11 September 2019
by ALESSIA AMIGHINI and GIULIA SCIORATI
On the Memorandum of Understanding (MoU) signed in Rome in March 2019, Italy became part of China’s partner in the Belt and Road Initiative (BRI) project – also known as the “new Silk Road” -, inaugurated by Chinese President Xi Jinping in September 2013.
Originally aimed at connecting China to the Western European markets by land and sea, the BIS has now extended its ramifications to Africa and Latin America, and its objectives far beyond transport networks: the BIS pursues indeed the increase in China’s international connectivity and integration not only in terms of infrastructure, logistics and trade, but also in terms of culture, energy and finance, to the point of becoming a real foreign policy instrument.
While Hong Kong, still shaken by the clashes between protesters and authorities, is preparing to host the Belt and Road Summit (an international platform that promotes commercial collaboration between the BIS partners), this fact-checking seeks to shed light on some key issues for BIS and the countries involved.
1) The BIS: only economic ambitions
The BIS is part of the Chinese strategy that aims to increase Beijing’s influence and weight in the world, both economically and on a political-military level. Although it is officially presented as an infrastructure project of economic development through greater regional and international integration of the country, the BIS has in fact a link now established with the People’s Liberation Army (PLA) and its naval arm (PLA Navy). Through the BIS projects, China is equipping itself with the ability to extend its geo-strategic arm beyond regional boundaries. For example, the construction in April 2016 of the first overseas naval base in Doraleh, an extension of the port of Djibouti, provides China with access to maritime routes far from China that have enabled the PLA Navy to establish a presence in the sea Red, thus also approaching the Mediterranean Sea. The solid logistics provided by the BIS also allows China to support its military power at a distance.
Furthermore, within the Sino-Pakistani Economic Corridor (one of the BIS’s flagship projects) a special economic zone was established for the joint production of fighter jets, navigation systems and military hardware, with the aim of facilitating the exchange of military technology between China and Pakistan with potentially serious consequences for regional stability.
According to the White Book of the National People’s Congress of March 2015 (the document that outlines the BIS vision and action plan), the ultimate goal of the project is the establishment of “a stable strategic space favorable to long-term development term of the Chinese economy “. Due to the growing number of Chinese investments in the world, this stability is closely linked to that of the BIS partners and the regions involved in the project. The PLA is therefore called to expand its limits of action to face the growing number of threats surrounding China’s foreign interests: among these, for example, those represented by the phenomena of violent opposition to the infrastructures and to the personnel linked to the BIS projects, as in the case of Vietnam in June 2018 and Pakistan in August 2018.
2) BIS investments: only transport networks?
Only a part of the BIS investments has resulted in the creation of transport networks: 24% of the total, or 301 projects worth $ 179.9 billion and include both road transport and the rail sector.
Out of a total of 1,247 projects carried out in the world in the context of the BIS, 32% (401) concerns the energy sector and aims to increase China’s interconnection with the networks of the main energy resource providers, as well as to acquire skills technology to manage their networks more efficiently. In this context, for example, in 2014, State Grid Europe Limited (SGEL), a company of the State Grid Corporation of China, acquired a 35% stake in the Italian CDP Reti, a company that controls Snam, Italgas and Terna, the electricity and gas distribution networks. Still in Southern Europe, in 2016 the Chinese company acquired 24% of ADMIE, a Greek electricity company, with an investment of 350 million euros. In July 2018, a similar initiative against the German 50Hertz distributor was prevented by the purchase of 20% of the company by the German public bank KfW. In Africa, starting in 2013, 59 projects related to energy, water and mineral extraction (for a value of 21.53 billion dollars) were made, with huge investments in the construction of plants hydroelectric generation, coal extraction and the construction of oil plants.
The telecommunications sector also deserves special attention. Although still relatively marginal (3% of total projects), it plays an increasingly important role. During 2018 the Pak-China Optical Fiber Cable, a 2,950 km long fiber optic network between China and Pakistan, was completed, which will significantly speed up the exchange of data and information between the two countries. China’s interest in building telecommunications infrastructure was already clear in Africa, where 70% of 4G networks were built by the Chinese giant Huawei.
Investments in telecommunications within the overall BIS project are likely to increase, also in view of the Chinese technological leadership in the 5G, where Huawei and ZTE currently have the most competitive solutions at the international level. In this sector, China has experienced a particularly rapid development also thanks to generous public subsidies and an internal market protected from foreign competition.
3) Do states that join the BIS increase their connectivity?
Chinese investments in the BIS have brought great benefits in the form of an increase in the connectivity of recipient countries, in particular maritime connectivity, measured in terms of a country’s integration (regardless of whether it has direct access to the country or not). sea) in the existing network of maritime transport routes (over 90% of world trade takes place by sea). Many of the countries concerned suffer from poor connectivity, one of the main obstacles to their development: in fact, poor connectivity increases the costs of imported goods and makes exported goods less competitive. For example, today in Tajikistan the incidence of transport costs on the value of an imported container is the highest in the world: $ 10,000 compared to a world average of $ 1,877. All the recipients of a large number of BIS projects recorded significant increases in their connectivity between 2013 and 2018: among them, for example, Iran (99%), Indonesia (74%), Sri Lanka (68%), Vietnam (59%) and Qatar (11%).4)
4) Do the BIS countries export more to China today?
Among the countries that have received the greatest number of BIS-registered projects, there is no univocal export trend towards China. From the graph below, which shows the countries with at least 15 BIS projects, it emerges that some of them – Myanmar, Sri Lanka, Cambodia, Serbia, Laos and Vietnam – have in fact recorded considerable increases in exports to China (up to almost 300%). However, other recipients of many BIS projects, such as Indonesia, have not seen any increase in exports to China, and some have even seen sharp reductions, such as Pakistan, Kazakhstan and Saudi Arabia. In the latter, the gap between the concrete results and the narrative prevailing internally on the benefits of the BIS as a channel to increase access to the Chinese market, which obviously does not depend solely on purely infrastructural issues, is significant.
5) Do the countries crossed by the BIS import more from China?
Imports from China have significantly increased and to a greater extent the number of BIS projects in the countries considered. The correlation between BIS projects and imports from China is high and positive, meaning that for now the benefits in terms of market access have generally been greater for China than for the other countries that have joined the initiative. In this regard, it is good to remember that the commercial objectives set by China with the partner countries are always formulated in terms of “interchange” (ie the sum of exports and imports) and not in terms of balanced trade relations that would require to consider also reciprocity, regulation of non-competitive practices and copyright violations.6) Can the BIS push countries into borrowing too much?6)
6) the BIS push countries into borrowing too much?
Among the BIS partners who have become more indebted to China, three groups can be distinguished. The first group is made up of those countries that already had a high external debt on GDP and that, receiving substantial funding from Beijing, further aggravated their debt position. These countries (represented in orange in the graph) now risk incurring a debt crisis. The second group of countries (in yellow), on the other hand, presents a ratio of foreign debt to contained GDP, but has contracted a large debt to China (for example, Afghanistan and Cambodia), thus risking becoming financially dependent on Beijing . In fact, being indebted to a single large creditor is more risky than in the case of greater fragmentation of creditor countries. Finally, a third group of countries (in blue) has a high external debt ratio on GDP but few Chinese funds (eg Egypt). The debt crisis that these countries risk is therefore not attributable only to Chinese loans received, but to the pre-existing conditions of the foreign debt ratio on GDP.
It is therefore not said that the greater exposure to China necessarily translates into a risk of unsustainability of the debt. The pre-existing accumulated debt stock and the number of countries to which the debt contracts are in fact two fundamental variables.
7) Are BIS investments concentrated mainly in Asia?
The BIS investments in Asia (central, southern, south-eastern and north-eastern) are about half of the total BIS investments in the world (equal to $ 321 billion distributed over 570 projects). In particular, Central Asia received $ 96.6 billion (148 projects) until 2018, while $ 158.22 billion (322 projects) was allocated to South and Southeast Asia. The countries that benefited the most were Malaysia and Indonesia ($ 32.4 billion and $ 27.2 billion respectively). In particular, Malaysia hosts 55 projects of which 9 in the energy sector ($ 8.48 billion) and 9 in the transport sector ($ 9.47 billion). Also in Indonesia there are 55 active projects, distributed between the energy sector (19 for $ 12.6 billion) and transport (4 for $ 4.9 billion). In Northeast Asia, only South Korea received BIS investments (15 projects totaling $ 10.2 billion)
In Central Asia, Pakistan is the country that has received the highest number of investments, amounting to $ 39.6 billion for 52 projects, of which 31 are aimed at the energy sector ($ 27.5 billion) and 14 at the transport sector ($ 10.6 billion). Pakistan is home to the China-Pakistan Economic Corridor (CPEC), one of the BIS’s flagship projects that aims to connect the Southwest China with the Arabian Sea (see the map below).
In addition to Pakistan, Russia also benefited from significant BIS investments, amounting to $ 25.33 billion (37 projects, mostly concentrated in the energy sector).
Kazakhstan, China’s gateway to Central Asia, received investments of $ 10.44 billion, divided into the energy sector (6 projects for $ 2.5 billion), chemicals (2 projects for $ 2.4 billion) and transport (2 projects for $ 2 billion).
Finally, China has allocated 18 projects to Iran for a total of $ 12.47 billion. Of these, 6 projects concern the transport sector for a value of $ 4.2 billion, while the same number of projects have been concentrated in the energy sector ($ 3.5 billion). Iran has acquired an increasingly strategic importance for China because its geographical position allows the meeting of the North-South and East-West corridors.