The Market Mogul
10 July 2018
China is currently the world’s second-largest economy and is on a trajectory to become the world’s next leading superpower. China has been heavily covered by mainstream media as it has taken a central role in the global political arena. This path to dominance in the global political and socio-economic context hinges on several key aspects.
Debt-trap, Diplomacy and the Belt and Road Initiative
The One Belt One Road (OBOR) initiative is a key instrument by which China will increase its presence in global trade and this project is imperative in realising China’s vision of global dominance as well. The OBOR is an ambitious string of infrastructure initiatives that will realize the modernisation of two ancient trade routes linked to China through land and sea:
- Silk Road Economic Belt: A land-based trade route that will increase links between China and Europe.
- Maritime Silk Road: A series of maritime infrastructure projects spanning the South Asian, Pacific and Gulf regions.
What is known as debt-trap diplomacy is simply part and parcel of executing the infrastructure projects of the OBOR and they have been criticised for being predatory. It essentially entails China handing over unpayable loans to countries for the construction of infrastructure conducive to realising the OBOR. These nations, now indebted to China and unable to repay the loan, lease the land to China who effectively gains an overseas territory and geopolitical leverage despite an apparent financial loss.
Sri Lanka is a stellar example of such a handover. In 2017, the government of Sri Lanka handed over the port of Hambantota to China on a 99-year lease, a sore point vexing pretty much every single Sri Lankan national. The project cost $1.3bn, financed by loans obtained from China and, now, is effectively owned by China. The China Merchants Port Holdings and the Sri Lankan Ports Authority set up the Hambantota International Ports Group (HIPG) and the Hambantota International Ports Services (HIPS) which owns the port; the Chinese firm pays the Sri Lankan government for the lease of the port, which it holds a 70% stake in.
China is adamant that its intentions are for utilising the port for commercial purposes only, but that has not swayed the popular opinion that the port could be used as a naval base. It is important to note that Beijing is not known for its transparency and a force with a grand plan of questionable intentions would never disclose it upon interrogation. As it stands, the Hambantota port is close to a busy maritime trade route, yet attracts virtually none of the traffic.
There are several other significant projects, which China is pursuing with governments in the region, either underway, completed or on the drawing board. Some of these projects include a string of power plants scheduled to be built in Indonesia along with a high speed railway, the overseas railway project linking Laos to China and of course the China-Pakistan Economic Corridor (CPEC), a series of infrastructure projects underway throughout Pakistan and hailed as the ‘flagship project’ of the OBOR. China’s investment in Pakistan is as much a strategic political maneuver as much as it is an economic initiative on account of strained Pakistan-India relations and India’s increasing ties with the United States. This makes the CPEC, or Pakistan itself rather, central to Beijing’s political strategy.
Flexing Its Muscle
Military development is important for China as it would allow it to project and protect its interests whilst being perceived as a formidable power. This is why China has been investing quite substantially in improving its defence. The actual value of the Chinese military budget is a topic of debate, primarily due to the opaqueness of what is actually included in the military budget, information on equipment pricing and a general lack of transparency when it comes to publicising statistics. Nonetheless, a key element in budget estimates published by organisations highlights one thing: an increase in Chinese military expenditure.
Reuters reported an increased military budget of $175bn, China’s largest defense spending in three years (and an increase of 8.1% from 2017). Chinese military spending has grown substantially, propelling China to the nation with the second largest military expenditure in the world. A recent report published by the Stockholm International Peace Research Institute (SIPRI) cited an increase in Chinese military spending as a share of world military expenditure from 5.8% in 2008 to 13% in 2017 with China making the highest absolute jump in military spending in 2017. Despite China cutting back on its armed forces by 300,000 personnel in 2015, the People’s Liberation Army has engaged in a modernisation drive with upgrades to its military. Beijing flexed its naval muscle in 2017 with the unveiling of what is reportedly the world’s second most advanced destroyer after the United States’ DDG-1000 destroyer.
Besides the modernisation of its military, Chinese weapons sales have increased within the region as well seemingly in an endeavour to bolster strategic trade ties with neighbours and thereby increase regional influence. Between 2013 and 2017, Asia accounted for around 70% of Chinese arms transfers. China’s portion of the Pakistan market has substantially increased as well, with Pakistan now being China’s largest importer (China’s share of Pakistan imports was 70% between 2013-17) followed by Bangladesh, Indonesia and Myanmar. With China’s manufacturing capability its arms exports have risen by 38% and imports of arms have decreased by 19% between 2013 and 2017.
The South China Sea
Though the statistics supporting increasing Chinese arms sales are not necessarily a cause for concern considering the US has more than 30% of the global market share, dwarfing everyone else, it must be noted that Chinese military engagement in Southeast Asia is on a rise despite the United States military presence. Tensions persist in the South China Sea due to China placing (a legally unsubstantiated) claim on a shared maritime territory.
There are two primary reasons for this, the first being trade. As of late, as evident by the traction gained by the OBOR, China’s intentions to influence global trade is abundantly clear. The South China Sea is a prominent shipping passage with $5.3trn worth of trade traversing its waters each year, the equivalent of approximately one-third of all global maritime trade. According to the US Department of Defense report published in 2015, the South China Sea trade route accounts for approximately $1.2trn worth of yearly trade with the US. The South China Sea issue is essentially between the US and China more than it is between China and its South East Asian neighbours.
As it stands, there is tangible friction between the two nations with China distrusting the US, perceiving it as a force bent on halting its rise. The US, being a naval power and the world’s superpower, has a certain unspoken commitment to ensuring open trade routes and the free trade of goods and at the same time, is also wary of China’s rise in economic and military power as well as Chinese intentions with regards to the global trade route. Due to both these nations treating each other as potential threats, the South China Sea is experiencing some heightened military activity albeit not so much as to cause a serious conflict. The second reason for China’s interest in the South China Sea is due to the estimated untapped 11 billion barrels of oil and 190 trillion cubic feet of natural gas which would no doubt be lucrative for the nation controlling all, if not a majority, of the South China Sea. Needless to say that a nation with access to oil and gas will most definitely obtain substantial financial gains.
China Looks to Africa
Chinese interests in Africa has been steadily growing as evidenced by Chinese weapons exports to Africa increasing by 55% between 2013 and 2017. China opened a naval base in Djibouti, its first overseas military base. This base in Djibouti does not merely operate on a logistical capacity but rather functions as an instrument through which China expands its overseas military presence and extends its influence in Africa. Furthermore, this port might potentially be an effort on China’s part to gradually ease out Western influence in Africa, effectively eliminating any potential obstacle to a key point in the western part of its OBOR leading to the Gulf region. China recently invited African army chiefs to Beijing as well, reflective of China’s intentions to strengthen military engagement in a rapidly developing region which would supplement China’s lucrative weapons market in Africa.
It has been stated by Jerome Pellistrandi, a professor of the University of Clermont-Ferrand, that African nations prefer acquisition of military equipment from China as opposed to Europe owing to China having lower concerns regarding human rights regulation. The growth in Chinese weapons exports to Africa is commensurate to an increase in foreign investment from $40bn in 2012 to $90bn in 2016. Africa is a promising investment for China in terms of growing its political influence and access to reaping gains off of rapidly developing markets. Infrastructure opportunities, for example, are abundant in African nations where the infrastructure is largely underdeveloped hence presenting an opportunity on which China is capitalising. China reportedly has issued approximately $86bn in loans between 2000 and 2014 to fund over 3,000 infrastructure projects.
China is buying its way into Europe via investments and acquisitions. There has been a recent reported increase of Chinese investments in Europe as with FDI in the EU backtracked to China totalling an estimated €35bn in 2016. A brilliant article written on Bloomberg delivers a comprehensive breakdown of Chinese commercial endeavours in Europe depicting Chinese investments across a wide array of sectors from chemicals to beverages. China has also reportedly bought or invested in European assets worth $318bn over the past 10 years.
An Asian Future?
A title of a superpower is achieved via the convergence of efforts towards progressing military activity, economic proliferation, diplomatic influence and technological capability. China has been active across all these areas and as of now, it is in conflict with the US on trade, tech and military activity. China’s friction with the United States was bound to happen. A growing new power is bound to run into strife with an incumbent one. The United States, after the Second World War, dominated the globe and utilised its trade and military superiority to project power to protect the interests of its allies as well as itself. This is changing. By the year 2032, 5 out of the 10 largest economies in the world will be Asian and it is undoubtedly likely that Asia will play a central role in global trade and driving the global economy. Given the rise of nations like India, it would seem that the balance of power is shifting to the east with China at the helm of a potential Asian centric power structure.