China’s Economic Offensive

How China is extending its economic initiatives through debt trap diplomacy and the Belt and Road Initiative

As the trade war between the United States of America and China escalates, China is seeking to retaliate against American tariffs with its ambitious long-term economic investment projects. These programs span across 68 countries, 65% of the world’s total population, 40% of the world’s gross domestic product (GDP), and over 1700 individual projects. This is the Chinese Communist Party’s global Belt and Road Initiative (BRI). China for a long time had been trying to formulate a way to increase transnational investment, bypass maritime choke-points, and reduce its economic inconsistencies. The BRI is China’s answer to western economic dominance and it could not have come at a better time. Currently, the United States and the European Union (EU) are distracted by unstable economic policies, turmoil in the Middle East, and a resurgence of protectionism. Moreover, the United States is moving in an unconventional direction with the Trump administration rejecting globalism and embracing isolationism. This is a dangerous policy for Washington as it leaves an economic void that is quickly being filled by Beijing.

However, not everything is going according to plan. China has seen slowing economic progress with its year-on-year (YOY) growth reaching only 6.5%. This is less than the projected 6.6% and marked the weakest YOY quarterly GDP growth since the 2008–9 financial crisis. Despite slowing economic growth, China is still achieving high growth rates compared to the EU (2.1%) and the U.S. (2.9%). YOY GDP growth describes how fast an economic market grew in its most recent quarter. It also reports the aggregate economic growth for the year if the economy continued to grow at the same rate.

The most important indicator of growth in the economy is the output of durable goods. Durable goods are big-ticket commodities meant to last three years or more. As a result, firms and states purchase them infrequently and refrain from purchasing them when the economy is not doing well. They include things like non-defense aircraft, heavy machinery, and raw materials like steel.

By factoring in durable goods, a more complete picture is apparent of how the current trade war between the U.S. and China is turning out. According to the U.S. Census Bureau, new orders for manufactured durable goods in September 2018 increased $2.0 billion or 0.8%. On top of that, shipments of manufactured durable goods increased $3.3 billion or 1.3% to $256.8 billion ensuing a 0.9 percent August increase. This means that the American economy is expected to grow faster in the coming quarter, but the U.S. must still be wary of China either refraining from purchasing American goods or imposing new tariffs on them.

How Does The Belt and Road Initiative Work?

The Belt and Road Initiative has two main iterations: a land-based project to revitalize the ancient Silk Road and a maritime project to secure the seas. The land-based project focuses on developing railways, roads, bridges, hydroelectric dams, and pipelines that run throughout Asia and Europe. This allows for a strong infrastructure to further develop China’s long-term interests in maintaining a steady, resourceful supply line. This is evident with dams that are being constructed along the Mekong River in Myanmar, Thailand, Laos, Cambodia, and Vietnam. Over 30 million people depend on the River to sustain their daily lives and Chinese hydroelectric dams are destroying the environment and eroding the vital, nutrient-rich sediment meant to sustain wildlife and vegetation.

The maritime project has the Chinese looking to increase their naval presence and diversify supply lines to its eastern coast. A staggering 90% of global trade is maritime-based. Consequently, the development of industrial ventures has been well underway. This includes deep-water ports meant to accommodate massive container ships, paired with refineries meant to process hydrocarbon resources such as natural gas, oil, and coal. The Chinese Government is also constructing a large network of deep-water ports in the Indian Ocean known as the String of Pearls. Beijing has legal stakes in 2/3 of the world’s 50 largest deep-water ports, making it necessary to have a formidable naval force.

The Strait of Malacca is one example of why China needs to secure trade routes in naval chokepoints. Currently, 84,000 ships pass through the Strait annually, which account for about 15-20% of the global trade. This includes 80% of China’s crude oil imports and 30% of global crude oil shipments. Furthermore, China has sustained operations in the South China Sea. The Chinese have been building artificial islands to expand their exclusive economic zone (EEZ) and permanent aircraft carriers to further reinforce their iron grip on the region. China claims the South China Sea through its “nine-dash line,” a maximalist strategy that infringes on other states’ sovereignties and extends as much as 2000 kilometers from mainland China. To add insult to injury, there is little the U.S. can do short of war in the South China Sea to slow Chinese progress. Although the former can still practice freedom of navigation, this means often sailing through highly contested waters, resulting in close encounters with Chinese warships. It all simply remains a show of force.

Deep Pockets

Many continue to ask the same question: how exactly will China fund its costly projects? The answer is rather complicated. The BRI will receive funds from two principal financial institutions: the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund. The AIIB is a multilateral bank with a foundation fund of $100 billion and caters mainly to Asia and Oceania. From an organizational standpoint, it is similar to the World Bank or the International Monetary Fund (IMF). On the other hand, the Silk Road Fund has a base of $40 billion and is overseen by the People’s Bank of China, the country’s central bank. The former’s purpose is to invest in projects rather than loan out large sums of money like the AIIB. Thus, the combination of the two institutions is a strategy of concentrated investment efforts, along with the large loans needed to build resilient infrastructure.

Chris Chappell is an expert on Chinese geopolitics and geoeconomics

The China Development Bank and the Export-Import Bank of China also contribute a massive amount to the BRI. The former has pledged $890 billion incrementally invested over a long period of time. Lastly, funding can also be summoned from China’s foreign exchange reserves, a portion of which are managed by its sovereign wealth fund, the China Investment Corporation (CIC). Total reserves amount to $3.7 trillion, while the CIC manages $220 billion. As is apparent, a lack of capital is not the problem. It is rather the ability of Beijing to advance its foreign agenda through forging alliances with other states that benefit both parties and establish genuine partnerships. This is something that China has done very little of compared to the United States, whose core set of values allow it to flexibly recover when economics fails. China, in a sense, prefers to assert itself through means of dominance and predatory debt trap diplomacy.

This is typical business for a nation looking to expand its hegemonic interests, raising major concerns among its regional neighbors and the international community. Japan views the Chinese concessions in Cambodia, Malaysia, and Thailand as a threat to Japanese maritime access. India believes it is being surrounded by Chinese concessions in Pakistan, Myanmar, Sri Lanka, and the Maldives. All of this stems from deals struck with the respective governments and major loans given in return for a guarantee of exclusive access to the aforementioned countries’ resources and the establishment of key naval ports and military bases.

Sustainable Development or Debt Trap Economics?

Just like the United States and Russia, China has legitimate reasons to develop a network of logistics and support facilities beyond its mainland. The ports obtained in the Indo-Pacific region give China a substantial advantage in the geopolitical theater and further establishes its blue water navy — its capacity to operate on a global scale and maintain networks across deep and remote parts of the ocean, along with further bolstering established trade routes or lending itself to the creation of new ones.

Contrary to western accusations, the government in Beijing claims the development of naval ports are not for the purpose of naval bases and that the host nations are able to dictate their port operations. There is truth to that statement, but only to a certain degree. It is the case that host nations will have a say on how to operate ports, until they are taken as collateral for the loans that were given. The fact is that Beijing deliberately sets up a developing country in a debt trap in order for said country to relinquish control of its ports. After all, China understands the concept quite well as it was used against it in the British seizure of Hong Kong.

Examples of such can be found in Pakistan, Sri Lanka, and currently Africa. In Sri Lanka, the government had failed to secure financial backing to ensure full authority over the port. Initially, the plan for the port had showed great promise and was meant to take advantage of Sri Lanka’s strategic location. Sri Lanka is located in between the Strait of Hormuz and the Strait of Malacca, so this makes it a crucial port for ships traveling to and from East Asia. Also, the port would make Sri Lanka the logistical hub it should be.

Unfortunately, the current Sri Lankan administration had desired the construction of a port on the southeastern coast of the island. This had directly conflicted with an already existing port just 240 kilometers away in the capital, Colombo. As a result, international investors got cold feet and withdrew many of their proposed offers for development of the port. Many investors saw the port as a white elephant project, meaning that the costs to maintain and develop it would outweigh its usefulness and projected profits. In 2007, Beijing saw an opportunity and extended a $300 million loan to Sri Lanka. Three years later the project was finally completed and the result was an absolute disaster. The actual traffic was nowhere near projected and only a few dozen ships have docked in the first few years. Apathetic to the feasibility of the failed investment, the Sri Lankan Government once again bowed to the Chinese with open palms for supplementary loans to revitalize the port. By then, the Chinese had committed a sum of $757 million and Beijing ensured the creation of a codicillary package that was very disproportionate.

In 2015, a new government was elected, but the damage was already done by the previous one. The hereditary debt to China had increased to 8% of the country’s GDP. As the mountain of debt piled on, the Sri Lankan Government needed more loans to pay back the old ones. Unfortunately for Sri Lanka, the government was not able to acquire the loans and was forced to fall into China’s trap, borrowing another $1 billion. At this point, Sri Lanka was living paycheck to paycheck. Eventually, in July 2017, the Sri Lankan Government surrendered 70% of the equity over the port and about 50,000 acres nearby for an industrial zone to a Chinese firm for the next century.

Unlike Sri Lanka that has produced mixed results, China’s advantages in Pakistan are unequivocal. There, China has been able to fully utilize Pakistan’s hostility towards India by developing naval bases to act as a gateway for trade. It recently opened a port in Gwadar which is near the mouth of the Persian Gulf and the Strait of Hormuz. The port also connects the western provinces of China to the Arabian Sea through Pakistan, allowing Beijing to reach Africa and Europe with greater convenience. Evidently, these commercial ports like Gwadar and the ones across the Indian Ocean will, no doubt, be followed up with naval bases. China is adamant about secure access to the sea while extending its influence and military.

Chinese Neo-Colonialism or Global Partnerships?

Another prominent aspect of Chinese investment can be found in the continent of Africa, a developing and rapidly growing market that Beijing is looking to establish itself in.

In the aftermath of the 2008 global financial disaster, global credit was easily accessible, especially to developing states. Several African governments saw an opportunity and took on foreign denominated debt to fund infrastructure projects. However, as American and European markets recovered, and central banks raised interest rates, the African states were left with a constantly swelling tab, which has recently gone past $450 billion.

African leaders gather to attend an economic summit in Beijing

China saw African governments needing a bailout from this seemingly insurmountable debt, and, in just 20 years, China has become Africa’s largest economic partner. About 10,000 Chinese state-owned firms operate on the continent in the field of trade, finance, aid, infrastructure, construction, and more. These firms bring what Africa is lacking in quantity and quality through initiatives like investment, technical expertise, technology, and jobs.

No other country has such a presence in Africa and between 2000 and 2017, Chinese Government banks and contractors extended $143 billion in loans to dozens of African states. To that end, Beijing has used a flexible bartering system. For example, in return for investment, some African states have granted China exclusive rights to resources such as copper in the Democratic Republic of Congo and oil in Angola. The flexibility of China allows nations to repay for investments in forms that are not only convenient for them but for Beijing as well. Resources rather than actual money or allowing the construction of military bases are all examples of payments that China accepts.

The terms of Chinese investments in Africa differ from state to state but it is this resilience that has allowed China to invest in places beyond the reach of western nations. China does not have the same democratic standard as the United States or Europe does and is able to be less stringent on matters pertaining to human rights or authoritarian dictatorships. Therefore, China has been able to invest in places like Eritrea, Zimbabwe, the Congo, and Nigeria.

The fact that China accepts payment in resources leaves it as the sole option for countries that are struggling to develop infrastructure. Many African states have nowhere else to turn to for the loans needed, which allows Beijing to negotiate from a position of strength, thus securing its access and exclusive rights to the natural resources of Africa. In the long-term, China’s influence in Africa will pose a problem for other resource-dependent nations such as Japan and South Korea. The debt trap diplomacy coupled with the BRI allows China to apply similar strategies elsewhere and gain consistent rewards.

Realistically, there will always be political opposition to Chinese investments, particularly in projects that provoke concerns about sovereignty. These concerns are already evident in projects across Myanmar, Malaysia, and even in Pakistan to some degree. A state cannot establish influence solely through an economic strategy, which is something that China needs to fully grasp.

To forge strong partnerships, China must realize that both sides must have mutual interests. As a stark example, in 1991, the passing negotiations resulted in the expulsion of the United States Navy from a strategic naval base known as Subic Port in the Philippines. Yet Washington and Manila rebuilt and extended their military ties shortly afterwards due to both having mutual interests. If China is to establish a military presence in Djibouti, for example, they must persuade the leadership in such a host nation that the Chinese would directly enhance their security or offer other incentives. In Pakistan, for example, the leadership in Islamabad is fully aware of the Chinese deathtrap, yet China and Pakistan share an objective to contain India. As a final note, while economics can cover a wide range of prerogatives, ultimately it is a tool of policy, but not policy itself. It can and will backfire if not handled with care. Therefore, to forge a lasting alliance that remains even after China overextends itself, it remains necessary to assure nations that the alliance is of benefit for both parties.