter will give an introduction to the Belt and Road Initiative. It will start by briefly describing its emergence, followed by the official purpose and means. To give an impression of the dimensions of this initiative, an illustration of the economic and geographic scope will be given. The attention then will be drawn to Chinese financing, its motivations and the risks of the Belt and Road Initiative. A short conclusion will summarise this chapter.

3.1 Contributing factors to the emergence of the BRI

Before looking directly at the Belt and Road Initiative and its characteristics, it is helpful to step back and try to see the big political picture and the developments in the years from 2000 to 2013. Besides other domestic factors, there are two national policies, in particular, that might have directly contributed to the emergence of the BRI, namely the ‘Go West Strategy’ (officially the ‘Western Development Strategy’) and the ‘Go Out Strategy’. The 9th National People’s Congress first declared them to be important national strategies in their plenum sessions in 2000. (Yelery, 2014, p. 3) Eventually, they have been included since the 10th Five Year Plan (FYP) in 2001. (Zhu, 2001, n.p.) Besides those two official policies, the so-called ‘China Dream’, combined with Xi Jinping’s vision of his leadership, has developed great influence in the Chinese political landscape and the self-concept of China’s role on the global political stage. (Ferdinand, 2016, pp. 941-949) The aim of this chapter is to briefly illustrate some domestic forces that have been at play in the formation of the Belt and Road Initiative and its characteristics. Without a doubt, external factors have had great influence too, especially the ‘Pivot to Asia’ strategy under the Obama Administration. The main targets of this strategy have been the fostering of strategic alliances and strengthening economic ties with Asia. On the part of China, this has been seen “as a major step to balance or contain the rise of China”. (Hu, 2017, p. 111) As mentioned, this paper will focus on economic aspects of the Belt and Road Initiative and mainly neglect geo-political factors.

3.1.1 The ‘Go West’ strategy

The intention of the Go West strategy has been to boost the development of western China, as these regions lagged far behind the development of coastal regions in the east. In 2000, this backlog was reflected in the small share of western regions of only 17.1% of the national GDP. To combat this inequality, a number of measures were determined, such as preferential fiscal policies, financial support and heavy investments in infrastructure. However, ten years after implementation, hardly anything has changed. The GDP share of western regions grew to 18.7% in 2010. (Yu Hong, 2012, p. i) The income inequality didn’t change as wished, and the western regions remained the “poorest, least-developed and least-educated part of the country.” (Richburg, 2010, n.p.) There have been huge investments in infrastructure, from transport to electricity and water supply; yet, it seemed that it was mostly state-owned companies that benefited from these investments. (Richburg, 2010, n.p.) As Yu Hong noted: “Unfavorable geographical conditions remain one [of] the biggest challenges […] . Other challenges include the lack of economies of scale, weak industrial agglomeration, excessive exploitation of resources and generally low technological levels in the western region. The central government has yet to find an effective solution to the issue of regional inequality in China.” (Yu Hong, 2012, p. ii) For this reason, the Chinese Government continued to implement strategies for the development of western China in its 12th Five Year Plan from 2011 to 2015. (Yu Hong, 2012, p. ii)

3.1.2 The ‘Go Out’ strategy

The Go Out strategy was, as mentioned above, initialised as national strategy in the 10th Five Year Plan and was also inherited by the following Five Year Plan. (Pickles/Zhu, 2014, p. 56) The 10th FYP describes the necessity for this strategy as follows:

“[W]e need to implement a "going outside" strategy, encouraging enterprises with comparative advantages to make investments abroad, to establish processing operations, to exploit foreign resources with local partners, to contract for international engineering projects, and to increase the export of labor. We need to provide a supportive policy framework to create favorable conditions for enterprises to establish overseas operations.” (Zhu, 2001, n.p.)

Besides the goals mentioned above, China’s accession to the World Trade Organisation in 2001 was of vital importance for this strategy. On the one hand, outsourcing and delocalisation in other countries were used to counter anti-dumping criticism and trade barriers. The export was thereby channelled through a third-party country, and thus bypassed trade barriers for Chinese products as they were not labelled as Chinese exports anymore. On the other hand, the enormous amount of foreign exchange that resulted in an “economic bubble and criticism from developed countries about RMB’s slow appreciation has led the government to release the pressure of these […] reserves through outward investment”. (Pickles/Zhu, 2014, pp. 56-57) This Strategy has been retained in the 12th Five Year Plan. (Cpianalysis, 2014, n.p.) The amount of outward foreign direct investments grew from USD 2.85 billion to USD 107.84 billion in the years from 2003 to 2013. (NBS, 2005, n.p./NBS, 2014, n.p.) In 2013, the total stock of these outward direct investments reached 613 billon US dollars and has mainly been financed by stated-owned banks such as China Export-Import Bank and China Development Bank. (Zhou Lihuan, 2015, n.p.) Naturally, the western provinces with their lower GDP were lagging far behind the amounts of outward foreign direct investments (OFDI) of the eastern provinces. In 2012, Shandong alone had a higher amount of OFDI than the western provinces Tibet, Yunnan, Qinghai, Xinjiang, Gansu, Sichuan, Ningxia, Guizhou and Chongjing combined. (Kou/Li/Qiao, 2014, pp. 19-20)

3.1.3 The ‘China Dream’ and Xi Jinping’s new leadership

From the early 2000s until the end of Hu Jintao’s leadership, the picture of China is mostly defined by its rapid economic development, its entrance into the World Trade Organisation and, despite the growing economic power, a low profile manner in international politics. Hu Jintao was tied up with the maintenance of the positive economic development and encountering the growing dissatisfaction of large inequalities. He initiated the ‘harmonious society’ campaign and avoided taking any risks of deeper involvement in international affairs. In March 2013, Xi Jinping succeeded Hu Jintao and became the new president of the People’s Republic of China. (Ferdinand, 2016, pp. 941-942) “And Xi clearly aspires to be a stronger leader”. (Ferdinand, 2016, p. 945) The term ‘China Dream’ had already been used before Xi Jinping’s time as president. In particular, Li Junru, former deputy head of the CCP Central Party School, used it to glorify the CCP’s accomplishment of transforming China into a modern, rich and powerful country. He emphasised the need for further development and increasing prosperity for all and encouraged everybody to participate in defining the China dream and thereby foster innovation. (Ferdinand, 2016, pp. 942-943)

It was, however, Xi Jinping who converted it into a national slogan after first using it on November 29th, at an exhibition of the National Museum in Beijing. The topic of this exhibition was “Road to Revival” and addressed China’s wounds and humiliation through the colonial powers that eventually recovered due to the great accomplishments of the CCP. Since then, Xi Jinping used the slogan frequently and made it “the main subject of his acceptance speech to the National People’s Congress”. (Economist, 2013, n.p.) Although the president has to follow the inherited long-term goals, such as “the attainment of a ‘moderately well-off society’ by the time of the party’s 100th birthday in 2021”, the vague term enables him to emphasise possible changes under his rule. (Economist, 2013, n.p.) Unlike the American Dream, the China Dream is not one of individuals. It is about rejuvenation of China, about the rise of China to a global leader, with the CCP and core values of socialism at the top. Xi redirected the narrative of the China Dream back under party control and adjusted it to fit nationalists in the party to counter his rivals. Thousands of articles have been written about China Dream since then, and a different depiction of China has been propagated. It is not only about the legitimacy of the CCP, the importance of the whole people instead of the individual, or the glorious future of China, but it is about the supremacy over other civilisations’ dreams. It sets forth a picture of surpassing the western nations. This new level of self-confidence changed China's foreign policy and can also be seen in a hardened negotiation style, for example concerning the South China Sea dispute. (Ferdinand, 2016, pp. 945-949) The huge momentum of the changing foreign policy under Xi Jinping is unusual in comparison with China’s previous policy developments and has surprised many China observers. (Yu Hong, 2017, p. 356) China wants especially to tell western powers of its claim for supremacy in Asia in no uncertain terms and wants to be treated accordingly. (Miner, 2016, p. 11) In the book ‘Governance of China’ by President Xi Jinping which includes political theories by him, he vows that in 2049, at the 100th anniversary of the foundation of People’s Republic of China, “the Chinese Dream will be fulfilled.” (Carlson, 2015, n.p.) And according to his opinion , “realizing the great renewal of the Chinese nation is the greatest dream in modern history.” (As cited in Carlson, 2015, n.p.)

3.2 Revival of the Silk Road

The term ‘Silk Road’, introduced by Ferdinand von Richthofen in 1877, stands for the ancient trade routes that connected the eastern civilisations of Eurasia (Asian and Europe combined landmass) with the western ones. (Das Kundu, 2016a, p. 1) With a history of more than 2100 years, it had a lasting impact of human civilisation. Besides the trade of silk, glass, handicrafts, and gold, it also fostered intercultural, scientific, economic and religious exchange. It was composed of far-spreading networks and nourished the development of all civilisations it connected. A section of the Silk Road was added to the World Heritage list in 2014. (Kou/Li/Qiao, 2014, pp. 3-4)

Only six months after his appointment as president, Xi Jinping introduced his ideas about a revival of the Silk Road. In his speech at the Nazarbayev University in Kazakhstan, on September 7th, he described the vision of building the Silk Road Economic Belt. In October 2013, at a speech to the Indonesian Parliament, he expanded his proposal of connecting the Eurasian nations, by promoting further maritime cooperation and ‘ jointly building 21st Century Maritime Silk Road. ’ (Yang, 2016, p. 14) These two initiatives were later merged into the ‘One Belt One Road’ initiative (OBOR), with the Belt connecting Asia and Europe overland and the Road as maritime route from Asia to Africa ending in Europe. Xi Jinping made clear that OBOR will be his “one and only major foreign policy initiative during his administration”. (Lim, 2016, p. 3) However, the name One Belt One Road was confusing and caused a great many misinterpretations, since there are actually three land and two sea routes (see Chapter 2.3). Henceforth, in cooperation with the Central Compilation and Translation Bureau of the People’s Republic of China and the Chinese Academy of Social Sciences, the Chinese government defined ‘Belt and Road Initiative’ (BRI) as the new name and has used it since August 2015. (Shepard, 2017a, n.p.) The BRI main objectives are increased connectivity between the Eurasian countries and economic development. The means for accomplishment are: investments in transport networks on land and across the sea, extended economic integration, fostering trade and cultural exchanges. (Das Kundu, 2016a, p. 1)

Up to the present time, the BRI still has not gone beyond the conceptual level, and apart from a small section of the 13th Five Year Plan, the white paper ‘Vision and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road’ (hereafter called Vision and Actions Plan), issued in March 2015 by the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs (MFA), the Ministry of Commerce (MOC) and with State Council authorisation, is the only specific official document with further details on the BRI that has been published by now. (Ghiasy/Zhou Jiayi, 2017, p.2) Furthermore, the BRI “has no formal institutional structure. A deliberation and coordination body for the BRI overseen by vice-premier Zhang Gaoli has been established within the” NDRC. (Ghiasy/Zhou Jiayi, 2017, p. 3) There exists no central institution for implementing BRI and besides the mentioned ministries involved in the Vision and Actions Plan, several other participants, such as state-owned and private enterprises, authorities on different administrative levels and investors, act upon their own plans. The success of BRI depends on the cooperation of all participating countries and regional initiatives that already exist. It is not officially clarified, though, which specific countries or projects are currently classified with BRI. There exist different unofficial lists of up to 69 countries theoretically directly related to BRI. By the end of 2016, 60 countries and international organisations (such as the United Nations Development Programme), were actively participating, and 30 signed memorandums of understanding (MOUs) with China. (Ghiasy/Zhou Jiayi, 2017, p. 3-4) “However, several of these MOUs have not yet been given much substance and BRI partner country follow-up and commitment has not always been notable.” (Ghiasy/Zhou Jiayi, 2017, p. 4) The following chapters will give more specific details about the BRI.

3.3 Information on the Vision and Actions Plan and 13th Five Year Plan

This chapter analyses the information given in the Vision and Actions Plan as well as the section mentioning the BRI in the 13th Five Year Plan. The 13th FYP, with a time span from 2016 to 2020, was approved by the National People’s Congress and incorporates the vision and goals of the BRI in Chapter 51. (NPC, 2016, pp. 146-148)

In the Vision and Actions Plan, the Chinese government tries to convince the reader, to actively join and contribute to the success of the BRI. It emphasises the positive effects of the ancient Silk Road for its participants and the advantages it brought, namely economic and cultural prosperity as well as peace. According to the Chinese government, slow global economic recovery, uneven development, fierce challenges for all countries, and changes in various fields, such as trade and investment, make it is necessary to work together to achieve prosperity for all. Repeatedly, the plan mentions, in particular, its inclusive and flexible nature, the recognition of the individual characteristics and development of participants, win-win benefits for all, the need for extensive cooperation based on equality in order to succeed, and market forces as controlling power. It also emphasises the “Five Principles of Peaceful Coexistence: mutual respect for each other’s sovereignty and territorial integrity, mutual non-aggression, mutual non-interference in each other’s internal affairs, equality and mutual benefit, and peaceful coexistence”, that function as guiding principles for the BRI. (NDRC/MOF/MOC, 2015, n.p.) By increasing the connectivity of countries in Asia, Africa and Europe and expanding their cooperation, one wants to fulfil the following goals: “help align and coordinate the development strategies […,] tap market potential in this region [s] , promote investment and consumption, create demands and job opportunities, enhance people-to-people and cultural exchange, and mutual learning among the peoples of the relevant countries, and enable them to understand, trust and respect each other and live in harmony, peace and prosperity.” (NDRC/MOF/MOC, 2015, n.p.)

Table 1 shows the five key areas of cooperation mentioned in the Vision and Actions Plan, their main targets and the important measures of each:

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Table 1. Key areas of cooperation mentioned in the Vision and Actions Plan ^[1]

Concluding the information given in Table 1, the Chinese government seeks intensive cooperation on a broad spectrum of different fields. The initiative should be inclusive and does not name any specific countries that the BRI is aiming at. Besides the general inclusion of Africa, Asia and Europe, it identifies some approximate routes of the Silk Road Economic Belt and the 21st Century Maritime Silk Road.

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Figure 1. Routes of the Silk Road Economic Belt and the 21st Century Maritime Silk Road, and countries officially participating in or associated with the BRI ^[2]

As can be seen in Figure 1, the Belt consists of three routes, namely: China-Central Asia-Russia-Europe, China-Central Asia-West Asia-Persian Gulf-Mediterranean Sea and China-South-east Asia-South Asia-Indian Ocean. The Road consists of two main routes, the China-South China Sea-Indian Ocean-Europe route and the China-South China Sea-South Pacific route. However, these mentioned routes are just an approximation. (NDRC/MOF/MOC, 2015, n.p.) As mentioned before, various different listings of potential and currently participating countries are currently circulating. The most comprehensive one is from the Hong Kong Trade Development Council, and together with recently joined Madagascar, 69 countries are strongly associated with BRI. (China Embassy, 2017, n.p./HKTDC Research, n.d., n.p.) However, this listing is not officially confirmed and can only serve as a guideline.

In Figure 1, countries that are blue-coloured did not officially sign any memorandum of understanding (MoU) with China concerning BRI. More important are the light-red-coloured countries. Up until August of 2017, 41 countries actually did sign a MoU and thereby are actively working together with China. Appendix A includes a listing of all 69 countries and China, with an indication as to whether they signed a MoU, and data on their population, land area and gross domestic product (GDP), as well as household consumption. The first three mentioned economic data are from the year 2016, while household consumption values are from 2015.

Two countries should be named specifically, as they serve as examples for, on the one hand the inclusive nature of the initiative and on the other hand its struggle to persuade all relevant countries. One of them is New Zealand, being the first Oceanian country to sign a BRI MoU with China. As those of the other countries too, it does not include any legal binding commitments, and is only to be seen as declaration of intention for mutual consultation and finding ways to achieve the BRI principles, foster the bilateral connectivity and expand the initiative. Other more specific agreements apart from this would not be possible anyway, since the government of New Zealand “itself is still getting to grips with what Belt and Road means” and are “still working with their Chinese counterparts on a detailed work plan”. (Sachdeva, 2017, n.p.) With New Zealand as new partner, the Belt and Road Initiative is proved to be geographically flexible, not bound to countries originally part of the ancient Silk Road, and as inclusive as promised.

The second country is India. Since President Xi Jinping’s first introduction of the BRI, India had strongly opposed this vision and was even hostile towards it. One of India’s most prominent displays of aversion that caught the attention of the media was the rather harsh public refusal of an invitation to the Belt and Road Forum. (Ayres, 2017, n.p.) The summit, held in Beijing in May 2017, was to have been a showcase for the expanding scope of BRI, its success, and an event to welcome new participants. It was to have served as evidence for successfully bridging cultural and political gaps and overcoming boundaries emphasising the mutual benefit for all deriving from this initiative. 30 World leaders attended and “a total of 68 countries and international organizations signed agreements on furthering the Belt and Road concept”, including a cooperation agreement with Interpol. (Tiezzi, 2017, n.p.) Besides a delegation from the United States of America, North Korean diplomats also attended the summit. Clearly, at this point in progress, the focus of Xi Jinping was on mass, and he again emphasised that, under the principles of mutual respect and non-interference, the BRI was open for everybody, including the United States of America. All in all, the summit did not disclose any new important information, though, and a second BRI Forum is planned to be hosted in 2019. (Tiezzi, 2017, n.p.) India’s absence, as the second largest superpower in Asia and a direct neighbour of China, created a large flaw in the international and boundless flair. India has several reasons for opposing BRI, such as China’s cooperation with Pakistan on the China-Pakistan Economic Corridor (CPEC). This corridor heads through the territory of the former princely state of Jammu and Kashmir, a territory that Pakistan and India both claim. Therefore, India saw China’s cooperation on CPEC as interference in its territorial integrity and sovereignty. (Ayres, 2017, n.p.) Besides this specific problem with Pakistan, India is sceptical about the geo-political consequences of the BRI, with China’s outreach to direct access to the Indian Ocean and its expanding presence in the region. India assessed this as a security risk for itself and as an act of challenge to India’s own striving after more influence in South Asia. (Pant, 2017, n.p.) Despite several conflict issues, there has been a lack of communication, and India blamed China for not responding to its request for consultation. (Bagchi, 2017, n.p.) With a bilateral trade of over USD 70 billion in 2016 and foreign direct investments from China about USD 1 billion, China is India’s top trading partner. (Pant, 2017, n.p.) Nonetheless, India is currently not willing to follow China’s vision. Without a doubt, by acting like this, China does not follow its statement in the Vision and Actions Plan to “accommodate […] the interests and concerns of all parties involved, and seek a conjunction of interests”. (NDRC/MOF/MOC, 2015, n.p.) However, looking at the map one sees that with Nepal recently signing a BRI-MoU, “ China now has India surrounded, wrapped up by land and sea via its Belt and Road initiative ” and puts pressure on India’s resistance. (Shepard, 2017b, n.p.) It remains to be seen, if and under which conditions China will come to an arrangement with sceptic and opposing countries such as India.

Nevertheless, the economic and geographic scope of the Belt and Road Initiative, be it that of all associated BRI-countries or only China and its official partners that signed MoUs, is tremendous. As can be seen in Figure 2, China and its official partners jointly account for one-third of world’s population and land, a quarter of global GDP and over one-fifth of global household consumption. Naturally, China accounts for the lion’s share, and besides land area, accounts for half of all values. The numbers are even more impressive if one takes the data of all countries that are under the BRI umbrella, which naturally are the numbers China prefers to mention when talking about BRI: 65% of global population, 41% of world’s land area, 34% of global GDP and 31% of global household consumption.

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Figure 2. Share of China, China and official BRI partners and all countries associated with the BRI in the world’s total population, land area, GDP and household consumption (%) ^[3]

The Vision and Actions Plan, together with Chapter 51 in the 13th FYP, defined six economic corridors through which international economic cooperation and infrastructure connectivity should be developed: namely, “the China-Mongolia-Russia corridor, the China-Central Asia-West Asia corridor, the China-Indochina Peninsula corridor, the new Eurasian Continental Bridge, the China-Pakistan corridor, and the Bangladesh-China-India-Myanmar corridor.” (NPC, 2016, pp. 147-148) The economic corridors will build upon existing international transport routes and focus on the connection of key cities as well as important ports. (HKTDC Research, 2016, p. 1) Figure 3 shows the approximate routes of these six economic corridors.

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Figure 3. Routes of economic corridors of the Belt and Road Initiative according to the Vision and Actions Plan and 13th FYP ^[4]

The New Eurasian Land Bridge Economic Corridor consists of an international railway line. It connects Lianyungang in China’s Jiangsu province with Rotterdam in the Netherlands. It connects the eastern, central and western provinces of China, leaves China through Xinjiang and heads towards Kazakhstan. Afterwards, it will transit Russia, Belarus and Poland until eventually ending in the Czech Republic, Germany or Rotterdam. (HKTDC Research, 2016, p. 2) The whole trip from China’s East to Germany takes between 12 and 16 days, and the demand for this direct freight route is rising steadily. More than 40,000 containers were transported between China and Germany in 2016, an increase of about 15% on 2015. This transport route is especially interesting as it is cheaper than transport by plane, yet twice as fast as transportation by sea. (AFP, 2016, n.p.) The railway lines do not necessarily end in Germany; in January 2017, the first train reached London. From Yiwu in China’s East to London, a trip of about 12,000 km, the train only needed 15 days. Railway transport between China and Europe has great potential; compared to shipping, however, it only plays a supplementary role, for now. (Josephs, 2017, n.p.) The trend of expanding rail-freight through China pushing BRI led to gold-rush mood of companies specialising in Europe-China rail transport. It led to new innovations in this sector, and one of them makes it possible to transport temperature- and humidity-sensitive goods over a long distance by train. A company called ‘Unit 45’ has developed a container with integrated self-supporting temperature unit combined with a thermostat system. This makes it possible to transport perishables or other sensitive goods such as electronics from EU to China, through different zones with extreme temperature variation, at any time of year. There has already been such a container-type, though only appropriate for smaller distances and not designed to adapt to extreme temperature changes. (Shepard, 2016a, n.p.)

Another important corridor is the China-Mongolia-Russia Economic Corridor. It was brought into being at the end of 2014, when these three countries agreed to enhance tripartite cooperation based on bilateral agreements between all of them. The cooperation concentrates mainly on expanding rail and highway transport networks between them as well as fostering trade by mutual customs clearance facilitation. (HKTDC, 2016, p. 2) The China-Indochina Peninsula Economic Corridor will cover the area between China and a part of South East Asia, the Indochina Peninsula. It is not clear, which countries of South East Asia, China associates with Indochina, and there exists no uniform definition of it. President Xi Jinping initiated consultations for this economic corridor at a meeting of Greater Mekong Sub-regional Economic Cooperation. The Greater Mekong Subregion consists besides the Chinese province Yunnan and Guangxi of Cambodia, Laos, Myanmar, Thailand and Vietnam. These five countries also are frequently named as forming the modern Indochina. (Mcneill, 2014, n.p.) This economic corridor focuses on investments in the transportation network, industrial cooperation projects and cooperation in funding. New highways and railways have already been built between China and Vietnam. Several more routes should increase the connectivity between each country and between them and China. (HKTDC Research, 2016, n.p.)

The fourth corridor has already been mentioned, namely the China-Pakistan Economic Corridor. Initiated in 2013, it stretches from Kashgar in China’s Xinjiang province, crossing Pakistan from the north to its south port Gwadar. It is the showcase project of the Belt and Road Initiative, with massive investments in transport, energy and communication infrastructure. (HKTDC Research, 2016, n.p.) The total worth of all projects is estimated at USD 54 billion. (EFSAS, 2016, p. 1) The operation of the corridor should start in 2018, and it is estimated that the investment program could be fully realised by 2023-2025. (Chan, 2016a, p. 200)

Also under discussion is an economic corridor that would link Bangladesh, China, India and Myanmar. Although it has been debated since 2013, due to the rejection of India as mentioned previously, it has not advanced a great deal. An expansion in infrastructure connectivity is interesting for India too, yet the security concerns and territorial problems outweigh this. Therefore, on the one hand, India rather focuses on initiated projects of their own, such as the International North-South Transport Corridor and other regional projects. (Das Kundu, 2016b, pp. 46-50). On the other hand, India cooperates with other nations, such as Japan, in order to even counter China’s BRI by working on their own Silk Road. One such counter move is the establishment of the Asia-Africa Growth Corridor (AAGC) at the end of 2016, which has a high analogy to the BRI. It is no secret that India and Japan focus on countering China’s growing global influence. The goal of this corridor sounds familiar and is to “better integrate the economies of South, Southeast, and East Asia with Oceania and Africa”. (Shepard, 2017c, n.p.)

The sixth corridor has the name ‘China-Central Asia-West Asia Economic Corridor’. The most important countries are Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Turkmenistan, Iran and Turkey. It aims at combining the domestic development projects of the five Central Asian countries and foster cooperation in “areas such as trade, investment, finance, transport and communication”. (HKTDC Research, 2016, n.p.)

Abbildung in dieser Leseprobe nicht enthalten

Figure 4. Division of Chinese provinces into five groups according to their role in the Belt and Road Initiative ^[5]

The Vision and Actions Plan moreover defines the role of Chinese provinces in the BRI. Figure 4 shows the division of the provinces into five groups. Most importantly are Xinjiang, as the core province for the overland Silk Road Economic Belt, and Fujian, as the core province for the 21st Century Maritime Silk Road. The north-western and north-eastern provinces will focus on connectivity with Russia and Mongolia. Tibet, Yunnan and Guangxi will be the window to South and South East Asia and the respective economic corridors. Naturally, the developed ports on China’s East and South coast will be the key players in connecting China through the Maritime Silk Road with South and South East Asia, as well as Africa and Europe. Interestingly, the plan also mentions Taiwan as important for the BRI and intends to “make proper arrangements for the Taiwan region to be part of this effort.” (NDRC/MOF/MOC, 2015, n.p.) The main task of the inland regions will be to expand connection of the transport corridors of each region. Besides mentioning important cities, the plan also emphasises the development of various economic and demonstration zones. Some of them are: the Zhejiang Marine Economy Development Demonstration Zone, the Fujian Marine Economic Pilot Zone and the Ningxia Inland Opening-up Pilot Economic Zone. Each region should use its comparative advantage and intensify the interaction and cooperation with all others. (NDRC/MOF/MOC, 2015, n.p.)

3.4 Chinese financing of BRI

The main focus of the Belt and Road Initiative in the early phase, as may be elicited from the description of the economic corridors, is on construction projects for vast amounts of infrastructure. The other aspects of the BRI, such as cultural connectivity and fostering policy coordination, will surely play an important role in the future. As for now, the expansion of the physical connectivity and power infrastructure, as a basic requirement for most of the other aspects, seem to be prioritised. Financing of these projects is of vital importance. Hence, this chapter will name the Chinese funding entities, pre-existing ones and those especially founded for the BRI, as the BRI-related Chinese infrastructure funding is estimated to be approximately USD 1.2 trillion, in total, over the next decades. (Mooney, 2016, n.p.) Afterwards, a short chapter will deal with estimates of infrastructure demand, in order to give an impression of the possible necessity for the BRI. In the end, a conclusion will summarise the findings.

3.4.1 Asian Infrastructure Investment Bank (AIIB)

The Asian Infrastructure Investment Bank is one strong example of China’s new self-concept and an illustration of its will to play an important role on the global stage. This multilateral development bank (MDB) was firstly proposed by Xi Jinping in October 2013 and was officially launched in June 2015 with 57 founding members. (Wan, 2016, pp. 44-48) 37 of the members are regional and 20 non-regional. 30 additional interested nations could increase the number of members to 87 and thereby surpass the 67 members of the Asian Development Bank (ADB). The headquarter is located in Beijing and Jin Liqun, former Vice Minister of Finance of China, is the inaugural president. Special characteristics of this new MDB are the absence of a resident board, a small staff of 500-600 (compared to 10,000 of the World Bank, with costs of USD 2.4 billion per year), flatter organisation and an orientation towards overall more efficient and faster approval mechanisms. The authorised capital is USD 100 billion and up to USD 15 billion of new loans should be approved annually. The new annual loans would be only about one third of those annually approved by the World Bank, yet the staff efficiency would be 6-7 times higher. (Chan, 2016b, p. 178-182) AIIB will primarily invest in “the five major areas during its initial stages – energy, transportation, rural development, urban development and logistics.” (Chan, 2016b, p. 181) About USD 30 billion of the authorised capital will be contributed by China. (Wan, 2016, 9. 50) Thus, since the supermajority for major decisions is set at 75%, China will have the veto power with a share of more than 26%. The United States, holding the veto power in International Monetary Fund (IMF) and World Bank (WB), and Japan, with the majority in ADB, both showed suspicion towards China’s majority in the AIIB and refused to become members. Doubts were also expressed about the standards of governance, environment and social safeguards. It was seen by some as rival to IMF, WB and ADB and as a mere policy tool for the BRI. Jin Liqun reacted to these criticisms, by assuring that the AIIB will not prioritise BRI related projects and will follow the highest social, environmental and governance standards, similar to those of other MDBs. The power will be held by the Board of Governors, English will be the operational language, USD the operational currency and the AIIB will be complementing the offering of the existing MDBs. (Chan, 2016b, pp. 179-181) Advice from various veterans of WB and ADB were integrated into the formation process of AIIB, and the opposing stand of US and Japan can be explained with a “perceived loss of power and privileges.” (Wan, 2016, p. 54) Despite some suspicion, the cooperation and communication between AIIB, WB and ADB have been successful, and several projects have already been co-financed. (Tsuruoka, 2017, n.p./Xinhua, 2017b, n.p.)

Concerning the BRI, the AIIB as MDB has two major advantages. First, it serves as a neutral funding entity and thus is not involved in geopolitical disputes. Projects involving China with other countries can be depoliticised by funding through AIIB. Second, MDB debts enjoy higher ratings than debts of its individual members. Thereby, funding costs of MBD loans are far lower and funding of infrastructure projects is made cheaper. MDBs become more and more attractive for capital markets and “the market is increasingly willing to participate in sound MDB initiated infrastructure loans.” (Chan, 2016b, p. 182) The AIIB recently received highest AAA-ratings for long term loans of Standard & Poor's, Moody’s and Fitch. It also received the best ratings for short term loans by all three rating agencies. (Zhang Dongmiao, 2017, n.p.) With these top ratings, the requirements for cheap loans are fulfilled. Besides the cost of the funding, it will be interesting to see which non-financial loan evaluation criteria the AIIB will use for its projects. Many MDBs have a long list of social criteria such as human rights and democracy, and market criteria such as free-market principles and deregulation. (Chan, 2016, pp. 183-184) This is often criticised, as it is delaying projects, increasing the approval costs and “divert the MDB’s attention from their main role of fund mediation from international capital market to developing countries”. (Chan, 2016b, p. 184) China has a different point of view and emphasises economic aspects rather than political or social ones. Also, the attitude towards coal power plants differs. WB and ADB do not fund coal plants anymore, while China assesses them as the cheapest energy source for developing countries. (Chan, 2016b, p. 184) However the long term orientation will be, currently, the funding by AIIB is still very low, and by mid-July 2017, 17 Projects with approved loans of USD 2.8 billion had been supported. (Zhang Dongmiao, 2017, n.p.) For this reason, it does not play an important role for the BRI yet.

3.4.2 New Development Bank (BRICS Development Bank)

The New Development Bank (NDB) was founded by the five countries Brazil, Russia, India, China and South Africa in 2015. Like the AIIB, it has an authorised capital of USD 100 billion and an annually renewed loan target of USD 34 billion. All members have equal shares and voting rights and it is headquartered in Shanghai. Infrastructure and sustainable development are the main fields of project funding and will not emphasise social criteria. (Chan, 2016b, pp. 184-185) Similarly to the AIIB, the NDB lags far behind its ambitions. Up to the time of writing, only seven projects with a total investment of USD 1.5 billion have been approved. Unlike the AIIB, the NBD did not receive a rating from the three most prominent rating agencies mentioned previously, yet. Judging by economic and political problems in South Africa, Russia, and Brazil, it will not be too good. It is planned to fund 15 projects in 2017, together worth up to USD 3 billion, and to obtain new members, but the future of this MDB is unclear. (Ghoshal, 2017, n.p.) In its current state, the role it plays in the BRI is only a minor one.

3.4.3 Silk Road Fund

The Silk Road Fund was established in December 2014 to finance projects of the BRI. Its investments focus on “infrastructure, resource and energy development, industrial capacity cooperation and financial cooperation.” (Jin, 2016, p. 14) Mrs. Jin Qi, who has been Deputy Director at the People’s Bank of China in the foreign financial institution department, has been announced as the first president. (Chan, 2016b, p. 186) The fund will use a market-based approach and follow international practices. Thus, the mid to long term profitability of potential projects will be crucial. Mrs. Jin emphasised that the fund is neither a policy tool nor an aid fund. It might also invest in profitable projects in regions not included in BRI. The Silk Road Fund was initiated with a capital of USD 40 billion. (Jin, 2016, pp. 13-14) In May 2017, this capital was increased to USD 54.5 billion. (Chen Yawen/Goh, 2017, n.p.) Especially interesting are the shareholders of the fund. “China foreign exchange reserve (SAFE) holds 65% share, China Exim bank 15%, China sovereign country fund China Investment Corporation (CIC) 15%, [and] China Development Bank (CDB) 5%.” (Chan, 2016b, p. 186) The shareholders' combined assets amount to USD 7 trillion. The preferred investment mode is similar to WB’s International Finance Corporation, and it is designed to be a private equity fund. This type of fund is also very attractive for private investors and fosters Public-Private-Partnerships (PPP). This could increase its financial capabilities substantially. (Chan, 2016b, p. 186) At the end of 2016, the Silk Road Fund invested USD 4 billion and thus ranks as an insignificant funding entity as concerns BRI. (Ma/Wildau, 2017, n.p.)

3.4.4 Chinese policy banks

The two policy banks China Development Bank (CDB) and the China Export-Import Bank (EXIM) were both established in 1994. The CDB pursues the goal of assisting the development policies of the government and wants to support outward foreign direct investment. It is the second biggest bond-issuer in China, using these government-backed bonds to raise funds. With assets of RMB 10.32 trillion in 2014, it is the biggest development bank in the world and “the biggest foreign currency provider in China”. (Chan, 2016b, p. 187) EXIM has been set up to support foreign trade and concessional funding. It had assets of over RMB 2 trillion in 2014. In 2015, the capital of the CDB and EXIM was increased by the government, receiving USD 48 billion and USD 45 billion, respectively. It is expected that these two policy banks, with their global experience and their vast lending capacity, will play a major role in the BRI. (Chan, 2016b, pp. 187-188) Unfortunately, it is not easy to determine their actual amount of funding to BRI-related countries, as both banks do not publish specific data. Various different figures are stated in this context. In 2015, the CDB announced a capital reservation of USD 890 billion for 900 projects in total. (Kuijs/Tianjie, 2017, n.p.) The executive vice president of China Banking Association, Pan Guangwei, stated that CDB’s and EXIM’s combined amount of extended loans for BRI-related projects was USD 200 billion by the end of 2016. However, it is not clear which projects this figure is referring to, over which period and what the status of these projects is. (Jia/Qinqin, 2017, n.p.) Xinhua reported in June 2017 that the CDB will issue loans related to the BRI from 2020 on and that it will support BRI projects with “a special lending plan worth 250 billion yuan ($36.7 billion) in mid-May”. (Xinhua, 2017c, n.p.) Another source states that both banks had BRI loans of USD 239 billion by the end of 2016. Again, it is not certain what projects this included. (Dollar, 2017, n.p.) An estimate by the Financial Times, based on company statements and Oxford Economics, argues that outstanding loans or equity investments for BRI related projects reached USD 24 billion and USD 110 billion for EXIM and CDB, respectively. (Ma/Wildau, 2017, n.p.) In conclusion, until specific data is published by the banks or the Chinese government, a clear assessment of the magnitude of CDB’s and EXIM’s funding for BRI related projects is not possible. Both banks have an extraordinary amount of capital to boost the BRI and will play a major role in it.

3.4.5 Chinese commercial banks

The Agricultural Bank of China (ABC), the Bank of China (BOC), the China Construction Bank (CCB) and the Industrial and Commercial Bank of China (ICBC) are the biggest commercial banks in China and globally. In end of 2016, ICBC was the biggest bank in the world, for the fifth year in a row, and had total assets of USD 3.47 trillion. It was followed by CCB with USD 3.01 trillion, ABC with USD 2.82 trillion and BOC with USD 2.61 trillion. (Relbanks, n.d., n.p.) With assets of USD 33 trillion in total, the Chinese bank system surpassed the USD 31 trillion of the Eurozone and became the biggest banking market in the world. (Wildau, 2017, n.p.) The ABC does not have a long history of overseas banking, and it is not expected that it will be a big part of the BRI in the upcoming years. However, its huge amount of capital could influence the BRI if it decides to step in. The Bank of China has the most overseas activities and has planned to lend USD 100 billion for BRI projects from 2016 to 2018. (Chan, 2016b, pp. 189) The ICBC, BOC and CCB were actively granting credits to BRI related projects, USD 225.4 billion in total, by the end of 2016. (Wang, 2017, n.p.) Again, this number should not be taken for granted. The estimate by the Financial Times rather suggests that the biggest four Chinese commercial banks had BRI-related outstanding loans or equity investments of about USD 150 billion at 2016 year end. (Ma/Wildau, 2017, n.p.) The BOC wrote in its annual report of 2016, that it “granted new credit of about USD 30.7 billion to the ‘Belt and Road’ countries, resulting in a cumulative total of almost USD 60.0 billion in credit extended.” (BOC, 2017, p. 40) The ICBC stated in its annual report of 2016 that it lent USD 23.5 billion to BRI related projects in 2016. (ICBC, 2017, n.p.) The China Construction Bank did not mention a specific figure concerning loans for BRI projects in their 2016 annual report. As previously, a specific figure is hard to find. Overall, the commercial banks play an important role in financing BRI projects. With respect to the very low rate of only 3% overseas loans out of all the loans granted, Chinese commercial banks still have a vast potential for enhanced funding for BRI projects. (Chan, 2016b, p. 189)

3.4.6 Infrastructure investment demand

This short chapter focuses on the question of whether or not the BRI and China's funding is actually needed. In order to answer this, it will examine briefly current estimates of infrastructure demand. The amounts mentioned are only intended to give an impression of a demand tendency, as most estimates vary a lot, and it is too difficult to forecast the need for infrastructure precisely.

There exist various different estimates of how much investment in transport infrastructure is actually needed. In 2016, the World Resources Institute (WRI) published a summary of several important estimates from McKinsey, OECD and others. These estimates analysed the global infrastructure investment needs. They differ in several ways, such as included transport subsectors, climate scenarios and whether they include maintenance or not. For this reason, their results vary a great deal. Without maintenance, the WRI’s consolidated estimate stated a demand for global infrastructure investment in the years 2010 to 2030 of USD 2 trillion per year, if the average global temperature increases 2°C by 2050. USD 2.3 trillion is needed annually with a temperature increase of 4°C. This “covers transport subsectors that include road, rail, bus rapid transit, parking, airports, and ports and does not include investment in rolling stock and vehicles or operations and maintenance of the infrastructure.” (Chaudhary/Lefevre/Srivastava/Yavrom, 2016, pp. 1-3) The reason for not including maintenance or investment in rolling stock is that there do not exist reliable global data covering the mentioned transport subsectors, according to WRI. The lion’s share will be annual investments in roads, with about USD 1.1 trillion needed, followed by parking with USD 505 billion and rail with USD 155 billion. (Chaudhary/Lefevre/Srivastava/Yavrom, 2016, p. 14) However, the authors reported severe limitations of their analysis, most importantly that it will not be possible to use their results for general regional assumptions. The Asian Development Bank (ADB) recently published an estimate for infrastructure demand in Asia and the Pacific region in the years between 2016 and 2030.^[6] The ADB had already published an estimate for the years 2010 to 2020, but the economic and demographic developments of these regions made it necessary to revise the estimate upwards. If the goal of maximum 2°C temperature increase were to be complied with, the total amount of infrastructure investment needed amounts to USD 26.1 trillion for Asia and the Pacific region. The estimate includes investments in transport, power, telecommunication, water and sanitation. Without climate adjustment USD 22.55 trillion would be needed. For simplification we will proceed without climate adjustment. The annual rate would be USD 1.5 trillion of investments. The share of People’s Republic of China equals about 58%. The most investments would be needed for power infrastructure, at USD 11.7 trillion, followed by transportation infrastructure investment of USD 7.8 trillion. The annual rates concerning transportation infrastructure (defined as rail, road, airports and seaports) equals USD 520 billion. The ADB stated that about 43% of the total infrastructure investments should account for maintenance and rehabilitation. (ADB, 2017a, pp. 43-45) In 2015, the 25 biggest developing member countries, together accounting for 85% of the GDP of all developing members, made investments of USD 881 billion. According to the estimates of ADB, they should have made USD 1.21 trillion, leading to an investment gap of USD 330 billion. With China excluded, the investment gap of the other 24 countries reached USD 262 billion. (ADB, 2017a, p. 50) Between July 2015 and end of June 2016, the World Bank approved loans of USD 45.9 billion in total. (World Bank, n.d.a, n.p.) The Asian Development Bank issued credits worth USD 31.7 billion, in 2016. (ADB, 2017c, n.p.) Still, there is a substantial financing gap, hence, other financing methods are needed to generate enough capital. The ADB argues that “90% of Asia's infrastructure investment is done by the public sector”. (ADB, 2017b, n.p.) The mobilisation of private capital would help to bridge the gap, for example through Private-Public-Partnership (PPP), in which private capital gets mobilised besides governmental capital. Several different methods could be used such as traditional equity investment, to nonrecourse bank financing and project-bond issuance. (Rogers, 2017, n.p.) Nonrecourse finance is typically used for high capital projects, which are long-term oriented and with revenue streams that are uncertain. This financing method allows the creditor to draw repayment out of generated profits and not from the debtor’s assets. (Investopedia, n.d.a, n.p.) In order to attract private investors, the projects have to be commercially feasible, and bidding and procurement processes have to be transparent. At this time, private investors are still deterred by commercial and political risks of the projects, long construction periods, and non-transparent substitution by influential Chinese creditors. (Rogers, 2017, n.p.) Concerning bond issuance, the Chinese government tries to foster the use of bonds for the BRI for foreign investors as well. Therefore, the “Bond Connect trading link between mainland China and Hong Kong” has been established in mid-2017. (HKTDC, 2017, n.p.) Regulation of so called “panda bonds”, RMB-denominated bonds issued in China by foreign investors, has been eased, and bonds worth RMB 122 billion were issued in 2015. (HKTDC, 2017, n.p.) Chinese commercial banks also recently stated that they will issue special bonds related to BRI. The China Construction Bank and the Bank of China announced that they will issued bonds worth USD 15 billion and USD 3 billion, respectively. (Wu/Zhu, 2017, n.p.)

3.4.7 Conclusion on Chinese BRI financing

The Belt and Road Initiative’s magnitude is gigantic in terms of planned infrastructure investments. As various estimates stated, there is an enormous need for investments, with demand for power infrastructure leading the way, closely followed by transport infrastructure.

Thus, the idea of promoting investments in these fields is welcomed, and financing is the crucial factor for the realisation of this initiative. The Chinese financing entities provide huge amounts of loans for BRI projects, and there is a substantial potential to even increase their commitments. Assessment of the real scale of financing is not easy, though, as comprehensive official figures on part of the Chinese government or Banks are not published. The missing clear definition of the Belt and Road Initiative and unspecific inclusion of related projects complicates the matter. For this reason, a clear statement on the scale of BRI projects and Chinese funding is not possible. Another result of this chapter is that, even in cooperation with other development banks, the current investment is not sufficient to meet the infrastructure need. Besides, as the ADB and others have emphasised, the investment in maintenance is equally important to investments in new capital. However, maintenance is hardly mentioned in connection with BRI. A solution would be increased private financing, yet, as mentioned, private investors have still doubts. Two aspects are thought-provoking. While the AIIB and Silk Road Fund have been established specifically to foster BRI financing, they hardly play a role at this time. AIIB is a young multinational development bank; as such it still needs some time to fully establish all capabilities. Both started to focus on profitable projects, which might dampen the investment speed, too. Strongly governmentally controlled institutions, such as the policy banks and also the state-owned commercial banks, have the lion’s share in Chinese BRI financing, of which the amount of international development banks is just a fraction. Also, despite the need for private financing, the Chinese government recently implemented stricter regulations for outward foreign direct investments (OFDI) and capital controls. The private OFDI has increased strongly and accounted for nearly half of total OFDI of USD 226.5 billion in 2016. The new restrictions limit the exchangeable amount of money and increase verifying processes for big OFDI transactions. The Chinese government especially focuses on big private companies such as Wanda and stopped several of their OFDIs. The reason for these interventions could be to hamper the increasing private capital drain and to keep control of Chinese OFDI. Clearly, this will have a lasting effect on private investments in BRI projects outside of China, and the Chinese government thereby prioritises the role of state-owned companies and institutions. (Shepard, 2017d, n.p.) Interestingly, the announcement of Chinese commercial bonds issuing BRI related bonds only came one week after the new regulations. (Wu/Zhu. 2017, n.p.) In summary, this conveys the impression that the Chinese government wants to foster private investments, as long as it keeps the control over it. Additionally, the lack of transparency in the important BRI funding institutions is not inspiring confidence, in terms of financial feasibility of their projects, and this might diminish the demand for their issued bonds.

3.5 China’s motivation for the BRI

This chapter will report some of the most important economic motives behind the initiative. Without doubts, several geopolitical factors influenced the decision to introduce BRI, and it would be naive not to interrelate economic with political aspects. However, this paper focuses on economic aspects and therefore will not mention the political aspects.

3.5.1 Developing China’s western provinces

As stated in the beginning, the Go West strategy has been pursued since 2000, however, it did not show the desired effects. Inner provinces per capita income is only 60% of the income of those in wealthier coastal provinces. In 2014, a study by the Southwest University of Finance and Economics in Chengdu estimated that the Gini coefficient^[7] was about 0.6, one of the highest rates in the world. The combined household income of coastal regions was 2.7 times greater than that of inland regions. (Hsu, 2016, n.p.) GDP per capita of Xinjiang was between USD 6,000 and USD 8,000 in 2015, while that of eastern coastal provinces was a minimum of USD 10,000 and Jiangsu, Shanghai and Tianjin were above USD 14,000. Shanghai was five times as rich as the poorest province Gansu, with a similar population. The overall slowdown in China’s GDP growth hit inland provinces especially strongly with a nominal growth of below 2% in 2015. Shanghai, Beijing, Tianjin and other richer provinces achieved growth rates from 5% to 8%. Several factors account for this trend. One reason is the falling commodity prices of coal and metal, decreasing over 65% between 2011 and 2015. They did start to recover slightly in 2016, however not enough for the 17 inland provinces with mining and metal GDP share above average. Another problem is inefficient resource allocation. Inland provinces such as Xinjiang and Shanxi have had vast amounts of investments in physical assets, which increased from 54% to 104% and 48% to 73% (as share of provincial GDP), respectively, in the years 2008 to 2015. Far too often, these investments have been in unproductive projects. Despite cheaper labour and lower prices for land, they could not attract enough investors; coastal regions are still favoured due to “better skills and education, more reliable legal institutions, and so-called ‘network effects’—that is, the clustering of similar businesses in one place, which then benefit from the swapping of ideas and people.” (Economist, 2016, n.p.) The main reason for inequalities between coastal and inland regions, though, is the simple fact that inland regions are landlocked. 80% of manufactured exports are transported by sea. (Economist, 2016, n.p.) Consequentially, manufacturers located in inland regions have higher transport costs and need substantially more time to get their products to Europe. Products from inland manufacturers can take up to 60 days to arrive by sea. (Economist, 2014, n.p.) Additionally, the capacity of rail connections from inland to the seaports is far too low, which leads to extra delay. (Puls, 2016, n.p.) By developing overland connectivity to Eurasia, South and South-east Asia, western provinces such as Yunnan and Xinjiang could compensate for their geographic disadvantage. Instead of transporting their goods first to China’s east coast, they could transport them either directly to Europe via rail or to ports in the Indian Ocean. This would reduce the transportation time to Europe and US significantly. Their geographic disadvantage could become a strategic advantage, as they could use their proximity to the named regions, becoming gateways and hubs for trade between them and China. (Yu Hong, 2017, p. 358) If, and when, the BRI will affect China’s inland regions and compensate their overall backlog remains to be seen. Certainly it will take some time, and concerning exports by rail currently “accounts for less than 1% of all exports from China.” (Smith, 2017, n.p.) Until the situation changes, budget subventions by the Chinese central government to inland regions will have to proceed. Nearly one third of China’s provinces received 50% of their budget from the central government, in 2015. (Economist, 2016, n.p.)

3.5.2 Overcapacity

Between 2013 and 2015, 70% of outward credits by CDB and EXIM, were granted upon “condition that at least part of the funds be used to purchase Chinese equipment and involve Chinese labor.” (Djankov, 2016, p. 6) It is easy to see that the Chinese government also had the increasing problem of overcapacities in various sectors in mind when introducing the Belt and Road Initiative. Officially, the Chinese government tries vehemently to separate the problem of overcapacities from BRI. Interestingly, the topic of overcapacity became framed in a new policy, called the ‘Industrial Capacity Cooperation’, introduced in 2014 by Premier Li Keqiang. This policy is intended to tackle the problem by new means and far greater scope. The idea is not only to export overly produced goods such as steel, coal and construction materials, but entire industries. (Lelyveld, 2017a, n.p.) China propagates this policy as economically logical and mutually beneficial support for China and developing countries. As China moves up the manufacturing chain, it wants to offer developing countries industrial facilities of high quality and with moderate operation costs, in order to support them in their industrialisation process. According to China with these much needed industrial projects, FDI can be attracted, demand and job creation boosted, and deflation risks warded off. It is not about China exporting manufacturing overcapacity or outdated industries. “China aims at win-win cooperation, aligning the development strategies and industrial cooperation of both countries on the basis of voluntarism, equality and mutual benefit” and only “critical eyes with colored lenses” would be suspicious. (Zhang Jun, 2015, n.p.) Kazakhstan is currently one major destination for Chinese industrial facility exports. Both countries signed projects with a total value of USD 27 billion. Corresponding to these, a capacity cooperation fund of USD 2 billion has been set up and loans of USD 15 billion have been granted. Up until May 2017, 34 projects, from copper mining to cement plants, had been completed and brought on stream. 43 other projects are currently being constructed. (Kazinform, 2017, n.p.) New means of tackling the enormous problem of overcapacity, which is based on debt financing and unsustainable and wasteful spending, are absolute necessary, as previous measures have been ineffective. In 2015, China produced 40 million tons of Aluminium, 9 million tons more than global demand. (Fulco, 2016, n.p.) “Most remarkably, between 2011 and 2013 China produced more cement than the US did during the entire 20th century–6.6 gigatons, compared to the US’s 4.5”. (Fulco, 2016, n.p.) With regards to steel, China produced twice as much as India, Japan, Russia and the US combined. The most effective way to deal with the overcapacity would be huge layoffs, and a cut of 6 million state-owned enterprise (SOE) jobs, including 500,000 jobs in the steel sector, has been announced in end of 2015. This will reduce, for example, the steel output by about 13%, which definitely is not enough, but the Chinese government fears higher layoffs, due to possible social reactions. Since 2007, huge investments in unneeded capacity have led to a capacity growth that has been higher than actual production growth. That means that the amount of untapped capacity in the existing facilities is huge, and even a halt in investments would not forcibly stop the capacity growth. (Fulco, 2016, n.p.)

In conclusion, China is trying to reduce its overcapacity in different ways. Investment restrictions and smaller layoffs will not do the job alone. Without going to much in detail about pro and cons of the capacity cooperation policy and its reasonableness, both for China and the recipients, the export of whole industrial facilities is a new way to get rid of overcapacity. The official stance that the BRI is not related to overcapacity seems doubtful. As the loan practices of CDB and EXIM imply, the Chinese government is trying to find orders for its construction firms abroad. The attribution of China’s actions to its different policies is difficult, though. As David Bachman, professor of international studies at the University of Washington, said, “It's almost a fool's errand to try and disentangle all of this and figure out what really is Belt and Road and what is other stuff”. (As cited in Lelyveld, 2017a, n.p.) Independently, the current scope of the BRI cannot make up for more than a fraction of the whole overcapacity. In order to absorb the steel excess capacity, an annual extra demand of USD 60 billion would be needed, not taking into consideration the demand needed to cover overcapacity of coal, cement and other metals. (Dollar, 2016, n.p.)

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^[1] Adapted from NDRC/MOF/MOC, 2015, n.p.

^[2] Adapted from NDRC/MOF/MOC, 2015, n.p., for sources of country categorisation see Table 3 (Appendix A)

^[3] Own compilation based on Table 3 (Appendix A) Note: Values of population, land area and gross domestic product are based on data from 2016, while those of household consumption are based on data from 2015

^[4] Adapted from NDRC/MOF/MOC, 2015, n.p./NPC, 2016, 147-148/HKTDC Research, 2016, n.p.

^[5] Adapted from NDRC/MOF/MOC, 2015, n.p./Chin/He, 2016, pp. 10. Note: Guizhou, Hebei, Jiangsu, Shanxi and Tianjin were not officially mentioned; They were categorised according to given information

^[6] Estimate refers to investment needs of the 45 developing member countries of Asian Development Bank, for detailed listing see Table 4 in Appendix B.

^[7] Gini coefficient is used to define equality in income distribution. Gini coefficient of 0 means perfect equality, 1 means perfect inequality. (OECD, 2002, n.p.)