Issue #4: February 2020

Coronavirus and BRI; China in the Arctic Part II

Unfortunately I’m late putting this edition out, mainly because the story I decided to cover turned out to need a deeper and longer look than expected. But hopefully this extended edition is worth the delay. This month, we’re continuing with Part II on China in the Arctic. Last time I covered the growing economic and strategic significance of the Arctic, as the rapidly changing climate reveals new resource deposits and allows easier transport in the region. I looked at China’s interests in the High North and focused on developments in Russia in particular. While there is plenty to say about China and some of the other Arctic states (to which I may return in future editions), for this issue I’ll be concentrating on Greenland.  

But first, a word on the COVID-19 virus, which is understandably dominating the news on China at the moment. 

BRI AND THE CORONAVIRUS

As with the Chinese domestic economy, the coronavirus outbreak is likely to have an impact on the Belt and Road, as travel bans in several countries prevent Chinese workers returning from the Lunar New Year break to resume projects, while supplies of needed materials and machinery are also disrupted. Not every BRI country has reacted the same way, though, with Pakistan (one of China’s closest allies) briefly suspending flights from China before reinstating them a few days later. As of 24 February, Ethiopian Airlines had reduced but not suspended its flights to and from the PRC.  One Foreign Policy headline claimed that the ‘Wuhan virus is the Belt and Road pandemic’, but this is really a stretch. It’s absolutely true that China’s greater integration with the global economy and rising numbers of outbound travellers mean that containing the outbreak has been more difficult than was the case during the 2002 SARS epidemic. But BRI plays only a relatively minor role in this. Based on air travel data, risk of ‘importing’ cases of the virus is highest in neighbouring East Asian states (irrespective of whether these countries are BRI members or host Chinese-built infrastructure projects), as well as Australia and the US. 

There has been some speculation about why Africa (and particularly sub-Saharan Africa) has so far been ‘spared’ (at the time of writing there have been two known African cases, one in Egypt and the other in Algeria), seen as surprising given, as the Foreign Policy article puts it, ‘...China’s expanded interests and infrastructure...’ in the region. The lack of reported Sub-Saharan African cases (as of 26 February) could be to do with a combination of factors- including the climate in some areas and the possibility that cases have simply not been detected yet. It’s quite possible that we could see the virus spreading in Africa, though a Lancet study puts the risk of importing cases to the continent at only a tenth of the level for Europe. It might be that some of the puzzling over why Sub-Saharan Africa has so far apparently avoided the coronavirus is based on an exaggerated sense of just how closely connected to China the region has become. Numbers of Chinese migrants in Africa are significant, but perhaps overestimated, for example. 

That said, the Lancet article argues that the risk is highly variable across Africa- and partly depends upon how the virus spreads within China, given that different Chinese airports serve as the main connection point to different African countries.  If the virus does arrive, there are serious questions about the capacity of some African health systems to cope. Nevertheless, capabilities also vary a great deal by country- and some parts of West Africa may actually be in a better position to respond after the experience of fighting the Ebola outbreak of 2013-14. In any event, many African countries definitely are quite dependent on the Chinese market for their exports- and so the economic impact may be significant even if they manage to avoid an outbreak within their borders. 

CHINA IN THE ARCTIC PART II: GREENLAND

Last August Greenland hit the international news when Donald Trump expressed an interest in the US purchasing the world’s largest island, to widespread bemusement. But it seems as though the idea did not come completely out of the blue- and in fact was probably a reaction to the perceived threat of Chinese encroachment in the Arctic. While the US won’t be buying the country any time soon, multiple American delegations have since visited and this month Trump’s budget request included money for a new US consulate in Nuuk, the island’s capital. 

Trump was derided for failing to grasp the distinction between real estate and sovereign territory- and ignoring the wishes of Greenlanders in the process.  But the idea that the US might gain control of Greenland is not without historical precedent. Various proposals for American annexation or purchase were put forward in 1867, 1910 and 1946- and during the 19th Century the US even claimed Greenlandic territory outright, based on the Polaris expedition which had been the first known party to set foot on the northwest part of the island.  

Nuuk, capital of Greenland Source: Visit Greenland

Trump’s comments also reflect contemporary US strategic thinking on Greenland and the wider Arctic, albeit crudely. Bigger in land area than Mexico but with a (mostly Inuit) population of just 57000, Greenland is still part of the Kingdom of Denmark. Since 2009 the island has had a status of ‘self-rule’, meaning that the Greenlandic government exercises authority in all areas except foreign policy and defence. Part of the agreement stipulates that Greenland can move towards full independence if supported by a majority of the population. But in order to do so it would have to forgo an annual transfer from the central Danish budget, which currently accounts for more than half of Greenlandic government revenues. 

The US, meanwhile, has maintained a military presence in Greenland since World War II. The island is situated in a strategically important location in naval terms and, because of the short distance over the pole to Russia, served as a vital cog in US Cold War operations (including a planned secret nuclear base and sometimes coming at the expense of local people). Thule Airbase (and the 254 square mile security area around it) still houses missile early warning and space surveillance systems- and seems likely to become more important as strategic and economic competition in the Arctic escalates.  

Greenlandic governments in recent years have tended to see the country’s potential for mining and tourism as the most plausible route towards economic and therefore overall independence from Denmark. It is here that China has entered the picture, with successive administrations making efforts to court Chinese investment. Both Danish and US authorities seem to be worried about this prospect- and it’s easy to see why. If Greenland were to achieve independence on the back of Chinese economic support, so goes the logic, it could potentially become a conduit for Chinese influence on the Arctic Council, Chinese control of strategic natural resources and even Chinese military bases in the North Atlantic. 

Map of Greenland showing main towns, bases and Chinese-invested mining projects. 

Source: Andersson, Zeuthen & Kalvig (2018)

As so often when discussing China’s expanding global presence, there is plenty of hyperbole around familiar themes here, underneath which sits a grain of truth. Chinese firms are involved in a handful of Greenlandic mining ventures, though in the two most important projects they only control a minority stake and neither are currently operational.  In Greenland’s far north, Australian firm Ironbark holds the rights over a major zinc and lead deposit at Citronen Fjord. State-owned China Nonferrous has an agreement with Ironbark to build the mine and find most of the financing for it from Chinese banks (as well as an option for China Nonferrous to acquire a stake in the venture). Partly because of the logistical challenges involved (ships can only reach the site for short periods during the Summer), the project has not yet been developed, though production might start sometime after 2022

At the other end of the island the Kvanefjeld rare earth elements (REE) venture is closer to being realised. This project is owned by another Australian firm (Greenland Minerals), with a Chinese REE producer Shenghe Resources (which itself has a complicated mixture of private and state ownership) holding a 12.5% stake and an option to buy 60%. This mine has both strategic and economic importance. First, because along with REEs it will also produce uranium, an issue on which it  took two years of negotiations for the Greenlandic and Danish governments to reach agreement. But REEs themselves are also widely seen as strategic commodities. These are a family of elements which have a range of applications (principally as magnets and catalysts) across many sectors, including consumer electronics (smartphones), green technology (fuel cells and motors for electric cars and wind turbines), optics and fuel refining (including jet fuel). 

Perhaps surprisingly, while REE deposits are found on every continent, the vast majority of the industry, from extraction to most processing and manufacturing, has been monopolised within China. I wrote about REEs (with a particular focus on South Africa) back in 2012. At that time, concern was growing internationally about the degree of Chinese control over a sector with such strategic significance. Lower costs and less stringent environmental standards (which have had devastating consequences) meant the Chinese REE industry had outcompeted international alternatives, leading to the closure of formerly important mines such as Mountain Pass on the California-Nevada border. As of 2012 there were various efforts to reopen old mines and develop new deposits around the world- both as a way to counter perceived dangers of Chinese dominance, but also in recognition of likely future demand as the world increasingly takes up renewable energy.  

A handful of mines outside China since began producing, but this has done little to reduce China’s near-monopoly position. In fact, Chinese REE firms have themselves got involved in the sector’s internationalisation. In some cases this has been through taking direct stakes in new mining ventures. But perhaps more importantly, because China remains the main site for REE processing, most of the new mines have agreements to export the ore that they mine to Chinese separation plants.  There are arguments about how severe the impact on global supply chains really would be should China ever start restricting REE exports, but it is notable that REEs were exempted from US tariffs (and often seen as a potential ace up China’s sleeve)  in the American-Chinese trade war. From this perspective, Chinese interest in the Kvanefjeld project (which includes agreements for the mine’s output to be processed in China) looks to be centred on China’s REE industry itself- developing access to supplies from outside China, partnering with firms from the global north in order to access technology and in general moving towards a global industry in which Chinese firms play a leading role. 

Debate about Chinese global investments often revolves around how far they are motivated by strategic or economic concerns- is this just about firms seeking profit, or is each example of overseas expansion part of a larger political plan being orchestrated from Beijing? Greenland presents a good example of why that may not be quite the right way to frame the issue. Anderson,  Zeuthen & Kalvig, in a paper comparing the Kvanefjeld and Citronen Fjord ventures, ask instead whether the motivations are primarily about ‘Arctic access’ or else ‘access to minerals’ (both of which have strategic and economic elements).  What they conclude, plausibly, is that the Chinese central state’s expressed interest in the Arctic (and in Greenland in particular) provides an incentive for companies to look for viable projects in the region, because it brings a decent chance of being able to secure state support in the form of loans from the two main state-owned policy banks. However, the authors argue, because REEs are seen by Beijing as a more strategically important industry/commodity, investment decisions in this sector ‘...are more likely to be driven by China’s interest in the strategic resource itself, whereas decisions of where to engage in zinc projects are more likely to be determined by China’s foreign policy priorities.’ 

Importantly, they also don’t fall into the trap of treating all Chinese actors as necessarily all having the same goals or incentives (including the various arms of the state). It’s not possible to dig into the complexities of decision-making on the part of Chinese state or Chinese firms in a short newsletter like this.  But suffice it to say that research on these kinds of questions is vital if we want to understand how BRI works- and do better than simplistic understandings which assume every aspect of China’s global presence is part of some centrally-coordinated Machiavellian plan (or, for that matter, that Chinese firms are simply apolitical profit-maximisers).  

Fears that growing Chinese economic presence in Greenland will mean greater Chinese political influence- and thus the prospect of either the US being ejected from Thule or China setting up its own military bases- certainly seems to be shaping US responses, with knock on effects for both Denmark and Greeland itself. This has played out most obviously in the Nuuk government’s scheme to construct two new airports and upgrade a third. The plan was always  controversial domestically, given a price tag equivalent to around a fifth of Greenland’s GDP. But with no roads connecting the country’s towns and only two airports capable of handling international flights (both far away from the larger settlements and visitor attractions), the new airports’ backers saw the scheme as key to improving connectivity and fostering an emerging tourist industry. Then in 2018, China Communications Construction Company’s (CCCC) bid for airport contracts was shortlisted. This prompted the Danish government to step in and provide its own part financing for the projects (along with the Nordic Development Bank), in exchange for a stake and thus, apparently, influence over choice of contractors. CCCC then pulled out in 2019, citing difficulties in securing visas for its engineers. 

According to the Wall Street Journal, after learning about a Greenlandic delegation’s visit to China in search of loan financing for the airports, the Pentagon leaned on the Danish government to provide the funds instead. This is not the first controversy around how far Danish authority over defence matters allows Denmark to intervene in Greenland’s domestic affairs. But the airports scheme had been framed as an important step towards economic development and self-sufficiency for Greenland, so accepting Danish backing was seen by some as a backwards step, deepening Greenlandic dependence on Denmark. This was enough to cause a political crisis, with the pro-independence Naleraq party withdrawing from the ruling coalition. 

One way to look at these developments is that Greenland requires outside investment if it is to ever obtain full independence- and that Nuuk government has so far been successful in leveraging its growing strategic significance in order to play off external partners against one another. But the country remains in a weak position in relation to the other players. Trump’s desire to buy the island (from Denmark) infuriated a lot of Greenlanders, given their long history of being sidelined by US-Danish deals. Influential voices in Denmark are aware of these feelings- and perhaps wary, given the opening of a new US Consulate in Nuuk, that the Greenlanders might increasingly seek to deal with the US directly. But this comes alongside a view of Greenland as a ‘card’ to be leveraged in Denmark’s relationship with the US- for example in deflecting US criticism of Denmark’s failure to meet the 2%  GDP target for defence spending among NATO members. The recent decision by Copenhagen to name Greenland as its top security priority should be seen in these terms. 

As for China, it is not yet clear how far increased interest in the Arctic generally will translate into a greater involvement in Greenland specifically. As I discussed in the last issue, Beijing’s ability to participate in Arctic affairs is limited by its distance from and lack of claims over the region. An independent but weak Greenland reliant on Chinese investment might therefore represent an appealing outcome. But so far there’s not really much evidence that Beijing is actively pushing for it. Greenlandic governments have been proactively seeking infrastructure investments and loan financing from China for some years without apparently raising much interest, outside the CCCC airport bid (though bidding for oil licences might change that next year). Of course, China’s fierce assertions of sovereignty over Tibet, Xinjiang, Hong Kong and Taiwan mean that Beijing can’t be seen to officially back Greenlandic independence. 

In any case, it seems much more likely that a Greenland separated from Denmark would fall under greater American rather than Chinese influence. Everything points to the US military presence being scaled up in future- perhaps also as counter to Russia as well as China- while Greenland’s Prime Minister Kim Kielsen has said it is ‘beyond doubt’ that Greenland will remain part of NATO. Plans to help Greenland survey mineral deposits and develop a regulatory structure for their exploitation are reminiscent of the mooted Arctic Development Bank discussed in the last issue of this newsletter- and similarly, are probably aimed at keeping Chinese investments out. 

https://the-drive.imgix.net/https%3A%2F%2Fs3-us-west-2.amazonaws.com%2Fthe-drive-cms-content-staging%2Fmessage-editor%252F1566588370648-aerial_picture_of_thule_air_base.jpg?auto=compress%2Cformat&ixlib=js-1.4.1&s=12830476fe38247c13d2df3f640a0468

Thule Airbase Source: Public Domain

None of this is to suggest that Trump’s idea of buying Greenland is going to happen. Even if Denmark were to agree, any transfer would have to be subject to a Greenlandic referendum. Given the situation in other US overseas territories- including the US Virgin Islands, a former Danish colony sold to the US in 1917- it is improbable that Greenlanders (a large majority of whom support eventual independence) would ever vote to swap Danish for American rule. 

For ordinary Greenlanders the growing spotlight on their country presents a dilemma. Without more external investment it is hard to see how independence could be financially feasible (though some think otherwise). Mining and tourism could potentially provide much needed jobs, diversify the economy away from over-reliance on fishing and stem the tide of emigration, along with providing the money to address social problems. But some worry that a mining boom would bring immigration on a scale which could outstrip Greenland’s small existing population. Even the hypothetical prospect of Chinese workers arriving in the country has been hugely controversial in the past (though labour shortages are now seeing some East Asian workers arrive). More broadly, and as in the Arctic in general, many of the new economic opportunities are arising because climate change is leading to easier access for tourists and mining companies. For Greenland, that means boom times, but also the end of traditional hunting lifestyles and the isolation and even abandonment of remote settlements, as transport by dog sled becomes more difficult on the thinning ice. That melt is a major contributor to global sea level rise- and seems to be now progressing at a pace in line with what only a few years ago would have been considered a worst case scenario

Issue #3: December 2019/January 2020

China in the Arctic: Part 1

This month it’s an appropriately wintry edition (at least in the Northern Hemisphere), as I take a look at Chinese activities in the Arctic. There’s plenty to get into on this topic, so I’ll be splitting it into two parts. This month I’ll concentrate on Russia, a state which, whether seen as competitor or collaborator, is central to China’s Arctic ambitions. Next month I’ll take a look at some of the other polar states where China’s presence is growing. 

But first...a shameless plug.

My book In China’s Wake has just been released by Columbia University Press. It tells the story of how in the early part of the 21st century, Chinese demand drove a boom in commodity prices which in turn created space for the emergence of a variety of new development models across resource-rich states (I cover 15 countries, from Argentina to Zambia). Find out more here: https://cup.columbia.edu/book/in-chinas-wake/9780231187978 and get 30% off by using the promo code ‘CUP30’. 

Ok, back to the Arctic….

CHINA, THE US, AND THE ARCTIC

On 20th December Donald Trump signed the US National Defense Authorization Act into law, with a price tag of $738bn (roughly equivalent to the entire annual economic output of Turkey). Though Trump’s pet Space Force project and the removal of several anti-war amendments attracted coverage, one of the less commented upon parts of the Act is a call for an investigation into China’s investment activities in Arctic states. 

As climate change warms the far north, retreating sea ice cover is increasingly opening the Arctic Circle to shipping, research, tourism, military activity and resource extraction (in a sad irony, especially oil and gas). As good as the reasons may be for limiting many of these activities near the poles (and something similar is unfolding in the Antarctic, too), a melting Arctic is fast becoming a new frontier for economic expansion (and strategic competition). Chinese authorities are keenly aware of the region’s importance, not least because of its implications for the world’s largest trading and shipping nation as the ice melts and makes polar sea routes more viable. This interest isn’t new- Xi Xinping spoke of an intention to become a ‘polar great power’ back in 2014- but it continues to develop, with the ‘polar silk road’ becoming an official part of the Belt and Road Initiative in 2018. Along with various scientific and economic projects, China’s growing involvement in the High North is now significant enough to prompt a reaction from Washington. 

November Arctic sea ice extent for 1979 to 2019 shows a decline of 5 percent per decade. 

Source: NSIDC

With its most northerly point (in Heilongjiang) lying at the same latitude as the Netherlands and British Columbia, the PRC has nevertheless sought to present itself as a legitimate stakeholder in the North, calling itself a ‘near-Arctic’ state. However, with no territorial claims in the region, Chinese strategy has been to stress multilateralism as a means of preventing the far North from becoming the exclusive domain of countries whose sovereignty extends into the Arctic Circle. Those states- Russia, Canada, the US, Finland, Sweden, Norway, Iceland and Denmark via Greenland- comprise the full members of the Arctic Council, a forum that also includes ‘participants’ representing the region’s indigenous groups. China is an official observer at the Council (a status which has also been granted to the likes of India, Germany, France and the UK), but in recent years has been stepping up its bilateral engagements with several of the full members. 

Source: Public domain

It is here that US concerns lie, prompting the demand for an official report on Chinese investments in the region. In part this reflects the usual worries about Chinese infrastructure projects serving as a backdoor for potential later military use, something which has already prompted the cancellation of a major Chinese port project on Sweden’s west coast. It seems virtually impossible that any of the Arctic states would allow the People’s Liberation Army to operate on their territory, even if there are instances where Chinese civilian ventures may also have possible military or intelligence applications. Beyond security aspects, however, questions similar to those which have dogged the BRI around the world have also followed it to the Pole. First, the potential political and economic leverage over other sovereign states which China might gain via its loans and investments. Second, in a region with 4 million inhabitants (including 40 indigenous groups) and a particularly vulnerable ecosystem, what are the social and environmental results likely to be? There is plenty to talk about here in relation to most of the different Arctic states- and in terms of non-Chinese projects too

CNA Analysis and Solutions (a non-profit closely tied to the American foreign policy establishment) produced a report in late 2017 on investment in the Arctic that seems to have informed the US Administration’s current thinking. The report claims that Chinese polar investments are already substantial, equivalent to 6% of GDP in Iceland and 12% in Greenland, with nearly $200 billion going to Russia. Coming up with accurate numbers on Chinese financial flows overseas is notoriously difficult (as I’ve discussed previously) and the figures here are both hazily defined (they roll up everything from loans to stock purchases, joint ventures and credit lines under the banner of ‘investment’) and probably inflated (for example, they include China Non-Ferrous’ involvement in the planned Citronen Fjord zinc mine in Greenland, financing which will only materialise if zinc prices rise enough to make the project worth taking forward). But it doesn’t take much reading between the lines to see that the report’s call for new regulatory controls on Arctic investment (and a new US-led Arctic Development Bank) is an effort to pre-emptively limit China’s reach into the area. These ideas have been taken up in the NDAA, with the call to investigate Chinese investments also asking for a study into the feasibility of an Arctic Development Bank. This is all framed in terms of making sure future polar investments are socially and environmentally responsible, surely a tough case to make about any new fossil fuel projects, especially in the Arctic wilderness (drilling in remote parts of Alaska has been permitted by Trump, of course, and would be encouraged under the report’s proposals). 

THE NORTHEAST PASSAGE

The Northeast Passage (with the portion inside Russian waters known as the Northern Sea Route) runs from the Bering Sea, north through the Bering Strait and then west along the northern coast of Russia before finally reaching the Barents and then Norwegian seas. Shipping has regularly traversed the passage since the 1930s, although the hazards involved make it too risky and expensive to be used as a major cargo route, at least for the moment. As the ice recedes and thins, though, navigation will become easier, with current projections of ice free Summer waters from around 2040. Since travelling this way shaves off around a quarter of the distance between Shanghai and Rotterdam from the usual trip via the Suez Canal, it is easy to see why interest in the NE Passage has picked up in recent years. For China, a viable Northern route would also present a means of avoiding the strategic pinch point of the Straits of Malacca, a goal which informs both the Polar Silk Road strategy and other projects such as the overland road and pipeline corridor from Gwadar on the Arabian Sea to the Pakistan-Xinjiang border. 

Since the NE Passage crosses warmer waters and has better search and rescue infrastructure, it looks a better bet for shipping than the Northwest Passage (through the Canadian Arctic)- and certainly than the transpolar route which may become viable in mid- to late-century. That said, the NE Passage is likely to remain expensive (often requiring ice-classing of ships and/or icebreaker escort) and unreliable (unpredictable ice floes can delay journeys significantly) for some time yet. That combined with shallow waters which make it impassable for the largest cargo vessels mean its use as a route for just-in-time shipping will probably continue to be a limited one. Where we are likely to see serious expansion, however, is in the use of the NE passage as a route for shipping oil and liquid natural gas, the development of which underpins all of Russia’s plans for the Arctic.

WESTERN SIBERIA

Climate change is happening faster in Siberia than almost anywhere else. On 5 January Russia published a climate change adaptation plan, which warns of incoming dangers (melting permafrost, floods, wildfires and disease) but seeks to harness ‘positive’ effects, not least of which is the growing accessibility of new resource deposits in the Arctic, especially natural gas. 

Zapolyarnoye gas field, Yamalo-Nenets Autonomous Okrug, Russia

Source: government.ru

Russia’s economy is heavily dependent on oil and gas exports- and government officials have claimed that the country’s oil production could soon go into decline unless more is done to find and exploit new deposits. While there are almost definitely major untapped reserves in the Russian Arctic, there are technological challenges involved that mean help from western oil firms would likely be needed for extraction, difficult to arrange while Russia is under US and EU sanctions. Instead, activity has concentrated on liquid natural gas (LNG). Most natural gas is transported via a pipeline (like the new Russia-China ‘Power of Siberia’ pipeline). But LNG- whereby gas is supercooled to become a liquid, reducing its volume to just 0.2% of the original gas, making it possible to transport via ship- is becoming more important, especially for Russia.

In late 2018 Russian energy firm Novatek finished work on Yamal LNG, a $27bn LNG plant and port at Sabetta, on the east shore of the Gulf of Ob, which opens onto the Kara Sea. Lying 520km north of the Arctic Circle, it is now the most northerly industrial facility in the world. Novatek has plans for another massive LNG plant on the Gydan Peninsula across the Gulf of Ob from Sabetta (this one costing $21bn). Both projects have been impacted by US sanctions, which have effectively made it impossible to raise money in dollars. This has left an opening which Chinese banks and firms have been happy to fill, to the tune of $12bn in the case of Yamal LNG (perhaps surprisingly, French and Japanese firms are also involved, despite the sanctions). 

This matters for China because of its growing demand for natural gas imports. Air pollution is a serious issue for the PRC, with the potential to cause social unrest. As a result, in 2017 the government stepped up efforts to convert coal burning to gas across Northern China. The programme ran into problems, including shortages of gas which left many without heating. Efforts to boost a slowing economy mean that the coal to gas drive has been relaxed this Winter, but China is still going to be the main source of demand growth for gas over the coming years. From the Chinese perspective, reliable supplies of gas from Russia would help the PRC avoid too much dependence on alternative sources (mainly Qatar, the US and Australia), most of which are more vulnerable to sanctions and protectionism (indeed, any resolution to the US-China trade war will probably mean China committing to import more American LNG). Meanwhile, major Chinese investments in the Russian Arctic (China National Petroleum Corporation and the Silk Road Fund own 30% of Yamal-LNG between them) give China some leverage over the Arctic LNG industry and help strengthen PRC claims to be a legitimate stakeholder in the region. From the Russian perspective, this is about opening up a supply route lying almost entirely within Russian waters, lessening dependence on European export markets and maintaining Russia’s position as a major energy power. 

Whether the LNG ventures will push Russia and China closer together in a geostrategic sense remains to be seen. And Russia’s LNG push may well slow down or speed up as fluctuating gas prices make new projects more or less attractive. But the US sanctions on Russia and trade war with China have certainly made Russian-Chinese economic cooperation more mutually beneficial, especially in the Arctic. If that trend continues, it may even eventually have an impact on the global dominance of the US dollar. As for the Arctic, there is something deeply contradictory about a drive for cleaner air in China being met by new fossil fuel projects in the Siberian Tundra, where a changing climate is already making life harder for the local Nenets people.

Issue #2: November/December 2019

Chinese overseas lending, Sri Lanka

First off, apologies for missing the edition which should have come out in late October/early November. Family issues and travel prevented me from putting one out. I’ve also held the release of this issue back a few days to comply with the UCU strike. The next issue should be out late December/early January and hopefully we can keep to a regular monthly schedule from then on.

Right now my own research is mainly focused on official Chinese loans to other governments, which are the main mechanism used to finance Belt and Road projects around the world (this sometimes gets confused, with the loans being called ‘aid’, or ‘investments’). This month I thought I’d share a few bits and pieces of what I’ve learned so far- first on the topic of Chinese loans in general, and then on how this ties in to recent developments in Sri Lanka, the case that has been perhaps the most controversial of all when it comes to China’s lending practices.

CHINESE OVERSEAS LENDING

The idea of ‘debt trap diplomacy’ is at this point pretty much the standard in much English-language media as a way to frame Chinese lending. This is the charge that China is acting like a global loan shark- knowingly lending unsustainable amounts, waiting till countries can’t pay and then using the debt as leverage to gain political loyalty and/or the surrender of key assets. ‘Debt trap diplomacy’ was only coined in 2017, by Brahma Chellaney of the Centre for Policy Research in New Delhi (described here as a ‘polemicist’ by Chas Freeman, who was the US interpreter when Nixon met Mao in 1972).  Since then, talk of debt traps has become something of a meme, appearing in headline after headline about Chinese official lending (here’s a small sample from the FT, Al Jazeera, the Washington Post, Quartz, Deutsche Welle, and the Straits Times). It’s also become a mainstay of the Trump administration’s increasingly critical rhetoric on China, with Mike Pompeo, John Bolton and Mike Pence all repeating the debt trap accusation in the past year.

In the last few months, a new and slightly different charge has also dogged Chinese lending- that a large proportion of it is hidden, to the extent that ‘…outside of the government in Beijing, nobody knows much about where th[e] money has been invested and what conditions and risks are attached…’, as a recent Spiegel article put it. There have been worries about BRI’s transparency from the start. But fears have been amplified with the publication this Summer of a high-profile paper by economists Sebastian Horn, Carmen Reinhart and Cristoph Trebesch. They claim to have uncovered US$200 billion of previously unknown debts to China, owed by governments of emerging markets and developing economies (EMDEs- essentially countries of the global south, plus a few others in places like Eastern Europe).

The idea of hidden debts brings back bad memories of the late 1970s and early 80s, when a boom in private bank lending to governments, especially those in Sub-Saharan Africa and Latin America, turned into a major debt crisis. Back then, when countries started struggling to repay and began calling in the IMF, it was discovered that several owed more than had been publicly revealed. Today, the outlook for EMDEs does appear uncomfortably similar to the late 70s in some respects, with overall debts reaching comparable levels. Though it does not seem likely to do so any time soon, if the US raises interest rates at some stage, the cost of borrowing for EMDEs will rise, making it much harder for countries to manage their debt burdens. This is what happened from 79-82, with catastrophic results.

THE DEBT TRAP

But how worried should the world be about Chinese lending in particular? In first place, the debt trap idea can be more or less safely filed away as US propaganda at this point, even if it’s not hard to see why it has gained such prominence. The vast majority of EMDE loan deals with China come through one of the two main state-owned ‘policy’ banks- China Development Bank (CDB) and China Export-Import Bank (CHEXIM)- and are effectively treated as official government to government lending from the Chinese state. Assessing exactly how much is being lent and what for is tricky, because neither bank provides full details of its overseas loans (though then again, neither do many other G20 governments’ official lending institutions). One recent estimate puts CDB and CHEXIM’s combined overseas loan portfolio at $671 billion, equivalent to about one and a half times that of the World Bank’s total.

Lack of solid information has allowed space for all kinds of speculation as to the nature and purpose of Chinese loans. Compounding this, they often seem to go to places and projects that don’t make much commercial sense, at least in the view of some experts and traditional players in global finance. If some of these loans don’t look a good bet economically for the policy banks, then it’s not hard to make the logical leap to assuming there must be some other (usually nefarious) purpose involved- and that’s exactly what many analysts and journalists have done, which has then been seized upon by others for the sake of geopolitical point scoring.

It’s absolutely true that some Chinese-financed projects have been, at the very least, economically questionable, from railways in Venezuela and Kenya to motorways in Montenegro. Nevertheless, evidence that the policy banks are actively trying to turn bad loans into strategic investments, by swapping debt relief for control of assets in borrowing countries, remains thin on the ground. There are many rumours circulating about loan deals with secret clauses or, for example, the unconfirmed claim that Tajikistan gave up a slice of territory to China in exchange for debt relief in 2011. But the single concrete case of debt trap diplomacy invariably cited in the coverage is the Hambantota Port in Southern Sri Lanka- and on closer examination even that turns out to be mostly hype (more on which below).

There are a number of factors which, in combination, provide a more plausible explanation for the pattern of Chinese lending than the debt trap claim. It’s definitely true that, unlike private creditors, direct profit from loan deals themselves is only one part of what CDB and CHEXIM are trying to accomplish through their loan activities abroad. As Yiping Huang puts it,

“There are three types of [Chinese] external finance: commercial finance which is purely based on market principles and is conducted in pursuit of profit maximization; policy finance which is conducted for national strategies, not for profit; and development finance which is conducted for national strategies but which is commercially sustainable.”

Almost all the money lent to EMDEs comes under the banner of development finance. What this means is that while CDB and CHEXIM are expected to be financially self-sustaining over the long run, maximising returns is often not the sole concern behind every loan deal. As for the ‘national strategies’ Huang mentions, these can be both economic and political. On the economic side, CDB especially tends to plan not in terms of single loans, but packages of related deals. The idea is to boost the recipient country’s economic growth and tax revenue overall, so that borrowers will be able to make payments even if an individual project or two loses money.

In some instances the goal is to create new markets practically from scratch, which then might be profitable destinations for Chinese trade and investment. More directly, loan deals usually stipulate Chinese firms as the main contractors tasked with building whatever the loan is for (whether a road, power plant, stadium or airport). In this way, loans are a means to push and subsidise the global expansion of China’s domestic companies. Beyond this, they support the export of capital goods like railways, nuclear plants and renewable energy, where China is trying to establish itself as a global leader- and a setter of standards in these industries.   

Additionally, there is undoubtedly a political or strategic element involved to many loans, with a willingness to extend credit more freely and for a wider range of purposes to strategically important states like Pakistan, as well as to China’s oil suppliers such as Venezuela (at least until the recent collapse). Decisions to grant loans are often simply driven by requests from governments (which may in turn be the result of lobbying from Chinese companies angling for contracts)- and the degree to which a particular project is prioritised by a borrowing government often (though not always) seems to trump economic feasibility (or social and environmental concerns) when it comes to Chinese willingness to lend. 

Because there is a tendency in some quarters to view BRI as some grand Machiavellian scheme, western observers especially often seem to implicitly rule out the possibility that overly risky loan deals might just be the result of bad decisions. But there’s plenty of evidence of this happening. One way Chinese lenders have tried to balance risk in some cases is via commodity-backed loan deals, whereby the proceeds from a proportion of the borrowing country’s commodity exports are pledged to pay down the debt. In places like Venezuela, Ecuador and Angola, the idea is that no matter what financial stress these countries are facing, oil production will always be sufficient to meet loan payments- so tying loans to oil sales is a way of trying to guarantee repayment. But as the Venezuelan economy has collapsed in recent years under the pressures of a commodity bust, economic mismanagement and US sanctions, so too has the capacity of state petroleum firm PDVSA to keep the oil flowing. Contrary to the debt trap thesis, some scholars argue that China’s huge exposure in Venezuela (more than $60bn in loans) has actually resulted in a creditor trap- that is, far from debt being a lever for Chinese influence in Venezuela, China has found itself having to keep lending defensively in order to keep the Venezuelan government afloat in the hopes of salvaging repayments on the original loans. There are smaller scale examples from elsewhere, too. In Ukraine, for example, a $1.5 billion grain-backed CHEXIM loan to the State Food and Grain Corporation of Ukraine ran into problems when grain shipments meant to fund repayments amounted to only a fraction of the required amount. Exact details are hard to come by, but it does not seem as though Chinese authorities were able to force Ukraine to make full repayments.

Last, it’s important to remember that the decision-making around which projects get loan financing is quite fragmented across the various arms of the Chinese state- and some of those bodies (including firms lobbying for contracts) have an interest in pushing for deals, even if they present risky prospects. There are some indications that, probably in response to some of the failures, there’s been an effort to tighten up debt sustainability concerns recently.

HIDDEN LOANS

The key to the ‘hidden loans’ charge is understanding what the word ‘hidden’ means in this context. China is not a member of some of the major organisations which monitor international finance (such as the OECD and the Paris Club), so the loans it makes to other governments via the policy banks do not get systematically recorded (and neither the Chinese government nor the banks release comprehensive information either). Various teams of researchers have attempted to shed light on this area, using a combination of media reports, official documents and on the ground research to estimate bilateral Chinese loans (and sometimes aid) in Africa, Latin America and the Pacific, as well as globally. Working from these sources (plus a few others)  Sebastian Horn, Carmen Reinhart and Cristoph Trebesch have compiled their own estimate of how much 106 EMDEs owe China. They then compare this total with the combined figures reported by the same countries to the World Bank and find a huge gap, of $200bn in hidden debts to China which are not officially declared.

Frankly, I’m sceptical of these claims. First, some of the media reports on the paper have suggested that the authors uncovered previously unknown debts. But since almost all their data is complied from publicly available sources, it’s not as if any of it was some closely guarded secret only known to a select few inside the walls of Zhongnanhai, as you might think from the coverage.  

I’m really at the beginning stages of research in this area, but so far I’ve taken a close look at the numbers for four Central/Eastern European states (Montenegro, Belarus, North Macedonia and Ukraine) and thought I’d give a preview of my findings here (I’ll be putting out a paper on this in future). Essentially, I think that Horn, Reinhart and Trebesch have overestimated debts to China in each case. Now, obviously, even assuming I’m correct here, this does not necessarily mean the same holds for all the other countries they examined. But I raise it because my experience of looking at these four states in detail highlights some of the common problems encountered by pretty much any attempt to figure out how much countries owe to China- problems that tend to push such attempts towards overestimation.

Because there is no central repository of Chinese overseas loans, most of the efforts to compile estimates rely to varying degrees on press reports. The problem with this is that quite a high proportion of deals announced in the press don’t actually turn into loans. Sometimes early-stage talks between a government and Chinese authorities about a loan are reported as though they were done deals. In other cases, talks result in a framework agreement with a high price tag attached (as I discussed in the October newsletter in relation to Iran). These documents are essentially wish lists of possible projects for which funds could potentially be made available- but quite often are mistaken for concrete deals. In other instances loan deals are cancelled, scaled down or simply misreported. Last, even when loans have been agreed, the money is usually handed over in instalments, meaning that a country’s debt will increase gradually over time, rather than the full amount of the loan being added the moment a deal is agreed (as is often assumed).

Horn, Reinhart and Trebesch suggest that countries might be underreporting their Chinese loans to the World Bank because of inaccurate accounting- whether this is due to lack of statistical capacity (especially in poorer countries) or a deliberate attempt to hide debts. But in the four cases I looked at, it was possible, with a bit of digging, to find quite a lot of detail on amounts owed to China- and broadly this matched with figures reported to the World Bank. One of the most useful sources of data here have been bond prospectuses. When governments want to issue bonds for sale to international investors they are obligated to compile a prospectus containing usually a very detailed rundown on their economic situation- including a breakdown of their debts. While there’s no guarantee that the information is always correct, both the country concerned and the banks which help them prepare the report can be liable if the prospectus is inaccurate, so there is a big incentive for them to get it right. For example, here below is a screenshot from a prospectus issued by the government of Belarus- hardly a country known for openness and transparency.

Comparing this kind of information against the various existing estimates of Belarus’ Chinese debts, as well as media reports, provides insight into where some of the likely inaccuracies are coming from. For instance, the ‘Great Stone’ referred to in the list above is the name of a Chinese-financed industrial park on the outskirts of Minsk. Early reports on this project claimed that Belarus would be borrowing $3bn for its development- which, on the face of it, seems like an awful lot for an industrial estate. In fact, the $3bn figure probably relates to part of a $15bn framework agreement of the kind described above- an amount earmarked to fund future loans for possible ventures within the park, rather than the amount actually borrowed at that point. Other media reports concur with the $170m figure for the park itself, seemingly extended with another $110m loan after this bond prospectus was published. However, attempts to estimate Belarus’ Chinese debts (including Horn, Reinhart and Trebesch) have apparently taken the $3bn figure at face value, leading to an inflated total. 

In other cases across the four countries I looked at, I’ve been able to find debt details in government documents, audit reports of public enterprises, and, in one instance, even CHEXIM letters detailing the full schedule of payments for a major loan to Montenegro.  All this leads me to believe that the Chinese policy banks themselves do not generally treat their overseas loans (or their repayment terms) as matters of any great secrecy. The fact that media reports often overestimate rather than underestimate loan amounts adds to the sense that there is no systematic attempt to hide or minimise loans going on here. There may be some exceptions, but generally it appears that the onus is on receiving governments themselves to publish as many or as few details of their Chinese loans as they see fit. If this is the case, it would provide an opening for civil society groups concerned about transparency, in that pressuring their own governments to release figures will often be a more realistic task than demanding the same from Beijing.

Relying on governments to be transparent in every case of course presents its own problems. It is more likely that the kind of discrepancies Horn, Reinhart and Trebesch point to might occur in low income states where statistical capacity is less developed and where it may be easier for various parts of the state to conceal how much they have borrowed, and from whom. In Zambia, for instance, there is confusion over the country’s debt situation, including the possibility that some Chinese loans have been contracted by the Presidency without going through the required process of parliamentary approval. But it is important to remember that the one major confirmed case of hidden loans in recent years- in Mozambique- had nothing to do with China. In 2013-14 three quasi-state-owned firms liked to the Mozambican security services borrowed $2bn via Credit Suisse, Russia’s state-owned VTB Bank and via the European bond market. In theory, the money was supposed to fund a new tuna fishing fleet and security infrastructure to protect the country’s coastline. But more than half of the funds were kept secret from everyone but a small circle within the government and security forces, until coming to light in 2016 via the Wall Street Journal. Mozambique had to endure the withdrawal of support from most lenders and donors as a consequence, causing economic crisis. What happened to most of the money is still not entirely clear, but several figures from both the banks and the Mozambican government have been indicted by the US Justice Department.

Credit Suisse Headquarters in Zurich. Source: Thomas Wolf via Wikimedia Commons

So, if in the near future we enter an early-80s style debt crisis and it turns out some countries have larger debts than previously thought, it seems at least as likely that any secret loans will have come from commercial sources as from Chinese policy banks. This points to a larger issue with the way government debt (especially in poorer countries) is currently being discussed. There is no doubt that debts to China are significant in many countries- and that some of these funds have been both lent and borrowed in reckless, perhaps corrupt ways. But the fascination with Chinese loans in particular across media and policy circles has tended to obscure the much greater threat to economic stability presented by debts to private investors. According to the World Bank, in 2018 external debts to bondholders among low- and middle-income countries stood at $1.39 trillion. That’s more than double the amount of government-to-government loans (including debts to China, but also to all other states), even if Horn, Reinhart and Trebesch’s $200 billion in supposedly missing Chinese debts is included.

Because interest rates in the global north have been so low in recent years, investors have had to look further afield to find investments with higher returns. One consequence is that a much larger range of states- even low-income countries- have found it relatively easy to find investors willing to lend them money. Just as with Chinese loans, this can be a very good thing in terms of providing much-needed finance for development. But, as the Mozambique example shows, we shouldn’t assume that borrowing from these sources is necessarily more transparent, nor that it is subject to any particularly stringent tests in terms of whether the funds are being lent and borrowed sensibly or with the public good in mind. Commercial lending also tends to have higher interest rates- and unlike loans, bonds have to be paid back in one go when they become due.

SRI LANKA

On 18 November Gotabaya Rajapaksa was inaugurated as the Sri Lanka’s new President. Rajapaksa was defence minister during the Sri Lankan civil war and campaigned as a hardliner on security, arousing concern among both Tamil and Muslim minorities. But a good deal of international coverage has also been framed around the notion that Rajapaksa’s victory will mean a return of closer ties between Sri Lanka and China.

Gotabaya’s brother Mahinda Rajapaksa (appointed Prime Minister in the new government) previously served as President between 2005 and 2015, borrowing perhaps $5bn from China following the end of the civil war, when traditional lenders were less keen to provide funds. Mahinda’s tenure also saw a $1.4bn investment from China Communications Construction Company in building Port City, a land reclamation project on which an ambitious new financial district is slated to be constructed- and which has been the subject of worries over environmental damage.

Land reclamation at Colombo Port City. Source: Rehman Abubakr via Wikimedia Commons

Of all Mahinda Rajapaksa’s Chinese deals, the most infamous is the series of loans (totalling around $2bn, according to Aid Data) taken on to build the Hambantota Port in the country’s south. Later, in 2018 and with Sri Lanka facing a severe debt crisis, President Maithripala Sirisena handed operational control of the facility to China Merchants’ Port, receiving $1.1bn in return. For this reason Hambantota is often pointed to as the key (some would say sole) example of the ‘debt trap diplomacy’ discussed above. Details vary, but the basic outline as usually reported is that the port was never economically viable, but that kickbacks provided an incentive for Sri Lankan officials to borrow money from China to have it developed. Years later under Sirisena, with the Hambantota facility finished but nearly empty, and the country struggling to make loan repayments, the Chinese government forced Sri Lanka to hand over the port in exchange for debt relief. As to why a Chinese firm would want an apparently useless white elephant of a port, this is where many reports offer groundless speculation that Hambantota might eventually be used as a Chinese naval base. 

Ships docked at Hambantota Port. Source: Deneth17 via Wikimedia Commons

While all this makes for a good story, the truth seems to be more mundane. For starters, it’s not clear that Hambantota always looked like a nonsensical venture, with a range of feasibility studies going back to 2001 reaching mixed conclusions on commercial prospects. And while the port still isn’t profitable today under Chinese management, business does seem to be picking up. Either way, the most charitable interpretation of the project is that it was envisaged as part of reconstruction efforts in an area devastated by the 2004 Tsunami. A less generous version would be that the port (along with a surrounding industrial zone, plus a Chinese-built motorway and an airport, now empty) were pet projects for President Mahinda Rajapaksa in his home district (the port now bears his name).

It’s absolutely true that by 2016 Sri Lanka was mired in debt, with the government struggling to meet repayments. Chinese loans were an important part of this burden (around 10%), but hardly the overwhelming factor one might think based on some of the media coverage. Hambantota-related loan repayments only amounted to about 5% of the total. In this context, and with Hambantota Port losing money, Sirisena’s administration did a deal in 2017 by which CMPort would effectively get a 70% share on a 99 year lease for the facility, in exchange for $1.12bn. The deal is usually reported as a straight swap- control of the port for writing off the debts associated with it. But this is not accurate, since most of the money went towards paying off (much larger) debts to private investors, while the Hambantota loans remain on the books to this day. Deborah Brautigam instead calls the agreement a privatisation, making the comparison with the Greek port of Piraeus (now majority owned by China’s COSCO). But the Hambantota deal was not quite a straight privatisation, either- while protests around the site led to a reduction of CMPort’s share from 80 to 70 percent, the company successfully demanded control of a much-expanded industrial district, which, assuming the land is fully developed, will displace hundreds of local people in the process. 

One spin off from the debt trap idea has been a tendency to interpret Sri Lankan politics as partly being divided by attitudes to China, with the return of the Rajapaksa family to power signalling a likely turn back towards the PRC. But while Sino-Indian rivalry no doubt plays a role, Sri Lankan politics has been far more complicated in recent years for a simplistic framing in these terms to make much sense. 

In practice, the Sirisena administration did not mark a break with the PRC. On gaining power in 2015, Sirisena initially suspended work on most Chinese projects in the country, including the Port City development, before allowing them to restart after only a few months (and with some minor changes to terms). Sri Lanka also continued to borrow from China, including around $1bn earlier this year for a new motorway. There was also another $1bn loan in 2018, with this one earmarked to help repay other loans. That is significant, because such deals are rare, with China usually only lending to fund specific projects rather than to ease government finances, except in strategically important countries (Venezuela and Pakistan being other examples).

All this seems to fit something of an emerging pattern internationally. In Argentina Mauricio Macri came to power in 2015 with the intention of cancelling Chinese-financed hydropower projects in Patagonia, but could only negotiate a reduction in their scale. In Pakistan, Imran Khan’s presidency began with attempts to agree an overhaul of the China-Pakistan Economic Corridor, which quickly turned into an extension of existing agreements, with a few nods to Khan’s priorities in areas such as agriculture. What Sri Lanka, Argentina and Pakistan all shared during these episodes- and in contrast to the likes of Malaysia which was arguably more successful in its attempts to scale down BRI projects- was high levels of indebtedness. Importantly, debts to China are significant, but not dominant, in all three countries (the IMF has Chinese loans as making up 25% of Pakistani debt, for example). But with projects already underway and China presenting a relatively easy option for new funding, governments under the strain of heavy debt burdens have found it more advantageous to keep Beijing onside.

Interestingly, and seeming to confound the predicted turn back towards China, a few commentators on the recent Sri Lankan election have noted that the manifesto of Gotabaya Rajapaksa’s party, Sri Lanka Podujana Peramuna, included a pledge to renegotiate the terms on the Hambantota Port deal. It seems pretty unlikely that the Chinese side would offer anything more than symbolic concessions here, but again this may be more evidence of a pattern. In some countries Chinese influence is now a salient political issue- and it makes electoral sense for politicians of all stripes to at least gesture towards standing their ground, or pledging to conduct some sort of audit into the deals signed with China under previous governments. That such politicians often do not then make many substantive changes to the country’s relationship with China after coming to power suggests that, while the ‘debt trap’ story might be demonstrably false, there is no doubt that Chinese loans can be a source of influence in some countries- and one which lasts beyond changes of government.

ISSUE #1: SEPTEMBER 2019

Kashmir, Iran and The Pacific

Here is the first  of what I plan to be a regular monthly digest of Belt and Road-related news and analysis.

This isn’t meant to be a comprehensive repository of all things BRI - over a month there will be BRI stories in practically every country which is part of the Initiative (and several that aren’t). What I’m aiming to do instead with each newsletter is pick out a small number of important BRI-related stories from the last few weeks and delve a little deeper with them, providing commentary that will hopefully illustrate some of the wider geopolitical and geoeconomic context.  

In between issues I’ll also produce a shorter post once a month which will compile links out to some of the best English-language news and analysis on BRI (so look out for the first of these posts in early October). 

Since this is the first issue I’ll be casting a little further back and talking about events in August as well as September, rather than the usual monthly period which each newsletter will cover.

Three big stories to kick off:

KASHMIR

On 5 August Indian PM Narendra Modi moved to stripped the state of Jammu and Kashmir of its special status, which had previously conferred a degree of autonomy on the Indian-administered parts of the disputed region.

China is heavily implicated in that dispute from a number of angles. The PRC and Pakistan have had close diplomatic, economic and military ties for decades, which have been ramping up further in recent years. The China Pakistan Economic Corridor (CPEC)- a package of transport, energy and communications infrastructure estimated at anything from $30-$62bn-  is often regarded as the flagship of the Belt and Road Initiative (and the key plank in Pakistan’s development plans). CPEC will provide a route for China’s Gulf oil imports that avoids the Straits of Malacca, via the Arabian port of Gwadar and then an overland road and pipeline route which passes through Pakistan-administered Kashmir to the Khunjerav Pass on the border with Xinjiang.

Complicating the issue of India and Pakistan’s rival claims, China also controls parts of the greater Kashmir region (and India holds a small piece of territory claimed by China). A 1963 border agreement saw Pakistan cede a slice of high-altitude land known as the Trans-Karakoram Tract to China (shown as part of China but shaded red on the map below). India still lays claim to this territory as well as areas to its north. 

A larger chunk to the east known as Aksai Chin was part of the brief Sino-Indian war in 1962 and has been under Chinese control ever since. Both sides agreed to respect the ‘line of actual control’ (which also includes disputed borderlands in other regions) in 2005, but occasional flare ups have continued to occur.

Source: Public domain

Along with revoking special status for Jammu and Kashmir, Modi also announced that the state would be split in two, with the large but sparsely populated Ladakh region (including the Buddhist enclave around Leh) becoming a separate Union Territory. It is this element that seems to have annoyed the Chinese authorities the most, since the new Ladakh UT officially includes not only Aksai Chin but also the smaller Demchock sector to the South (claimed by China but mostly under Indian control- you can see this area in the bottom right corner of the map above).

This is not the place to get into Kashmir’s complicated history, nor the various domestic and international issues linked to Modi’s decision. From a BRI perspective, there are suggestions India intends to roll out new investment in infrastructure projects across the region, in part as a counter to CPEC. Pakistani PM Imran Khan has meanwhile moved to expedite some CPEC projects, though his hands remain somewhat tied by conditions on spending and debt related to an IMF agreement signed earlier in the year.

THE PACIFIC

Kiribati and the Solomon Islands both recently announced that they will be severing ties with Taiwan and switching recognition to the People’s Republic of China. Beijing and Taipei have been locked in a diplomatic struggle over recognition for decades, with Taiwan’s Republic of China government holding China’s United Nations seat until the General Assembly voted in favour of the switch to the PRC. From then on, both sides have engaged in what has sometimes been called ‘stadium diplomacy’, with aid projects (such as stadium construction) offered as inducements for often poor, smaller countries to either stick with or shift their official stance. The map below gives a sense of how this struggle has played out since the establishment of the PRC in 1949. Beijing has clearly had the upper hand here for some time, with only 21 countries recognising the ROC by 2016 and that list now having been thinned to 15. They range from a few small to medium sized states in Central and South America (Paraguay, Guatemala, Haiti, Nicaragua, Honduras and Belize), to exceptions in Europe and Africa (The Vatican and Eswatini), to very small island states in the Caribbean and Pacific (Saint Lucia, Saint Kitts and Nevis, Saint Vincent and the Grenadines, the Marshall Islands, Nauru, Palau and Tuvalu).  

Source: Universalis via Wikimedia Commons

While the Pacific has been a locus of struggle between the PRC and ROC for some time, there is now a renewed attempt on the part of the former to push Taipei out of the region (as well as continuing efforts elsewhere). The PRC seems to be poaching ROC allies as a means to intervene in Taiwanese politics. As Brian Hioe at New Bloom points out, Beijing held off during the previous, more pro-PRC administration in Taipei, with all of the six recent switches away from Taiwan coming since the election of Tsai Ing-wen as President. That may signal an effort to undermine Tsai- who is coming under pressure from elements of her (broadly pro-independence) coalition- ahead of presidential elections next year. More widely, a good deal of sentiment in the Pacific appears increasingly unhappy with levels of US, Australian and Tawianese commitment to the region and convinced that switching to Beijing reflects a changing economic and political reality. As Dan McGarry at The Interpreter puts it, ‘...[p]oliticians were presented with a choice: Move now, and get a better deal than Taiwan has ever offered. Or come back later, hat in hand.’ 

Solomon Islands PM Manasseh Sogavare wrote to Mike Pence in July stressing the need for help from the US, Australia and Taiwan on infrastructure development, an issue which he wrote ‘...has the potential to split the cabinet and could cause the government to fall…’. Australian PM Scott Morrison promised $170m (US) in infrastructure funding during a visit to Honiara in June, in a move interpreted as an effort to push back against the growth of Chinese projects in the region. Relations were then soured at the Pacific Islands Forum in August, where Australia agitated for a watered down declaration on climate change, much to the apparent frustration of island state leaders, many of which face severe threats from inundation. The fallout from the summit led to public comments condemning Morrison as ‘insulting’ and ‘condescending’ by Fijian PM Frank Bainimarara, which prompted a Chinese foreign ministry spokesperson to contrast ‘sincerity, real results, affinity and good faith’ on the part of China in the Pacific with Australia as  ‘a condescending master’. It’s hard not to wonder if the turn towards Beijing on the part of the Solomons and Kiribati (and possibly Tuvalu?) might not be related to all this, especially with Soavare’s statement on establishing relations with the PRC referencing China’s willingness ‘...to assist developing and least developing countries in the pursuance of the United Nations Sustainable Development Goals, including actions on climate change.’

We don’t know for sure what kind of deals the PRC has offered to the Solomons and Kiribati, though there has been talk of a $500m package for the Solomons. That would be big in proportion to the country’s size, but not beyond the realms of possibility.  It’s significant that both the US and Taiwanese responses to the Solomons shift alluded to the idea of debt-trap diplomacy (the notion that China deliberately lends unsustainable amounts to various countries as a means of gaining eventual political and economic dominance). The debt-trap idea (which only emerged in 2017) seems to have quickly become a central feature of official US foreign policy on China (and really their main line on BRI). 

Beyond rhetoric, though, USAID may withdraw its assistance programmes in response to the decision and Mike Pence has cancelled a scheduled meeting with Sogavare. Meanwhile, a number of US Senators have agitated for the passage of the TAIPEI Act, which would commit the US government to support Taiwan’s diplomatic efforts worldwide and impose penalties on countries severing ties with Taipei. Marco Rubio has gone so far as to argue on Twitter for Russia-style sanctions to be imposed on the Solomons. As several observers have pointed out, this would put the US in the bizarre position of condemning other countries for switching recognition to the PRC- something which actually brings them into line with the US’ own diplomatic stance. Daniel Drezner in theWashington Postnotes that this contradiction hasn’t stopped the Trump administration previously, as when it recalled Central American ambassadors over three countries making the same switch last year. Drezner speculates that this is the sort of trend that could eventually land us in Cold War territory, with countries facing economic cut-off from the US becoming more and more dependent on China to prop them up and thus creating opposing blocs of US and Chinese proxy states. We’re certainly not there yet, but these are the kinds of stories that provide a basic outline of how we might end up stumbling into such a world. And it’s not the only story like that this month…. 

IRAN

Petroleum Economist reports on an apparent deal for China to invest $280bn in Iran’s hydrocarbons sector, in addition to $120bn more in transport and manufacturing. The story has been picked up in a few places, including The Times. But key elements seem misleading or possibly dubious. The original report is that the deal was proposed as an update to a previous 2016 Iran-China deal, during a visit to Beijing by Iranian Foreign Minister Mohammad Zarif. It is not clear whether the deal has been signed, nor which side is supposed to have put forward the various proposals. In any case, there is a history of China signing these kinds of expansive framework agreements with other states- but they act more as a framing of aspirations rather than a detailed plan for specific investments- as you might think was the case from reading the reporting. Indeed, the 2016 agreement was a similarly aspirational document

All this is fairly standard for China’s international cooperation deals and how they get reported in the West. But the specifics of this one are particularly remarkable- and some sound pretty unlikely. First, the mooted total of $400bn looks far too large to be credible. It would absolutely dwarf not just current Chinese investment in Iran ($27.65bn since 2005 according to one estimate), but Chinese FDI in any developing/emerging market (the largest being Brazil, at $65.6bn), or even in the US ($185.5bn). Second, the deal supposedly contains a provision for 5000 Chinese security personnel to protect Chinese projects in Iran. It’s not entirely clear what is meant by ‘security personnel’, but if these figures are correct then this clause probably isn’t referring to People’s Liberation Army troops, despite an eagerness to interpret it this way in some quarters. In neighbouring Pakistan (where the China-Pakistan Economic Corridor is a potential blueprint for China’s involvement in Iran), Pakistani authorities themselves have deployed a special division of military and paramilitary troops to protect Chinese workers and projects. Chinese private security- including Chinese branches of multinational security firms like G4S as well as Chinese-headquarted companies- have also been playing an increasing role in Pakistan and elsewhere. Such firms have been involved in high profile rescues and military actions, as fictionalised in the 2017 blockbuster Wolf Warrior 2, which has a former PLA soldier fighting to protect aid workers from rebels and US/European mercenaries in an unnamed African country.    

Iran has been squeezed by US sanctions of late, with a crackdown by American authorities on international firms doing business in the country, including oil exports to the likes of China and India. So there is a dovetailing of apparent interests here which might explain the timing of this announcement. Iran wants to find a way around sanctions, especially when it comes to selling oil. China wants to gradually wean itself off reliance on the dollar and towards using the renminbi in more of its international transactions- concerns which might well be appear more pressing because of both the US-China trade war and the US sanctions on Iran. But, with China’s central bank holding upwards of $1tn in dollar-denominated reserves, it is highly unlikely that China is yet ready to risk having its major banks and firms falling foul of American sanctions and being locked out of the US financial system as a consequence. 

China has institutions set up to trade in barter or renminbi, which were able to endure previous sanctions and keep trading with Iran because of their (purposely) limited linkages to global finance. But if sanctions were to be enforced against the likes of state-owned oil firms Sinopec and CNPC, however, the impact would be far more serious- with consequences for the US as well as the PRC. Seen in this context, the part of the reported Iran-China deal which allows for China to buy Iranian oil using African or Asian currencies may well be a bluff or a negotiating card in the continuing US-China trade talks. US actions rely on China’s need for access to American banks being greater than its need for Iranian oil. That’s probably a safe bet to make, even if Chinese firms are still testing the limits of what they can get away with in importing from Iran. On the other hand, sanctions won’t last forever- and this is a good time for the PRC to secure closer relations with the one major Middle East oil exporter which remains outside the sphere of US influence. Iran has long looked like it would become a key part of the BRI jigsaw, along the lines of CPEC in Pakistan. That appears much closer now. Just don’t expect the bill to come to $400bn or the People’s Liberation Army to open a base in Bandar Abbas any time soon.

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Belt and Road Round Up

News and analysis on China's Belt and Road Initiative

BELT AND ROAD ROUND UP is a free monthly digest of developments from around the world relating to China’s Belt and Road Initiative. I’ll round up the latest news and point you in the direction of key commentary on all things BRI, as well as providing insights from my own research. I’ll cover Chinese projects across Asia, the Americas, Africa, Europe and the Pacific, as well as a broader perspective on how China’s rapid rise impacts global development and governance.


ABOUT

I’m Nick Jepson, Hallsworth Fellow in Chinese political economy at the University of Manchester’s Global Development Institute. I study the rise of China from a global and historical perspective. My current research project looks at bilateral Chinese loans to other governments and what happens when borrowing countries struggle to pay them back. You can find out more here.

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