Why China’s trump card in global diplomacy is fraught with peril

Even China’s most powerful dynasties found it hard to maintain influence in far-flung regions

PUBLISHED : Wednesday, 10 May, 2017, 7:04am
UPDATED : Wednesday, 10 May, 2017, 10:07am

Beijing uses words like connectivity and win-win cooperation to describe its ‘Belt and Road’ push, but if history is any guide there could also be risks aplenty along the new Silk Road.

In about 120BC, Emperor Wu of China’s Han dynasty launched an aggressive military campaign against nomadic Hun tribes to unblock trade routes to the west.

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But even China’s most powerful dynasties, such as the Han and Tang, found it hard to maintain influence in far-flung regions due to cultural differences, difficulties in maintaining military control and their own domestic problems. China’s first foray into the heartland of Central Asia met a resounding setback in 751 when the Arab Abbasid Caliphate defeated the Tang army at the Battle of Talas, close to today’s border between Kazakhstan and Kyrgyzstan.

When President Xi Jinping entertains 28 leaders from countries along China’s belt and road trade-development network in Beijing next week, there will be echoes from those ancient times, when tribes from afar admired the Middle Kingdom’s wealth and power.

However, analysts say China, the world’s second-biggest economy, faces the same problems encountered by those dynasties in far-flung regions: wariness from foreign leaders, a lack of supporting domestic resources and institutions, and competition from rival powers.

The belt and road initiative was “China’s trump card in exercising its international diplomacy”, said Professor John Wong, a professorial fellow at the National University of Singapore’s East Asian Institute, but China lacked “sufficient international experience to operate its belt and road activities effectively”.

After all, it’s a massive plan covering nearly 70 countries, including some of the world’s most dangerous places, and the investment and trade offered by China benefit from little in the way of institutional or military guarantees.

Puffing across the ‘One Belt, One Road’ rail route to nowhere

Taking China’s desire to export its high-speed rail expertise as an example, the building of the world’s biggest high-speed railway network at home in just a decade has failed to smooth the path for overseas sales of tracks and bullet trains.

The Mexican government cancelled a contract with a China-led consortium for a high-speed rail project in November 2014, just three days after Chinese media hailed it as the first export victory for the country’s high-speed rail technology. China’s attempts to export high-speed railway know-how have also met resistance in Europe, with the European Union investigating a project that would connect the Serbian and Hungarian capitals for possible violations of public tender rules. In Southeast Asia, China has faced fierce competition from Japan and changing circumstances in host countries.

Wang Yiwei, dean of the Centre for European Studies at Renmin University, said Beijing’s first belt and road summit would be more about building goodwill and trust than unveiling blueprints for specific projects.

Zhu Ning, deputy director of Tsinghua University’s National Institute of Financial Research, said there were “unrealistic expectations in some countries ... regarding China’s belt and road initiatives as charity projects, and a lack sufficient participation”.

In Central Asia, China is facing competition from Japan, South Korea and the United States, which have signalled their intention to beef up economic and political interactions with a region traditionally within Russia’s sphere of influence. Meanwhile, Russia, which formed the Eurasian Economic Union trading bloc with Belarus, Kazakhstan, Armenia and Kyrgyzstan in 2014, is watching China’s initiative warily.

Japan’s deep presence in Southeast Asia also presents a challenge and Beijing’s plans for infrastructure projects in Pakistan and other South Asian countries have caught the attention of India. And at the European end of the Silk Road, Beijing’s push for close ties with a massive European Union infrastructure investment plan has yielded little in the way of results.

China has expanded its overseas investment but the process of venturing abroad has been dotted by failures, in part because Chinese enterprises place a great deal of emphasis on maintaining ties with ruling parties. By ignoring the building up of connections with opposition parties, they are less prepared for political shifts.

The Myitsone Dam project in Myanmar has been suspended since 2011, largely due to local hostility. Whether construction will resume remains unclear despite a visit to China by Myanmar’s de facto leader, Aung San Suu Kyi, last August.

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Wang said Chinese enterprises with projects in Malaysia had placed all their bets on the political longevity of that country’s prime minister, Najib Razak, but that had not stopped some of them from facing strong criticism in Malaysia for evading public tender rules.

Big engineering projects such as hydroelectric power plants, airports and telecommunications infrastructure are usually associated with government aid and that can make them more vulnerable – politically and economically.

Unrest in Libya spanning eight months in 2011 forced the halting of more than 50 Chinese investment projects worth US$19 billion. When the Gaddafi regime fell, Chinese projects were left nursing massive bad debts.

The suicide bombing of the Chinese embassy in Bishkek, Kyrgyzstan, in August highlighted the need for China to step up security to protect its interests in Central Asia, which lies at the heart of the belt and road initiative.

Chinese enterprises also face challenges due to growing environmental awareness, with the Chinese Academy of Social Sciences saying projects in Myanmar, Cambodia, Namibia and Indonesia have encountered protests from local people or environmental groups, or been penalised by the local authorities.

“What I am most worried about is the pollution in the Red Sea with the development of the industrial zone, and that we have to invest a lot to protect the local environment,” said Feng Zhaoyi, a former chairman of the Suez economic and trade cooperation zone built by Tianjin’s state-owned TEDA Investment in Egypt.

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Back in China, observers warn, there are signs of an irrational rush by local governments to launch belt and road projects, given the initiative’s status as a national strategy.

“The belt and road scheme has replaced GDP as an indicator for cadre appraisals,” Wang said. “Some local governments rushed to help build China-Europe railway links or overseas industrial parks, some of which are vanity projects.”

Rail freight lines from at least 27 Chinese cities operate services to 11 European countries, including Germany, Poland and Britain. But most face losses due to high freight costs and an insufficient volume of goods on trains returning to China. That’s led to less frequent departures and a greater reliance on local government subsidies.

“Everyone wants to be part of the big pie, which blurs the original purpose of the scheme,” Wang said. “Outbound investments need to be regulated.”

State firms have been the main force in outbound investment, sometimes undertaken for reasons of national strategy rather than any commercial consideration and mainly funded by policy banks such as the China Development Bank and the Export-Import Bank of China. That has made it hard to measure the success of projects using traditional commercial criteria.

Low profitability has been a major concern, with the Ministry of Commerce saying 22 per cent of overseas projects were in the red at the end of 2011.

“We started outbound projects from the 1950s, which were mainly foreign aid, and we started commercial investment projects from the late 1970s, but, to be honest, we’ve hardly made any great profits in the past decades,” Gao Jiancheng, a senior executive at China State Construction Engineering, told a Centre for China and Globalisation forum in Beijing at the end of April. “It’s been gain here, lose there.”

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The government needed to improve its foresight, Zhu said. Previous government-backed acquisitions of natural resources in places such as Canada and Kazakhstan had taken place when oil prices were peaking, leading to much higher costs, he said.

“Going overseas is a necessary step for China with its rising economic power, but there have not been many successful cases, and corporate executives should improve their management of international business, labour forces and cultural differences,” Zhu said.

Beijing set up a leading group on belt and road initiatives at the National Development and Reform Commission (NDRC) in February 2015. It is led by Vice-Premier Zhang Gaoli, with Vice-Premier Wang Yang, State Counsellor Yang Jiechi, China’s top diplomat, and Wang Huning, a top policy adviser to Xi, as deputy heads.

A source close to Xi’s thinking said the scheme was a long-term vision and it was unrealistic to expect quick results. Zhu said the NDRC was working on establishing a framework for belt and road projects to avoid irrational outbound investment.

But China had few experts on smaller countries along the belt and road routes, observers said, which made it hard for company’s considering overseas projects to acquire useful advice.

Cultural and religious differences would also lead to economic risks in belt and road projects, BOC International chief economist Cao Yuanzheng wrote in a recent book, adding that China was “in urgent need of talent proficient in Arabic issues”.

Beijing’s strict capital controls are delaying belt and road project approvals

Policy coordination and a reduction in red tape were also needed to facilitate overseas projects, company executives said.

“It is hard to seek quick help from Chinese consulates when we are in trouble from a political riot or unpredictable policy changes in host countries,” one entrepreneur, who requested anonymity, said. “They are as bureaucratic as domestic government agencies at home.”

He said several departments were involved in regulating company’s overseas investments and they competed for leadership, lacked consensus and could not offer clear policy assistance.