Thought Leadership Brief, August 2019, no. 28

Abstract

HKUST IEMS Institute for emerging market studies

Thought Leadership Brief

1 Photo by Filip Mishevski / Unsplash Has the Belt and Road Initiative Become a Political Liability for China? Alicia García-Herrero Issue Since President Xi Jingping announced the Belt and Road Initiative (BRI) in late 2013, shortly after his arrival to power, China has invested some $300 billion in it, mainly in connectivity among neighboring countries. While the project is only five years old, President Xi Jingping’s grand plan for China’s global expansion has elicited strong reactions from the rest of the world, both from countries that will benefit from the BRI as well as other major players, such as the United States and the European Union. Over the five years since its announcement, the BRI has evolved in terms of its objectives: from its initial economic focus related to trade connectivity — and a way for China to export its excess capacity — to much more of a soft-power tool. A large number of the BRI’s infrastructure projects now appear to be strategic rather than economic in nature. KEY POINTS The Belt and Road is considered a grand plan for China’s global expansion and has elicited strong reactions from the rest of the world. The Initiative has evolved to become more of a soft-power tool with a lot of its projects now appearing to be strategic rather than economic in nature. A recent analysis confirmed that sentiment towards the Initiative has worsened in many countries, with the only exceptions being the Middle East and North Africa. AUG • 2019 No. 28 This research project is funded by the Strategic Public Policy Research Funding Scheme from the Central Policy Unit of the HKSAR Government. 2 This change in tone is associated with the increasingly negative view of BRI in the West. The EU has expressed concerns about China’s strategic ambition at the annual EU-China summit in April 2019. Nonetheless, this has not stopped Italy from becoming the first G7 country to formally join the BRI. There also has been backlash in the developing world where recipients of BRI’s infrastructure projects are in desperate need of funding to pay off their borrowing. Assessment A recent analysis that we conducted confirmed that sentiment toward the Belt and Road has indeed worsened in many countries. Our report, which drew data from the Global Database of Events, Language, Tone (GDELT) that covers broadcast, online and printed news from 132 countries in over 100 languages, shows a sharp move away from an average positive image before 2018 to a negative one thereafter. The only exceptions are the Middle East and North Africa. The worsening image of BRI is a wake-up call for China as it seeks to increase its soft power globally. Our analysis offers some insights into the reasons for the worsening image of BRI. The first and foremost is trade. Countries appear increasingly wary of excessive dependence on Chinese imports and an imbalanced trade pattern. For investment, while our study shows that it is not generally as negatively perceived Figure 1: China's Belt and Road Initiative (BRI) as trade, there are a number of salient issues which are closely related to investment, i.e. debt dynamics for the recipient country, environmental issues. More generally, China may have been piling up too many objectives under the guise of the BRI, some of which could be inconsistent with one another. In particular, China tries to replicate its internal way of doing business in overseas markets: using China’s resources and materials with a clear flavor of state capitalism. While keeping state-owned companies busy with BRI projects may be appealing from an economic perspective, it only exacerbates foreign concerns, weakening China’s international image. Most of the recipient countries welcome infrastructure financing from China, but also expect transparency and fair competition. The latter is at odds with China’s existing strategy. The fact that the BRI’s image is suffering is also demonstrated by the announcement of alternative proposals from both the U.S., through its Indo-Pacific strategy with Australia, India and Japan, and the EU with its EU-Asia connectivity plan. Some argue that the BRI may have been the tipping point for the U.S. administration to move from engagement to containing China, which has contributed to the current trade war between the two. Moscow Almaty Urumqi Dushanbe Tehran Xi’an Fuzhou Guangzhou Hanoi Kolkata Colombo Mombasa Jakarta Haikou Bishkek Samarkand Duisburg Rotterdam Venice Athens Istanbul Russia Kazakhstan Uzbekistan Tajikistan Iran China India Vietnam Sri Lanka Kenya Indonesia Netherlands Germany Italy Greece Turkey Kuala Lumpur Silk road economic belt Maritime silk road Malaysia Source: Geopolitical Intelligence Service 3 While painful, this is not a completely negative outcome for China, as it is clearly learning how difficult it is to acquire soft power, no matter a country’s economic size. In fact, such a backlash offers China an opportunity to explore a more sustainable strategy. China is realizing that aggressive expansion will trigger a confrontation with the U.S., and it is definitely not a winning strategy for China in spite of its economic benefits. Given the diminishing returns on investment at home, China needs to expand in overseas markets, but it should not do so by excluding other investors from benefiting from such projects. Against this backdrop, the next path for China’s Belt and Road needs to be a more flexible and open route to building its soft-power image. Recommendations To that end, China has recently made a number of strategic changes regarding the BRI, which have largely remained unnoticed, given the lower-key approach. First, China has sharply increased the number of countries signing MOUs from the original 63 to 131. The key is to make the Belt and Road less targeted, so as to limit the West’s geopolitical concerns about this project. Secondly, China is trying to use a more multilateral framework to push the BRI, and especially by involving the the Asian Infrastructure Investment Bank. Such a multilateral framework retains Chinese characteristics, thereby allowing China to keep the ultimate control of key projects, but it also offers room for other developed countries to get involved, especially Europe and South Korea. That said, China may be also willing to make some compromises in the way it shares the benefits of the BRI, but multilateralizing the strategy does not equate to a full retreat to the Western model. No matter how bitter it is to the existing order, the emergence of China with its unique system is reshaping the word, and the BRI is an important part of the process. The increasingly negative world response should not be regarded as the end of the project, but rather as wake-up call for China and, thus, a push to reshape the strategy towards a more open and multilateral one. Still, China is bound to remain at the center and maintain the huband- spoke approach to the BRI but with more market-based international cooperation. Figure 2: International sentiment towards BRI during May 1, 2017 - April 25, 2018 Central Asia Negative -4 -2 0 2 4 6 Positive Tajikistan Uzbekistan Sub-Saharan Africa South Africa Zimbabwe Tanzania Botswana East Asia & Pacific Iraq Syria Yemen Morocco Vanuatu Australia Thailand Vietnam Laos Middle East & North Africa Europe (EU) Poland Sweden Finland Portugal Netherlands Europe (Non-EU) Bosnia and Herzegovina Ukraine Turkey Belarus North America Maldives Bhutan Pakistan Afghanistan Guyana Venezuela Jamaica Canada US Latin America & Caribbean South Asia Source: Bruegel think tank 4 Read all HKUST IEMS Thought Leadership Briefs at http://iems.ust.hk/tlb Alicia García Herrero is the Chief Economist for Asia Pacific at Natixis. She also serves as Senior Fellow at European thinktank BRUEGEL and non-resident Research Fellow at Madrid-based political think tank Real Instituto Elcano. She is currently Adjunct Professor at the Hong Kong University of Science and Technology and member of the advisory board of Berlin-based China think-tank MERICS. Finally, Alicia is advisor to the Hong Kong Monetary Authority’s research arm (HKIMR) and the Asian Development Bank (ADB) as well as a member of the board of the Hong Kong Forum and co-founder of Bright Hong Kong. With support from T: (852) 3469 2215 E: iems@ust.hk W: http://iems.ust.hk A: Lo Ka Chung Building, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon Figure 3 Average change of the image of BRI across region over time (Jan 1, 2017 - Jan 28, 2019) Source: GDELT In previous years, Alicia held the following positions: Chief Economist for Emerging Markets at Banco Bilbao Vizcaya Argentaria (BBVA), Member of the Asian Research Program at the Bank of International Settlements (BIS), Head of the International Economy Division of the Bank of Spain, Member of the Counsel to the Executive Board of the European Central Bank, Head of Emerging Economies at the Research Department at Banco Santander, and Economist at the International Monetary Fund. In addition, Alicia has always combines her professional career with academia, having served as visiting Professor for John Hopkins University, China Europe International Business School (CEIBS) in Shanghai and Carlos III University in Madrid. Alicia holds a PhD in Economics from George Washington University and has published extensively in refereed journals and books (see her publications in ResearchGate or Google Scholar. Alicia is also very active in international media (Bloomberg and CNBC among others) as well as social media (Twitter, LinkedIn and Weibo). As recognition of her leadership thoughts, Alicia has recently been nominated TOP Voices in Economy and Finance by LinkedIn.