Chinese Optimism Meets Indian Realism on the Silk Road

23 May 2017 Lindsay Hughes, Research Analyst, Indian Ocean Research Programme Download PDF

Key Points

  • India chose not to attend the recent Belt and Road Forum in Beijing, citing fiscal reservations.
  • It is believed that the debt that would be generated would be unsustainable.
  • Pakistan and other countries are valid examples of that understanding.
  • It could be argued, therefore, that at this point at least, India has made the correct choice.

Summary

China hosted a two-day Belt and Road Forum in Beijing from 14-15 May. The forum was attended by high-level delegations, including 29 heads of state, from around the world. These delegations gathered in Beijing to discuss President Xi’s legacy One Belt One Road (OBOR) project. This is a twenty-first century re-imagining of the fabled Silk Road, a network of trading routes that connected Europe and East Asia in medieval times and was travelled by legendary figures such as Marco Polo. The current OBOR seeks to re-create those routes and, in so doing, revitalise international trade and commerce.

President Xi has gone to some lengths to re-emphasise the necessity of globalism in today’s world and to reject the isolationist protectionism inherent in, for instance, President Trump’s “America First” campaign slogan. In the first speech by a Chinese leader at the World Economic Forum in Davos, Switzerland, in January this year, Mr Xi called for renewed globalisation and warned of the dangers of a trade war, one that President Trump also appeared to indicate was imminent, that would benefit no individual state. Protectionism, he declared, was akin to ‘locking oneself in a dark room’ in order to defend oneself, but in doing so ‘cutting off all light and air.

The Belt and Road forum, then, appeared to be the very antithesis of isolationism, trade wars and nationalism. It trumpeted renewed trade and commercial co-operation between states, a renewed thrust towards globalisation and a renewed effort to lift many developing countries out of economic stagnation.

Or so China would have the international community believe.

Analysis

As the Government of Australia describes it:

‘The “One Belt, One Road” (OBOR) initiative is a Chinese economic and strategic agenda by which the two ends of Eurasia, as well as Africa and Oceania, are being more closely tied along two routes – one overland and one maritime.’

The “Belt” refers to the Silk Road Economic Belt, which consists of three overland routes, themselves consisting of six economic co-operation corridors through twenty-five countries, that connect China with South-East Asia, South Asia and the Indian Ocean; connect China with the Persian Gulf and the Mediterranean Sea through Central Asia and West Asia; and connect China to Central Asia, Russia and Europe. The “Road” refers to the Twenty-First Century Maritime Silk Road, which is designed to be a trade route from China to Europe via the South China Sea and the Indian Ocean in one direction and from China through the South China Sea to the South Pacific in another.

These two major initiatives target sixty-four countries and fifteen Chinese provinces through trade, energy and transportation projects.

The land-based economic corridors pass through China-Mongolia-Russia; China-Central Asia-West Asia; the China-Indochina peninsula; China-Pakistan; and Bangladesh-China-India-Myanmar. For the “Belt” maritime routes, China plans to purchase land and construct port facilities

‘… and associated economic zones in Australia, Malaysia, Indonesia, Bangladesh, Sri Lanka, Myanmar, Pakistan, Kenya, Tanzania, Oman and Djibouti are intended to provide China with maritime access and economic benefit across the Indian Ocean. These will connect to Piraeus, Greece’s major port, which has been bought by Chinese shipping group COSCO and which will allow direct access to the markets of Europe.’

Evidently, the entire OBOR initiative is predicated upon the assumption that China will continue to remain a manufacturing and services centre and that its products and services will continue to be exported worldwide.

OBOR Map.

It is surprising, therefore, that a developing country like India chose not to send an official delegation (one report stated, however, that India would be represented by local embassy staff or academics) to Beijing for the Belt and Road Forum but also not to take part in the OBOR initiative. China, reportedly, remains keen for India to take part in the project, first inviting New Delhi to join the project and, when India showed no inclination to change its stance, warning India via the Chinese media that it could not prevent its neighbours from joining the initiative. The Global Times, which, more often than not, acts as the public mouthpiece of the Chinese Government, stated that, ‘There is no way for India to impede its neighbouring countries from co-operating with China in infrastructure development’, before pointedly adding that, ‘If India doesn’t want to take a part on the stage, then it should just be a good member of the audience.’

There are a number of reasons why New Delhi feels a sense of unease about the OBOR project. India is, in the first instance, concerned about the China-Pakistan Economic Corridor (CPEC), which consists of transportation and energy networks and runs from the Pakistani port of Gwadar to China’s westernmost city, Kashgar, in Xinjiang province. A part of the CPEC route runs through Pakistani-administered Kashmir, which India claims as its sovereign territory. The CPEC, in India’s perception, therefore, contradicts its sovereignty. Since the CPEC is an element of the OBOR initiative, joining OBOR would be tantamount to shooting down its own sovereignty claim. As Indian External Affairs Ministry spokesman Gopal Baglay remarked: ‘No country can accept a project that ignores its core concerns on sovereignty and territorial integrity.’ Noting that concern, the Chinese Ambassador to New Delhi, Luo Zhaohui, who was China’s envoy to Pakistan in November 2008, when the terrorist attacks on Mumbai occurred, said, ‘China has no intention to get involved in the sovereignty and territorial disputes between India and Pakistan. China supports the solution of the disputes through bilateral negotiations between the two countries. CPEC is for promoting economic cooperation and connectivity. It has no connection to or impact on sovereignty issues.’ In an interesting aside, it was also reported that Mr Luo had offered to rename the CPEC if that would assuage Indian concerns. In his speech at the United Services Institution in New Delhi, Luo allegedly said, ‘Even we can think about renaming the CPEC. This is an example of China taking care of India’s concern.’ That remark was met with a degree of concern in Islamabad and derision in New Delhi.

The issue of sovereignty aside, India has other concerns about the OBOR initiative. At a conference organised by the Ministry of External Affairs and a local think-tank in New Delhi, India’s Minister for External Affairs, Sushma Swaraj, her deputy, the Minister of State for External Affairs, V.K. Singh, and Foreign Secretary S. Jaishankar elaborated on New Delhi’s perceptions of the OBOR initiative without mentioning it by name. Ms Swaraj differentiated India’s multilateral approach to regional initiatives from China’s unilateral one and underscored that difference by emphasising the need to first build trust in the region. Her remarks were probably guided by Prime Minister Modi’s earlier statement in September 2014 on the occasion of Mr Xi’s visit to India. Referring to co-operation between his country and China, Mr Modi said, ‘… we can reinforce each other’s economic growth’ when there is ‘a climate of mutual trust and confidence; respect for each other’s sensitivities and concerns; and, peace and stability in our relations and along our borders are essential for us to realise the enormous potential in our relations.’

Perhaps foreseeing the issue of infrastructural development in disputed territories, India required that a provision to obtain the agreement of all parties involved in matters of disputed territories prior to undertaking projects in those territories be inserted into the charter of the Asian Infrastructure Investment Bank, of which institution India, like China, is a founding member. The Foreign Secretary alluded to this approach in his speech at the conference, saying that, while India prefers to build connectivity through consultative processes, thus enabling positive outcomes as in the case of the bank,

‘… we cannot be impervious to the reality that others may see connectivity as an exercise in hard-wiring that influences choices. This should be discouraged, because particularly in the absence of an agreed security architecture in Asia, it could give rise to unnecessary competitiveness. Connectivity should diffuse national rivalries, not add to regional tensions.’

India also refused to take part in the OBOR initiative for fiscal reasons, warning of ‘an unsustainable debt burden’ for the countries involved. One of the criticisms of the Silk Road plan is that host countries may struggle to pay back loans for huge infrastructure projects being carried out and funded by Chinese companies and banks. As this writer has observed elsewhere in relation to the CPEC:

‘While on the face of it, the aid provided to build Pakistan’s energy infrastructure will be more than welcome in Islamabad, it does not look quite as appealing under closer examination. First, the aid provided will be used by Chinese construction firms using Chinese labour for the most part to construct the power plants for Chinese energy companies to own, operate and manage. The power generated will be sold to Pakistan. In essence, Beijing has perfected the diplomatic art of camouflaging the creation of business and employment opportunities in the cloak of developmental aid. There is little doubt that some Pakistani labour will be used to construct the power plants; if China’s African model is a precedent, however, the employment opportunities available to Pakistanis will be of the menial kind.’

That pessimism appears to have been justified. As a recent report notes:

‘The US$56 billion China-Pakistan Economic Corridor (CPEC) – a part of China’s “One Belt, One Road” vision – has yet to translate into the game-changer envisioned by its sponsors. Worse than that, the unparalleled tax breaks and mounting security costs involved have already saddled Islamabad’s exchequer with a hole in its finances of more than US$2.5 billion.’

A Pakistani industrialist and Director of the Khyber Pakhtunkhwa Board of Investment and Trade noted in the same report, ‘There is absolutely nothing in the CPEC for the local trade and industry; even the labour is coming from China, which will cause a steep escalation in the operational cost of the project.’ The cost of the CPEC has escalated due to the tax concessions that Pakistan has given the Chinese business organisations involved in the CPEC, including extensive tax breaks from customs duty, income tax, sales tax, federal excise duty and withholding taxes. The Pakistani Government justified the concessions by claiming that the organisations and their personnel were working in dangerous areas. It is, perhaps, this perception of danger that has seen Pakistan establish two Special Security Divisions, a fifteen-thousand strong force, in August 2016 to enable round-the-clock security for Chinese personnel and CPEC installations from Gwadar in the south to Rawalpindi and Khunjrab in the north. It is said that when Pakistani officials asked for the cost of providing this level of security to be reimbursed by China, they were told that security for the project was a Pakistani concern. This additional cost was, unsurprisingly, passed on to the Pakistani taxpayer. As a news report states:

‘The [Economic Co-ordination Committee of the Cabinet] approved a summary of the Ministry of Water and Power for issuance of a policy directive to Nepra [National Electric Power Regulatory Authority] to allow 1% of the capital cost (of the project) on account of [CPEC’s] security.’

In other words, irrespective of income level, every electricity consumer in Pakistan will pay for the security of the multi-billion dollar CPEC. Pakistan, furthermore, will have little or no foreign exchange inflows into the country while it pays US$90 billion back to China over thirty years against loans and investments worth US$56 billion incurred for the development of the CPEC. Adding insult to fiscal injury, the Central Bank of Pakistan noted in its quarterly economic review that in the first quarter of the fiscal year 2016-17, loans from Chinese commercial banks to import Chinese machinery surged to US$979 million from US$138 million the previous year at ‘questionable rates’. This has led independent economists to warn Pakistan that it faces the risk of having to approach the International Monetary Fund for another bail-out.

It is a report by Dawn, a Pakistani newspaper, however, that causes the most concern about China’s motives in Pakistan. China, it alleges, seeks to secure its food security, (probably at Pakistan’s expense) and ‘a deep and broad-based penetration of most sectors of Pakistan’s economy as well as its society by Chinese enterprises and culture.’ It further states, ‘Its scope has no precedent in Pakistan’s history in terms of how far it opens up the domestic economy to participation by foreign enterprises.’ It concludes that:

‘… the entry of Chinese firms will not be limited to the CPEC framework alone, as the recent acquisition of the Pakistan Stock Exchange and the impending acquisition of K Electric demonstrate. In fact, CPEC is only the opening of the door. What comes through once that door has been opened is difficult to forecast.’

The general tenor of the Dawn report, in short, is to warn of the real danger of Pakistan being reduced to a vassal state of China.

Beijing sought to have as many leaders of Western countries attend the Belt and Road Forum in an effort to obtain tacit validation for the project. Most of those countries declined, sending lower level officials instead. Among the attendees was Matthew Pottinger, Senior Director for Asia at the National Security Council in Washington. In his speech to the forum, Mr Pottinger urged China to insist on transparency in government procurement as projects began, saying, ‘Transparency will ensure that privately-owned companies can bid in a fair process, and that the cost of participating in tenders will be worth the investment.’ The German delegation made the same call for transparency. Many Western economists who have studied the programme share India’s reservations about the OBOR initiative and claim that China is not giving aid but is instead asking countries to assume debt from Chinese banks to pay for the infrastructure. Other sceptical officials from Western countries state openly that China is spending abroad to enhance its own geopolitical influence and corralling others to join it while keeping important sectors of its huge domestic market off limits to foreign investors. These are hardly the actions of a benign country that has developed a major initiative for altruistic reasons.

India appears to have made the right decision – at least until more transparency is available.

*****

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

Published by Future Directions International Pty Ltd.
Suite 5, 202 Hampden Road, Nedlands WA 6009, Australia.