Emerging Markets

Potholes Emerging In China’s New Silk Road

By Salman Rafi Sheikh, Asia Sentinel

China PotholeThe acknowledgement by Xu Shanda, a retired Chinese deputy director of the State Administration of Taxation, last week regarding potential losses of Silk Road projects has drawn widespread attention as it challenges the prevailing myth of an indomitable and inevitable system in which ultimately all roads will lead to Beijing.

The Silk Road endeavor, expected to cost as much as $40 billion, was conceived to project growing Chinese power across the planet and also as partly a way to soak up the country’s excess industrial capacity as it moves away from an export-based economy. But some of the numerous projects are in danger of stopping and for most of the system profitability is believed to be problematical.

Some infrastructure projects have already come to a standstill. For example, the gas pipeline known as “Power of Siberia,” the subject of an agreement signed by Russia and China in May last year, is in danger of flopping. In addition to this, the release of funds for the construction of the Altai gas pipeline to connect western Siberia and China has been delayed indefinitely.  Its huge domestic high-speed rail system, covering 19,000 km of track and hauling more than 2.5 million daily riders, is deeply in debt much of which is problematical and which may have to be offloaded onto the country’s banks. Railways extending into Central Asia and other regions may be in similar trouble.

The Silk Road project, sometimes called “One Belt One Road, refers to the “Silk Road Economic Belt” and the “21st Century Maritime Silk Road,” a development initiative whose name was inspired by the ancient land and maritime silk road that stretched across Central Asia to Europe. It is aimed at connecting China with the rest of Asia, Africa and Europe via land and sea via infrastructure, trade, finance and policy. It is a central part of President Xi Jinping’s global economic strategy. However, the fact that it is aimed at transforming China’s regional and global outlook makes it a source of discomfort for its rivals, such as the US and Japan who will do high fives for every rut in the road that Beijing encounters.

Notwithstanding the rival states’ concerns, it now seems that there is also some worry within China that the ambitious enterprise may end up a costly albatross. Xu confirmed in an online posting that the program will probably run huge financial losses, despite the fact, he says, that the multi-nation enterprise is a necessary outlet for excess Chinese industrial capacity.

Xu argued in his online posting that “In previous years, China made large investments in the energy sector. Looking at it now, these investments were useful in ensuring energy supplies, though financial losses were large. If we do not go this route, external demand will shrink, which will put tremendous pressure on domestic production and exacerbate the overcapacity problem. So, despite the difficulties, we need to stick to this overseas economic strategy.”

Also, given China’s long-term investment strategy, Beijing can afford to sit on these investments without requiring immediate returns. As Xu pointed out, some projects, such as a high-voltage power line in Kyrgyzstan, provide the Chinese government with foreign-investment legitimacy and thus material return is not necessarily the priority.

Concerns over the viability and feasibility of the Belt-Road project nonetheless continue. Countries that are now attaching themselves to China may soon find their financial futures too closely tied to China’s and, accordingly, suffer (or benefit) from it. Xu Shanda seems to believe that success and benefit may soon turn out to be nothing but an illusion. Hence, an increase in the prevailing sense of doubt. Sri Lanka has been struggling with a wide range of commercially nonviable projects commissioned by the former regime that were financed with Exim bank loans of 6.3 percent.

While the difficulty in financing projects is becoming gradually visible as China’s economy flags, the cardinal logic of Silk Road is at best questionable and, therefore, likely to result either in failure or drastically fewer benefits than being estimated today. According to Sarah Lain and Raffaello Pantucci, writing for the British think tank Royal United Services Institute for Defense and Security Studies, “Much of the historical bilateral projects have been funded through linked loans, where China provides the funding through loans that have stipulations attached to them, such as the requirement that Chinese companies implement the projects on the ground. In other cases where China’s Exim bank or the Silk Road Economic Belt CDB has provided loans to fund projects, it is unclear whether there are any short- or medium term returns or even security on the investment.”

For instance, the whole project is based upon exporting China’s industry and goods to new markets in politically and economically unstable countries such as Pakistan, where not only Islamic militancy is a major problem to deal with but also the separatist movement running in Balochistan, Pakistan’s territorially the largest province, which is crucial not only for the Gwadar port but also for the short route it offers to the Middle East via Iran-Pakistan border.

While China may be able to gain long-term access to the Gwadar port because of the fact that Pakistan has agreed to provide a force of almost 10,000 troops to protect the newly built road to Gwadar, problem in Balochistan could be exacerbated potentially to its over-militarization. Pakistan, therefore, does not stand to gain as much benefit as China seems to be offering. Therefore, while Xi promises a win-win situation for all, the biggest winner would be China itself. This is because Beijing is at once the project’s architect, financier, and builder.

This is a sort of unidimensional path that many countries that have decided to bask in China’s glory continue to ignore or have not been able to make sense of so far. This, however, they would be not be able to ignore for long. Xu’s acknowledgment is perhaps a first step towards grasping the depth of the ‘New Silk Road,’ its implications and consequences for the partner countries and, indeed, for China itself.

Certainly there are concerns in New Delhi over a geopolitical strategy that covers ports in Sri Lanka, the Maldives and Pakistan but not India itself, which rightfully could be worried about China’s encroachment on India’s territory. Also, China’s planned Pakistan-China Economic Corridor cuts through disputed areas of Kashmir, an indication of China’s tilt towards Pakistan.


Courtesy of Asia Sentinel

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