Xi's US Visit 2015

The grand plan behind China’s economic diplomacy: ease strain domestically, build status to rival America

PUBLISHED : Thursday, 28 January, 2016, 11:44pm
UPDATED : Thursday, 28 January, 2016, 11:44pm

According to Chinese tradition, giving a gift seals a friendship.

It’s a tradition that’s been underscored recently by globetrotting President Xi Jinping (習近平) who has left in his wake dozens of top-dollar deals in his efforts to make friends around the world.

Over the past year or so Xi has made headlines everywhere from the United States and Britain to France, Africa and the Middle East. Many of those headlines were accompanied by pictures of the Chinese leader smiling broadly and shaking the hands of his foreign counterparts, but it was not the diplomatic niceties that created great media discussion – it was the sheer size of the business deals involved.

Xi appears to be treading a similar path to the Chinese emperors during the legendary surpluses of the Han dynasty, an age characterised by the first Chinese expansion to the west and south.

Today, Xi is involved in his own expansion plans. He has proposed to revive the ancient Silk Road trade route, which stretched from China’s old capital of Xi’an as far as ancient Rome, and his backing his vision with pledges of huge Chinese investment.

READ MORE: Xi Jinping’s whirlwind globetrotting heralds “new power diplomacy” - will it work?

Much like the Chinese belief that money makes friends, Xi’s actions have been characterised as cheque book diplomacy by many observers.

China has the money to spend and also the motivation – it wants to better utilise its more than US$3 trillion in foreign exchange reserves. Most of China’s foreign exchange reserves – the world’s largest – are currently tied up in US treasury bills.

In his recent trip to the Middle East, Xi said China would set up a US$20 billion common investment fund with the United Arab Emirates and Qatar, and pledged 230 million yuan (HK$272 million) of humanitarian aid to the region.

Last year was a particularly busy one for Xi. He paid state visits to 14 countries and held talks with leaders from 74 countries, sometimes on multiple occasions. During this diplomatic whirlwind China pledged several hundred billions of dollars in direct investment, loans or aid. The pledged amounts – which may be spread over a number of years – equate to several percentage points of China’s annual output, which was over US$10 trillion in gross domestic product last year.

Zhu Zhiqun, a political science professor and director at the China Institute at Bucknell University, said that since Xi took office, China had continued to expand its influence by signing trade and investment deals with countries in every corner of the world.

“Xi’s dollar diplomacy is consistent with China’s new diplomacy that began in the 1990s. It focuses on securing resources, expanding export markets and promoting China’s soft power,” Zhu said.

Under conservative estimates, Xi pledged more than two hundred-billion dollars worth of commercial deals, state investments, loans and aid during trips to Pakistan, Russia, Belarus, the US, Britain and South Africa last year.

Xi began his year of diplomacy by visiting all-weather friend Pakistan, signing up to US$46 billion worth of Chinese investment in a memorandum. Most of the projects involved the construction of renewable energy power plants to relieve the country’ electricity crisis.

In his visit to Russia in May, Xi oversaw the signing of a US$25 billion contract on high-speed rail financing, natural gas payments and the founding of a capital joint investment bank.

In Belarus, he signed up to granting US$15.7 billion in government aid, railway financing, fertiliser sales and other such deals.

In the US in September, China signed a US$38 billion contract to buy 300 Boeing aircrafts, the single largest commercial deal this year. During the visit, Xi saw the completion of a deal to buy US$27.1 billion of American products.

READ MORE: Back to the future: Chinese President Xi Jinping’s Middle East visit ... and his Middle Kingdom dream

In Britain in October, Beijing pledged to invest US$62 billion in infrastructure and other projects, including investment into a nuclear power plant and energy projects partnering BP.

In Africa in November, Xi offered the continent US$60 billion in funding for development of industry, agriculture and infrastructure. A further US$6.5 billion investment and loan will be spent on building electricity facilities and a car factory in South Africa, and US$1.2 billion on a power plant in Zimbabwe.

Zhu expected Beijing to increase its investment in Africa, Central Asia and Latin America as Beijing continued with its policy of maintaining strong relations with these developing countries.

Zhu said some investments were also meant to reward all-weather friends such as Pakistan and Zimbabwe.

Some analysts said China’s increasing outward investment was an effort to export the country’s industrial overcapacity, nurture domestic structural reform and boost growth. They said Xi’s missions were designed to expand the market for made-in-China products and help Chinese businesses access natural resources at their source.

“China’s use of economic diplomacy is a means of easing domestic economic strains,” said Benjamin Herscovitch, a research manager at China Policy, a Beijing-based policy analysis and advisory firm.

Matt Ferchen, a resident scholar at the Carnegie–Tsinghua Centre for Global Policy, said many of Xi’s international economic initiatives, such as the Asian Infrastructure Investment Bank and the One Belt, One Road, focused on promoting development, especially financing and building infrastructure in China’s neighbourhood.

“Such initiatives are a combination of a strategic vision for promoting Chinese economic and diplomatic interests in regions like Southeast and Central Asia and at the same time a reaction to China’s slowing and changing domestic economy,” Ferchen said.

Some western diplomats say China under Xi will speed up its ‘go global’ strategy with the aim of competing with the US economically.

But Beijing also wants to compete with the influence of the US in terms of setting global norms and standards. To that end, Xi has initiated the BRICS Bank, the AIIB and the Silk Road reboot.

Diplomatic analysts said China’s aggressive economic expansion was part of a strategy to expand its sphere of influence under Xi’s new diplomacy to forge a “major power status equalling Washington”.

Mellahi said there was little doubt China had become a significant diplomatic player in a very short period of time. Its diplomatic presence was now felt in all corners of the world, he said.

“More noticeably the recent shift from what one may call passive or responsive diplomacy to a proactive one is enabling China to shape the world order and its position in it,” Mellahi said.

But some economists question whether such cheque-book diplomacy – rewarding political allies with investment and loans – is commercially smart or sustainable.

“And even if it has been successful, is it worth the inordinate cost, time, and effort? One has to say that there is no straight answer to this question,” Mellahi said.