Chinese grand strategy and the new Silk Road

Last year the Duisburg to Chongqing train took its maiden voyage, spanning the Eurasian landmass taking two weeks and a number of border crossings it transported machinery from the heartland of advanced European manufacturing to the new workshop of the world – namely the Chinese megacity Chongqing. This new route is symbolic of a wider Silk Road renaissance which has unfolded over the last few decades. The Silk Road was a collection of trade routes across Central Asia, India and Western Asia that connected Europe and Asia, the hostility between the Ottoman Empire and European powers in the 16th century along with improvements in sailing technology and the opening of new sea routes across the Atlantic and Pacific Oceans brought about the decline of the Silk Road – until now.

China has a new vision to revive this moribund concept, the sluggish economic performance of many post-Soviet states, the political isolation of some such as Turkmenistan and further south Iran, plus instability in countries like Afghanistan have for many years made the route look pointless or just outright dangerous. The long distances and inhospitable terrain also make the idea look overly ambitious, particularly when sea travel is so efficient, but the Chinese view the project as a means to extend political power across Eurasia, something only the USSR and Germany have attempted in recent times, the ambition and vision behind the idea is potentially astounding.

The new Chinese leadership have recently designated the “major developing powers” (Kuoda Fazhanzhong De Guojia) i.e. the BRICS and emerging Asia as the new foreign policy priorities. There is now a US$40 billion fund to put the plan into action which promises to bind China’s neighbours closer to Beijing through new economic and political linkages.

The vast distances and inhospitable terrain make the logistics of improving rail and road connections difficult, the political and economic differences between the nations involved are profound and could result in the idea falling flat, but Beijing has proved time and time again it is capable of pulling off infrastructure projects on a grand scale.

Maritime Silk Road

In September 2013 the President Xi Jinping gave a landmark speech in Astana, Kazakhstan outlining his vision for a Silk Road economic belt extending from China to Europe encompassing Central Asia, Southern Asia and the Middle East. The following month saw President Xi give a speech to the Indonesian parliament outlining a vision of the 21st Century Maritime Silk Road, touting economic development along Asian and African sea routes, along with rail and airports, as usual this was assisted by win-win rhetoric of how this would benefit China’s partners as well as its own companies who would naturally take a lead in constructing his vision.

This foreign policy initiative comes at an important time for China as it enters what is being described as the “new normal” period of economic growth, 7% rather than 10+%. The government are keen to find new engines of growth, manufacturing exports have driven growth up until the financial crisis, after that debt became a key weapon in the Communist Party’s arsenal, but now new sources must be found. The Party must retain its reputation for economic management and by helping its state owned enterprises expand abroad it can strengthen its own economy as well as extending the nation’s influence in its backyard.

Already China is planning the development of ports in cities across the East coast of Africa from Dar Es Salaam to Djibouti to Maputo. Often these ports will be accompanied by industrial hubs and export processing zones, with much of the produce China bound. Further inland rail connections such as a new network for East Africa linking Kenya with Sudan, Uganda and Burundi will all benefit from Chinese largesse.

Crucial to these projects is finance, China has announced the creation of a new set of financial institutions which together with the China Development Bank and EXIM bank will fund the new Silk Road, but also challenge the existing development finance international architecture dominated by the US led IMF and World Bank. The Asian Infrastructure Bank and New Development Bank or “BRICS” bank have been formulated as a reaction to failure of the existing organisations to allow greater representation of developing countries within its board structure.

Swapping one colonial partner for another?

Chinese foreign policy has non-interference as a core principle, it explicitly sets out that Beijing will not seek to influence the actions of other sovereign nations. At the same time China’s going out policy has meant huge sums being lent to foreign countries, while this is often repaid in the normal fashion, some countries have turned to a form of barter, exchanging natural resources for credit, often referred to as the Angola model as the Southern African country exchanged oil for credit in one of the first instances of this trade.

China has enjoyed vital supplies of iron ore, oil, minerals and the many other raw materials from Asia, Latin America and Africa needed to create a manufacturing superpower. Many critics have considered this relationship exploitative and neo-colonial, citing China’s negative effect on national governance and disregard for environmental and social practices. On the other hand it has been argued that Chinese companies are no worse than western competitors and that China has largely stuck to its non-interference policy, plus there is no firm evidence it encourages dictators, taking this further it can be argued that China is now encouraging the growth of manufacturing in Asia and Africa through the offshoring of the textile and garment industries which are becoming less viable in China as its firms move up the production chain and these factories are moving to Ethiopia and Bangladesh.

The new Silk Road could be a declaration of Chinese economic dominance in developing countries, the creation of neo-colonial vassal states or perhaps something more equitable as emerging economies are helped up the ladder by Chinese engagement through infrastructure development and offshoring of certain industries that are no longer viable in China, but would benefit countries further down the economic ladder.

Economic imperative behind the Silk Road

The slowdown of economic growth in China has increased the need for firms to invest abroad and spend their excess capital, the rapid rate of construction in China had to slow down eventually, a big overhang in construction has created an oversupply of homes and buildings in many parts of the country, in the longer term another 400 million people are expected to urbanise in the next 30 years, so there is still plenty of room for growth, but in the meantime doing more business overseas will continue to be a priority. Chinese state owned firms have gained confidence in their dealings abroad and will want to continue “going out”.

The new SIlk Road could in fact widen and deepen the economic divide between Asian nations and China, one side providing the raw materials, energy, minerals and all the other commodities China demands from timber to cotton to rice, while in the opposite direction China will continue sending the manufactured goods which have got it where it is today. Or will rising costs in China provide the opportunity for other countries to pick up the low cost manufacturing which China has been so successful in over the last decades. Can the likes of Bangladesh, Vietnam and perhaps even Central Asian states start to develop with Chinese help their own manufacturing sectors. And from a political point of view will this mean that China comes to dominate the region or will peaceful co-existence and harmony rule the day?

Will China have to moderate its position with its neighbours or will it become excessively aggressive in trying to reach its foreign policy goals, some commentators believe it will become ever more entangled with its neighbours and international affairs, others believe it is unable and unwilling to exert more control abroad, as it has to focus more on internal issues such as security, controlling a vast and sometimes restless populace and maintaining the legitimacy of the Communist Party. Internal debates within China on foriegn policy range between those who believe China should be asserting themselves and taking a more aggressive stance on issues, to those who think that it should follow a multilateral path and avoid confrontation. The next few years will demonstrate which path China chooses.



Categories: China Goes Global, Development finance, Frontier Markets

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