Chinese's BRI: A Threat to the Nations' Sovereignty

Chinese's BRI: A Threat to the Nations' Sovereignty 

Recently, Sri Lanka's credit rating has been significantly lowered by international agencies, pushing Sri Lanka out of the international capital market. As a result, Sri Lanka could not reschedule its foreign borrowing. The devaluation of Sri Lanka's currency started due to the paucity of foreign exchange, and when Sri Lanka tried to curb imports, it led to shortage of commodities, especially fuel and food, causing hyperinflation. The Sri Lankan government believed that by curbing imports of fertilizers foreign exchange would be saved and domestic production of organic food, would be encouraged, which would also help increase exports. But this could not happen and the foreign exchange reserves kept depleting further. The Sri Lankan government had to sell its gold reserves and enter into currency swap agreements with India and China to prevent any default in repayment of international debt.

Behind Sri Lanka's crisis is China's old strategy of debt trap. Not only Sri Lanka, but many more countries of the world have been trapped by China. The story starts with Sri Lanka accepting China's proposal for development of Hambantota port, without any feasibility study. Between 2007 and 2014, China gave five loans amounting to $1.26 billion for the development of this port, in the beginning at 1 per cent or 2 per cent, but later rate of interest was escalated to 6.3 per cent with shorter repayment periods. After that China invested $1.4 billion in Columbo port city project. Billions of dollars in loans have been given to Sri Lanka by China, for developing a seaport, airport, highways and power stations. By 2020, Sri Lanka's total liability to China had increased to about $ 8 billion (2020), but these projects are far from earning adequate revenues for debt servicing, even today.

So far major forcible takeovers of national assets of other countries by China have made headlines of global newspapers. There was takeover of Hambantota port of Sri Lanka in 2018 and more recently, threat is looming large of similar takeover of Mombasa port of Kenya, if it defaulted on a $3.6 billion loan from China, used to build the Mombasa Nairobi Standard Gauge Railway (SGR). Modus operandi has been the same every time, trapping the national governments in the vortex of debt and when they are unable to pay back loan and interest, then forcing the governments to transfer the ownership/ operations to China. All this is being done under Belt Road plan and infrastructure development by China.

Though, China boasts that Belt Road Initiative is a positive effort for improving China's connectivity with other countries, with an objective to promote trade and development. But the majority view differs from this. It is being considered as an attempt to promote China's geopolitical interests and enhance China's influence across the world.

What is BRI?

BRI is generally considered to be a mega infrastructural initiative, with intent of promoting international trade, while improving the connectivity between different countries of the world through developing road, rail and sea routes.  This proposal is being linked to the concept of 'Historical Silk Road', by China. China claims that the route was developed by Han Dynasty almost 2000 years ago.

Countries which are proposed to be partners in BRI, account for nearly one-third of the world's GDP and international trade, while two-thirds of the world's population lives in these countries. Many of the countries involved in the BRI project are so poor that 20-25 percent of their population lives under poverty. It is being argued that in the absence of the infrastructure, their resources are not fully utilized, which impact their development adversely. It is claimed that the construction of basic infrastructure will reduce trade barriers and help poor people of these countries get out of poverty and underdevelopment.

It is being told that with completion of this scheme, the connectivity of roads, railways and waterways will improve between different countries, which will make the movement of goods and people easier and cheaper. At the same time, it will also save significant amount of time and energy. Today, it takes more than 30 days to ship goods from China to Central Europe, which may be possible in nearly half time by rail, with BRI. It is being argued that due to delays in getting goods from the factory to the destination, the trade is hampered. It is believed that by promoting trade, the global growth and incomes will improve. The success of BRI will make the business extremely smooth in the world's important corridors.

Since full scope of the BRI project has not yet been exposed, it is difficult to say how much total expenditure is expected to be made on this project. But it is believed that China will spend more than 1000 billion dollars, that is, more than a trillion dollars on BRI projects. Apart from this, it is expected that the governments of many countries and private sector will also invest in this initiative. All this shows that this ambitious project will have huge investment, which is not possible to be estimated as on date.

China's argument is that the BRI's objective is to promote mutual trade, economic transactions and cultural exchanges amongst developing countries themselves and also with developed world. Therefore, BRI is not a project of mere infrastructure creation, but it is an attempt to achieve these bigger objectives. It is also being said that while USA, which has been providing the market to countries around the world, is now getting introvert under the policy of 'America First', rejecting multilateralism. In such a situation, other countries, including developing countries, will have to work for filling the vacuum in the global economy. Belt Road initiatives can be helpful in this. With these arguments, China claims that agenda of BRI is in essence 'build community with shared future for mankind'.

Historical Silk Road

It is said that the original Silk Road came into existence during the western expanse of the Han Dynasty (206 BC-220 BC), in which the trade mechanism developed between present day Central Asian countries of Afghanistan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan and China; and also with present day India and Pakistan. This route continued to extend to Europe, having a length of about 4000 miles.

It is said that due to this route connecting the Eastern and Western markets, Central Asia was the center of the first globalization, due to which not only did prosperity spurred in this region, but it also became a medium of cultural exchanges. China used to sell silk, spices, etc. to Western countries, and in return it used to get gold, glass and ivory. During the first millennium, this route was used under Tang Dynasty (618-907 BC) in China and the leadership of first Roman and later Byzantine empires.

But after the attacks of Mongols in Central Asia, the trade slowed down and the result was that, the countries of Central Asia were separated from each other. Trade between these countries today is only 6.2 percent of their total world trade. China argues that the new Silk Road will help increase this inter-regional trade.

BRI is not well defined

Despite so much of fun-fare, BRI is yet not very well defined, as official list is not available, on how many projects it has in its periphery. Therefore, it is difficult to distinguish projects which come under BRI and other projects which China is undertaking, to exhibit its presence in the world. The government of China is working on a number of projects through itself and its companies. All these projects are not part of BRI, but there is a complete lack of clarity about what is included in BRI and what is not.

BRI projects are being funded in many ways. The Chinese government is sometimes lending at subsidized rates for these projects and sometimes at commercial rate, the Chinese government may invest itself or China Development Bank or other Chinese financial institutions can also lend to any scheme or various multilateral international financial institutions may also support them for these schemes. Apart from this, funding can be done on the basis of public-private partnership, jointly by Chinese companies of or companies of other countries' or any mix of the above. According to 'Financial Time', in 171 cases, finances for BRI were made available through Export-Import Bank of China; in 78 cases finance came through China Development Bank, in 45 cases from the Industrial and Commercial Bank of China; in 24 cases projects were funded by the Bank of China and in 40 projects by other Chinese institutions. None of these institutions are such that they lend for BRI projects only. That is Asian Infrastructure Investment Bank (AIIB) and New Development Bank (NDB), controlled by China, had extended loans to India on a large scale, which is not a BRI country.

So if we look at the financing of these institutions, then we cannot predict how big the size of BRI is. Therefore, in the absence of a list of BRI projects, it is not possible to trace the coverage and size of BRI. Even if you estimate on the basis of China's investment in BRI countries, it is not possible to know the coverage of BRI on that basis. Based on the contracts of Chinese companies, it is known that they have received contracts worth 250 billion dollars in BRI over the last 5 years. But if other companies' contracts are also added to these, BRI's investment will obviously be more than 250 billion dollars. Therefore, total presence of Chinese investment in BRI cannot easily be estimated. In fact this is a big Chinese puzzle.

China is trying to be bully

President Xi Jinping wants to register his name in the history that he expanded the Chinese empire under the scheme like BRI. BRI has been included in the Chinese constitution also. In this ambitious project of the Chinese government, though efforts have been made to include all the governments of the world, companies, financial and other organizations, 'think tanks' etc., including those from China, it is linked with regional infrastructure development in BRI countries, only in relation with China. It is being showcased as a reform, which include highways, railways, pipelines and special economic zones, mainly, but most of the participation in the same is visible only by the Chinese government and its associated institutions and we find that the Chinese government and its affiliates are investing heavily in these projects. However, private sector companies from all over the world, including China, are reluctant to support BRI. Significantly, Xi Jinping has repeatedly been saying that the role of private sector in the construction of infrastructure on such a large scale is absolutely essential. Experts also believe that if private sector companies do not invest in BRI then all the BRI's objectives will be difficult to achieve. BRI is a demonstration of the economic diplomacy of the Chinese government, through which they are trying to increase the influence of China globally by financial support and finance to governments of BRI's partner countries, in greed for business for Chinese companies. In public discussions about the benefits of BRI, efforts are being made to hide political, economic and geopolitical threats arising out of this mega initiative.

At the second Conference of the Belt Road Forum, not only governments of the affluent countries, but also the big companies present there, raised concerns about the risks associated with BRIs. Even though government machinery in China dominates Chinese companies, both private and public, these companies have started raising voice about the political risks and challenges of investment in BRI countries. Not only that, they also point out that regulatory institutions in BRI countries are also in very poor condition. Significantly, wherever risk is high, private companies do not invest there. As far as Chinese State Enterprises are concerned, they have to agree to the Chinese government, so it has been seen that mostly Chinese government companies have come forward in BRI projects. Government companies obviously cannot go against the government, whether projects been promoted are profitable or not. But private companies have more freedom and they can reject any one or all such projects where they are not economically viable. There is also a large presence of private sector in China today. According to a survey, it shows that both private and public sector companies are fearing big risks in BRI. Both types of companies consider investment climate and the political risks in these countries as a major challenge.

The effort of the China is that for additional capacity, they will get a big market in the world through BRI. But the question arises here is that, if China's public sector companies and financial institutions are harmed by risks associated with BRI, then it will ultimately impact Chinese economy adversely. Significantly, due to the continuously ongoing trade war, the financial capacity of the Chinese government is gradually decreasing, and on the other hand, Chinese government is facing the problem of depleting foreign exchange reserves.

Though China is taking BRI very seriously, it is clear that investors from countries other than China are not keenly interested in BRI at present. In the Second Conference of the Belt Road Forum, when the investors of Western countries started raising their apprehensions openly, it became clear that roping in private sector in BRI projects would not be an easy task for the Chinese government. Due to all these apprehensions, uncertainties and contradictions associated with this BRI projects, investors fear that investing in BRI projects is extremely risky. However, supporters of the project maintain that the success of this project may be suspected, but this project has to become a reality, since China has so far invested huge money in BRI. But here we must not forget that this project is not possible to be concluded by the Chinese government alone; and private sector investment is very important.

What are China's plans for its New Silk Road?

President Xi made the first announcement of Belt Road Initiative in 2013 during his official visits to Kazakhstan and Indonesia. This was a two-way plan: Silk Road economic belt and maritime Silk Road. Both were collectively referred to as the one belt, one road initiative, but it eventually came to be known as the Belt and Road Initiative.

Xi Jinping then announced plans for the 21st Century Silk Road in the summit of the Association of South-East Asian Nations (ASEAN) in Indonesia in 2013. Xi said that to expand maritime trade, from South and East Asia to East Africa, China will invest in the port development in Indian Ocean.

International organizations such as the Asian Development Bank says that in the coming days, various countries will have to invest hugely to overcome their infrastructure bottlenecks; hence the Belt Road Initiative that talks about connecting Asia, Africa and Europe, may be helpful in addressing these infrastructure issues.