Belt and Road: Xi’s initiative finds momentum and meaning in south Asia

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By:
Elliot Wilson
Published on:

BRI may be hard to define, but it is already working wonders in parts of a region crying out for good infrastructure. Global and regional lenders are happy to go along for the ride.

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China’s control of Gwadar Port, Pakistan, gives it unfettered access to the Indian Ocean
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BELT AND ROAD     

The genius of China’s sprawling attempts to rework globalization in its own image is that, for now at least, it defies any attempt at clarity. Ask any two people to define the Belt and Road Initiative and you receive utterly different answers. 

Nawaz Sharif, former premier of Pakistan, a country that stands to benefit handsomely from the initiative, has described the BRI as a “game-changer” for his homeland. Matthew Oxenford, a research associate at Chatham House’s global economy and finance team in London, sees it as Beijing’s “flagship branding exercise”. 

He draws comparisons between the BRI’s nation-building efforts and the Works Progress Administration, a Depression-era US agency that put jobless men to work building much-needed roads and public buildings.

This lack of clarity is often more help than hindrance. “Even if no one understands what BRI is, which they don’t, everyone does understand infrastructure,” notes Fraser Howie, author of ‘Privatizing China’. 

“Belt and Road allows you to justify pretty much any infrastructure development in any country along its route. BRI is a magic word that explains any project to investors, bankers, or multilaterals.” 

Nayana Mawilmada, head of investments at Megapolis, a scheme to rebuild Sri Lanka’s western provinces, says: “Even when a project isn’t tacitly part of the Belt and Road Initiative, it is part of the pitch process. Just saying that something is Belt and Road-related opens up new conduits of financial resources.” 

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Fraser Howie

Take the example of south Asia, which is the only part of the world in which the ‘belt’ and the ‘road’ interconnect, and which has benefited more from the initiative than any other region. China’s push into the subcontinent began back in 1962, when a border dispute drove a wedge between it and India. Beijing turned to Pakistan, which became a willing buyer of Chinese-made military equipment, and more recently a direct-aid recipient: in April, the Chinese government gave Islamabad $1 billion in loans to stave off a currency crisis.

China’s presence in Pakistan accelerated from 2009. First, it built and secured control over a new industrial port and naval facility in Gwadar on the Arabian Sea. This granted Beijing unfettered access to the Indian Ocean, with its busy shipping lanes, but also its lack, as the historian Robert Kaplan noted in his book ‘Monsoon’, of entrenched superpowers. 

From there, China pushed north, building infrastructure as it went. A 2,280-acre free-trade area sprang up in Gwadar, controlled by China Overseas Port Holding. Beijing is building new power plants, coalmines, hydroelectric dams, nuclear reactors and a highway linking Karachi on the Indian Ocean with western China via the Karakoram Pass. 

New pipelines built, funded and, importantly, controlled by mainland institutions, will convey Middle Eastern crude oil overland to China and send liquefied natural gas in the other direction, easing Pakistan’s constant energy and power shortages.

When China’s president Xi Jinping trotted out the phrase ‘win-win’ at the Belt and Road Forum in Beijing in May, it was projects like these that he had in mind. Pakistan gets the kind of quality infrastructure it has long needed without having to go cap-in-hand to exacting US, European or Japanese controlled multilaterals, or – at least in the short term – to dip into its foreign exchange reserves. Creating an overland trade route through Pakistan in turn allows inbound and outbound Chinese trade to avoid the Malacca Strait, a chokepoint patrolled by US warships. 

Pakistan is also a fascinating case study in the ad hoc nature of the BRI. Many of the early mega-projects were approved without an end game in mind, other than an abstract notion of increasing China’s sway in, and access to, the region. Only later, as Beijing’s determination to build and control better trade channels grew, did it feel the need to clarify its ambitions. 

So, it officially unveiled the China-Pakistan Economic Corridor (CPEC), which encompasses $46 billion-worth of infrastructure projects, with a completion date of 2030. As a sign of how quickly things are moving, that acronym is already losing its relevance, with many viewing CPEC as a constituent of the BRI. 

Funding

Elsewhere in the region, the influence of the Chinese state, and the BRI itself, is more mixed. In Bangladesh, officials are finalizing plans for $6.8 billion-worth of construction projects, including a new $3.14 billion rail line linking the capital, Dhaka, with the southwest of the country. The bulk of the funding is set to come from policy lender Export-Import Bank of China (Chexim), through a 20-year loan at 3% interest with a grace period of five years. 

Sri Lanka has also turned to China in search of cash and construction aid. The $209 million Mattala Rajapaksa International Airport, completed in 2012, was funded by a $190 million Chexim loan. In July, the Sri Lanka Ports Authority signed a $1.1 billion deal with China Merchants Port Holdings, handing the Hong Kong-listed firm a 70% stake in a new port in Hambantota. The deal includes the conversion of $6 billion of loans that Sri Lanka owes China into equity. 

Megapolis’s Mawilmada describes the deal as: “Crucial to our economy and critical to our infrastructure. It will have a major impact on our ability to maintain a high rate of growth, attract more foreign direct investment and deliver new jobs.” 

In Myanmar, mainland Chinese firms are building a $7.3 billion port and a $2.3 billion industrial park at Kyaukpyu, in projects led by Beijing-based Citic Group. Even the Maldives has cosied up to China. In the wake of a 2014 visit by president Xi, Chexim lent $440 million to the scattering of Indian Ocean atolls: cash that is being used to build, among other things, a new airport serving the island-capital Malé. 

Longer term, China wants to build a port on one of the southern atolls to secure permanent access to a key shipping lane that passes through the island chain. 

China has not had it all its own way, however. Officials in Myanmar shocked everyone, particularly Beijing, by suspending work in 2011 on the $3.6 billion Myitsone Dam, which would have channelled hydroelectric power to southwest China. The project remains unfinished, clad in scaffolding and testament to the fact that not every BRI project will see the light of day. 

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Matthew Oxenford, 
Chatham House

Then there is India, whose relations with China remain frosty at best. New Delhi sees the BRI, at least in south Asia, as a concerted attempt by Beijing to enfold and enclose it, hampering its ability, as it develops into an Indian Ocean power, to move around its region with impunity. 

This will not deter China, but it does hinder its ability to realize its full ambition. The Bangladesh-China-India-Myanmar Corridor, a planned 2,800 kilometre trade conduit from Kunming in southwest China to Kolkata in India has made little progress since it was first envisaged in 2013. 

There may not be merit in every BRI related project. And there has been pushback on some projects, most notably in Myanmar but also in Sri Lanka, where many question the need for the Mattala Rajapaksa airport, which is located too far from big cities and is served by just one international airline, the budget carrier flydubai.

But it is hard to argue that the Belt and Road Initiative has not been a boon to regional sovereigns desperate for cash to build new roads and bridges, rail networks and power grids. The World Bank reckons south Asia, including India, needs to spend $2.5 trillion by 2025 to close a yawning infrastructure gap and pull billions out of poverty. 

“Building better roads and better ports is not a bad idea, and you can argue that better infrastructure is required across the whole of south Asia,” notes Howie. 

The other clear beneficiary of China’s desire to build brand new infrastructure across south Asia has been the banking community. Beijing’s main policy lenders, led by Chexim and the China Development Bank (CDB), are the primary drivers and funders of many of the largest regional BRI projects. Its commercial banks have, in the main, been rather slower to react, at least in south Asia. Their inclination is to sing the praises of the Belt and Road Initiative, as one would expect from a group of lenders run and owned by the Chinese state. But many have a patchy presence in the region. 

Industrial and Commercial Bank of China, the largest listed mainland lender by market capitalization, has branches in the Pakistan cities of Islamabad and Karachi, both of which were opened in 2011. But it took Bank of China, Beijing’s most international lender, with offices in more than 50 countries, until May 2017 to open its inaugural Pakistan branch, also in Karachi, the country’s most populous city. 

China Construction Bank, the second-largest state lender by market cap, has provided financial support to 50 infrastructure projects in BRI countries. But despite having branches in Japan, Korea and Hong Kong, and even Vietnam and South Africa, it has no on-the-ground presence in south Asia. 

Foreign lenders and big regional banks have generally been quicker on the uptake. At the head of the list is Standard Chartered, with more than 150 years of experience in the region and offices dotted across Bangladesh, Pakistan, Nepal and India. The UK-based lender was involved in 10 regional Belt and Road infrastructure deals in 2016, including a five-year hydroelectric project in Pakistan, built by Beijing-based Three Gorges Corporation and financed with a $1.74 billion syndicated loan led by Standard Chartered, the Silk Road Fund, and the International Finance Corporation, the private-sector arm of the World Bank.

It is also one of the financial sector’s busiest BRI networkers. In November 2016 and again in May 2017, it organized client meetings in Karachi, Mumbai, Colombo and Dhaka, introducing government officials and corporate chiefs to executives at more than 30 leading Chinese construction firms, commercial banks and policy lenders. In April this year, it also ran a Beijing roadshow, introducing managers at its Pakistan and Bangladesh offices to officials from CDB, Chexim and the People’s Bank of China.

HSBC is not far behind, thanks to its long-standing presence in both south Asia and mainland China. Last year, it acted as sole arranger and agent for the $44 million financing of a new runway surface at Sri Lanka’s main airport in Katunayake, built by China National Aero Technology International Engineering. That project in many ways demonstrates the best of the BRI: big, long in the planning and vital to Sri Lankan trade and tourism, contracted out to a leading mainland China construction firm and pulled together using the financial expertise of a large Western lender. 

And a clutch of regional lenders are getting in on the act. In 2013, Karachi-based Habib Bank was the first of its domestic peers to open a Chinese desk manned by Mandarin speakers. It now has four dedicated China desks, in Lahore, Karachi, Islamabad and Gwadar, where it helped to finance the deep-water port that jump-started Beijing’s burgeoning interest in the region. 

Another Pakistan lender, MCB Bank, can boast an even-more impressive roll-call of BRI-related projects and clients, from China Electric Power Equipment, a subsidiary of State Grid Corporation of China, to the country’s leading dam builder, Sinohydro. MCB was lead financial adviser and arranger on a $255 million facility to fund the M9 motorway linking Karachi with Hyderabad – a key section of the main highway is at the heart of the CPEC corridor. 

And it led a $60 million syndicated Islamic facility to develop a 49-kilometre highway stretching from a new electric plant in Sindh province to the town of Islamkot, another vital link in the Belt and Road Initiative. 

Infrastructure

BRI experts can crop up in surprising places. Sri Lanka’s National Development Bank (NDB) was quick to spot China’s growing interest in the country. It set up its first dedicated Mandarin-speaking office in 2014, catering to the country’s growing Chinese business community. NDB was the first Sri Lankan lender to unveil a renminbi-denominated service for its growing roster of mainland clients, which includes China State Engineering Corporation, one of the world’s largest construction firms. 

There is an important, final point to make here. In the main, the Belt and Road Initiative has been a godsend for a region that has struggled for decades to fund and build good infrastructure, and to then stitch it all together. China is facilitating that process and a host of local, regional, global and mainland lenders are helping them. But it is not doing this out of altruism. 

For sure, Beijing covets reliable, secure overland transit routes that stretch from its landlocked southerly and westerly provinces to the Indian Ocean. But it also needs steady and reliable neighbours, well-built sovereign states that will, in the decades to come, be able to afford Chinese-made goods and services. Hence Beijing’s drive to build good infrastructure across the region, a process that will, it believes, lift all boats. 

As Chatham House’s Oxenford notes: “China will benefit significantly from the success of south Asia and that places it in a very advantageous position. Conversely, south Asia stands to benefit enormously from the Belt and Road Initiative.” 

A win-win indeed.