The Chinese Belt and Road Initiative (BRI)

_ Yuri Kofner, head, Eurasian sector, Centre for Comprehensive European and International Studies (CCEIS), National Research University “Higher School of Economics”. Munich, 15 July 2018.

Introduction

The “Belt and Road” is an initiative by the People’s Republic of China (PRC), which involves the unification of two projects: the “Silk Road Economic Belt” (SREB, i.e. the “Belt”) and the “21st Century Maritime Silk Road” “(MSR, i.e., the “Road”). Hence it is also referred to as the “Belt and Road Initiative” (BRI).

The idea was first announced by Xi Jinping, Chairman of the People’s Republic of China in his speech at the Nazarbayev University in Astana as part of a state visit to Kazakhstan in September 2013.

The “Belt and Road” initiative envisages the creation of two corridors: the land-based “Belt” corridor – through the countries of Central Asia and the Middle East to gain access to Eastern and Western Europe; and the maritime Silk “Road” – through the Pacific and Indian Oceans and the Mediterranean Sea (see Map 1).

Map 1. The Belt and Road Initiative (BRI)

Source: Lecture by Stephan Barisitz, Dr. Sciences (Economics), Senior Economist, Foreign Research Division, Austrian National Bank (OeNB). HSE, Moscow, 5 June 2018.

The Silk Road Economic Belt is a “brand” for the process, within the framework of which any projects aimed at achieving the main goal – supporting the economic development of the interior regions of China – can be implemented.

At this stage, the SREB is a non-institutionalized “process in motion” for developing bilateral trade and economic relations with the countries of Central Asia, the Middle East, Central and Eastern Europe. There is no plan for the implementation of the SREB with any specific quantitative benchmarks. Publicly, at least.

As for now, the SREB is, first of all, a transport project: connecting by railway China – Kazakhstan – Russia – Belarus and further the countries of Central and Eastern Europe.

Goals

The main goal of the concept is the creation and modernization of transport routes from China to Europe and the formation of points of economic growth “along the road”, further stimulating the development and modernization of the Chinese economy.

The development of the Silk Road Economic Belt is aimed at increasing the volume of China’s foreign trade, solving the problem of overproduction within the country and at stimulating the development of lesser developed Chinese hinterland regions, e.g. Xinjiang.

In recent years, China has been intensively developing its internal transport system, through the development of which a large number of jobs have been created.

Taking into account that to date the transport infrastructure of China has already been largely modernized, Beijing will be able to keep employment in the construction sector only by exporting China’s infrastructure competencies and solutions.

Implementation of the Belt and Road Initiative is aimed at achieving the following results:

“Utilization” of excess capital by investing it outside the country. Further investments in fixed assets within the country will lead to aggravation of the existing imbalances: creation of excess production capacities; deterioration of the environment; growth of corporate debt; slowing down the change in the economic development model from “investment + export” to “domestic consumption”.

Creation of additional demand for excess capacity products located inside China (metallurgical, cement, glass, etc.) and “new” Chinese high-tech products (creating an additional incentive to accelerate economic modernization).

Creation of an additional incentive for the further implementation of the Chinese business expansion program (“going out”). In fact, this is the preparation of the relevant territories for the arrival of the Chinese companies – large state-owned at the first stage and private small and medium-sized enterprises in subsequent stages.

Content

Within the framework of the Belt & Road Initiative it is planned to build a network of roads and railways, ports, pipelines, power stations along the routes connecting China with South-East and Central Asia, the Middle East, Africa and Europe (see Map 1).

It is difficult to distinguish a clear-cut list of projects realized or being realized exactly as part of the SREB, since, firstly, the project itself exists only for a few years, and secondly, the SREB, as mentioned above, is a brand for the process, rather than a defined business project.

As for now, in order to bolster and to promote the project on foreign markets and declare its success, the Chinese authorities connect to it any projects that began after 2013 with the employment of Chinese capital in the countries that belong to the Silk Road area. There is also no single list of countries – there is only an approximate geographical connection.

The transport and logistics junction Khorgos in the Almaty region of Kazakhstan as part of the special economic zone “Khorgos-Vostochnye Vorota” (development since 2005) can be attributed to the SREB. The special economic zone Khorgos includes a dry port, a logistics and industrial park, the Altynkol railway station and the Kazakh-Chinese International Center for Cross-Border Cooperation. According to Chinese experts, the total volume of Chinese investments was about $ 2.7 billion. At the same time, on could be skeptical about this amount, as China’s regional authorities tend to overstate their spending to increase funding from the central government and to demonstrate their success.

Also, projects that can be attributed to the SREB, which are financed exclusively by the Silk Road Fund, include:

The purchase of a 9.9% stake in Yamal LNG for $ 700 million.

Financing the construction of a hydroelectric power station in Karot, Pakistan. The total investment with the Eximbank of China amounted to $ 1.65 billion, under the terms of the deal, the hydroelectric power plant will be owned by the Chinese consortium for 30 years, then transferred to Pakistan.

Financing the purchase of the Italian tire manufacturer Pirelli. The Silk Road Fund purchased for $ 1.8 billion 25% of the shares of the China National Tire & Rubber Co., which in turn used the proceeds to buy Pirelli shares (98% of the shares in October 2015). Pirelli’s foreign assets include, among others, Kirov and Voronezh tire plants in Russia.

According to the Ministry of Commerce of China, in general, in 2015, within the framework of the Silk Road Economic Belt, the volume of Chinese investments amounted to almost $ 14 billion in 49 countries (an increase of 37% compared to 2014).

In railway segment, projects are under way to build a high-speed railway in Indonesia (Jakarta-Bandung) and Guangdong-Dali (China-Myanmar).

In February 2016, Chinese companies began the construction of a railway corridor in Iran aimed with subsequent connection of the Iranian transport infrastructure with the transport infrastructure of Turkey, which is another route for the creation of a continental railway transport corridor from China to Europe. The German company Siemens (additional compounds, signal systems and other equipment) participates in the project’s implementation.

In 2015, construction of a high-speed China-Thailand railway began. The total cost of the project is $ 470 million. At the same time, China provided Thailand with a quota of nearly $ 8 billion for investing in China.

In the future, the connection of the China-Thailand railway with the China-Laos railway is expected. The construction agreement was signed in 2015. The amount of financing is almost $ 6.5 billion. The route is from Boten (China) to Vientiane (Laos).

In order to implement the objectives of the Maritime Silk Road, the Chinese company COSCO received approval from Greece to acquire 67% of the Greek port of Piraeus. Under the terms of the transaction, at the first stage COSCO will receive 51% of shares for Euro 280.5 million. The remaining 16% will transferred over the next five years for Euro 88 million. It is planned that within 5 years after the privatization, the Piraeus port will attract investments worth Euro 500 million.

In early 2016, an agreement was signed for $ 3.3 billion to build the Sharshal seaport in Algiers.

Chinese companies rented part of the Darwin port in Australia for 99 years, part of the Gwadar port in Pakistan for 40 years, signed an agreement on the construction of a container terminal at the port of Sidney in Canada, as well as an agreement to build a military base in the immediate vicinity of the strategic Bab-el-Mandeb strait in Djibouti.

The use of the Silk Road for military purposes can potentially meet with opposition from China’s military opponents in the region – India, the Philippines, and Vietnam. However, for the while the interests of receiving Chinese investment prevail.

The megaproject area covers more than 60 countries in Asia, Europe and Africa, with a total population of 4.4 billion people (about 63% of the world’s population), and an estimated economic scale of 30% of world GDP (see Appendix 1).

Financing

The financial platform of the BRI is the Silk Road Fund ($ 40 billion). It has a focus on infrastructure investments. The founders of the fund are the Central Bank of China (65%), the China Investment Corporation (15%), the Export-Import Bank of China (15%) and the China Development Bank (5%). The fund operates in accordance with Chinese law, foreign investors can take part in its projects. The capital of the Asian Bank for Infrastructure Investments (potentially $ 100 billion) and the BRICS Bank (potentially $ 100 billion) can also be used to finance projects of the Belt & Road Initiative.

It is planned to create an additional fund ($ 30 billion) to support enterprises, which will export Chinese industrial goods along the Silk Road. The Chinese investment corporation is in the process of creating a mechanism to support direct investment of more than $ 40 billion.

It is planned to adapt the Chinese Development Bank, the Export-Import Bank and the Agricultural Bank of China for a deeper engagement in the implementation of SREB projects.

Individual Chinese provinces have the right to create additional funds to support provincial companies involved in the implementation of SREB projects or in the usage its infrastructure. For example, the authorities in Guangdong Province plan to create a fund for financing 40 key projects worth more than $ 50 billion, including the creation of integrated transport hubs.

The main financial mechanism for the implementation of the Belt & Road projects is the provision of loans by Chinese financial institutions for the implementation of infrastructure projects (usually a linked loan for 20 years at 5% per annum with a deferred payment for the first 5 years). The main condition for obtaining financing is the use of Chinese equipment, goods, services and labor.

Drivers

One of the main drivers of the Belt & Road Initiative is the implementation of large infrastructure projects, in particular, the construction of turnkey high-speed railways (HSR). It is assumed that in the implementation of HSR projects, Chinese large state-owned companies will be followed by private producers of hardware, software, engineering and service providers, as well as banks, insurance and other companies.

 Such a policy was called the “high-speed railway diplomacy of China”. Currently, talks on the construction of railways are conducted with almost 30 countries.

Another important component of the initiative, in addition to the “export” of high-speed rail technologies, is the construction of nuclear power plants and hydroelectric power stations.

In 2015, Chinese companies won a tender for the construction of six nuclear power plants in South Africa (totaling $ 93 billion), 9 power units in Argentina ($ 14 billion), and an agreement to finance the construction of a nuclear power plant in the UK ($ 28 billion).

In general, until 2030, Chinese companies plan to build 30 nuclear reactors in the countries of the Silk Road.

Conjunction of the EAEU and the Silk Road Economic Belt

In May 2015, Vladimir Putin and Xi Jinping agreed at the Moscow summit on combining two economic initiatives – the Eurasian Economic Union and the Silk Road Economic Belt. However, neither the principles of pairing them, nor any concrete content have been worked out yet.

The Central Asian countries participate in the SREB, i.e. its main rail road China-Kazakhstan-Russia-Europe branch, more as transit countries and recipients of Chinese capital, technologies and equipment. The main risks for Russia in the implementation of SREB are the exclusion of Russian enterprises from SREB projects and a reduction in the transit potential of Russian road and railway lines. Opportunities include the use of Chinese capital for the creation and modernization of infrastructure in the Russian territory and the participation of Russian companies in the implementation of the SRBEB projects, including in the territory of third countries.

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