Chinese Development Finance Blog

WEEKLY DIGEST: April 24 - May 1, 2018

5/1/2018

Los Angeles skyline. Good Free Photos.

The Belt and Road in California

At the recent Belt and Road Forum held in Los Angeles, California, Chinese Consul General Zhang Ping expressed optimistic views about California's close economic and cultural relationship with China, and went so far as to say that U.S. cooperation with China through the Belt and Road Initiative would start with California. As the largest state in the U.S. both by population and by economic size, California is seen by China as a gateway to the U.S., particularly because California has maintained close business ties with China and there is a substantial Chinese-American population in the state. California Governor Jerry Brown has expressed that the state needs a very close partnership with China, especially considering the state is home to the American technology and entertainment industries, and is pioneering the development of renewable energy and green technologies.

Criminal activity at a BRI harbor

Italian investigators have acquired substantial evidence stating that a Chinese criminal syndicate have been using the BRI harbor in Greek to import large quantities of counterfeit consumer goods. This criminal syndicate have also made false reports to merchants at the harbor so as to avoid paying the required tariffs.

The Asian Development Bank

Azerbaijan

The ADB will loan 900 million USD to Azerbaijan between 2018-2020. The plans for 2018-2020 will follow the bank's loan program. The first part of the plans is a 650 million USD loan for a Railway Sector development program and a Governance and Public Sector Efficiency Program.

ADB Annual Report

According to the Asian Development Bank (ADB) Annual Report 2017, the bank's annual operations reached a record 32.2 billion USD in 2017. This is a 26 percent increase from the year before. Support for climate mitigation and adaptation had a high increase of 21 percent. However, disbursements and co financing decreased and the ADB has said it will address these trends through their activities in 2018.

Pakistan’s Financial Woes

As Pakistan’s financial crisis worsens, financial institutions in China such as the China Development Bank have lent the nation nearly 2 billion USD. Pakistan has been using different loans, as well as other economic tactics like increasing custom duty rates, as means of temporarily stabilizing the Pakistani economy, as Pakistan attempts to avoid borrowing from the International Monetary Fund. However, the nation’s public debt to GDP ratio violating their own Fiscal Responsibility and Debt Limitation Act (2005), and economists predict that Pakistan will not be able to sustain itself to the end of the year without help from the IMF.

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WEEKLY DIGEST: April 17 - April 24, 2018

4/24/2018

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Athens, Greece. Pixabay.

The EU and the BRI

The European Union has long expressed some level of discontent with China's Belt and Road Initiative. In a recent joint report, 27 out of 28 of the EU ambassadors to China criticized the BRI. Europe remains an important component of the BRI, and China has made efforts to further integrate the EU into its overarching development framework. However, for Europeans, the BRI has its drawbacks; a prominent critique is that the BRI runs counter to the EU agenda for liberalizing trade and pushes the balance of power in favor of subsidized Chinese companies. Indeed, almost 90 percent of BRI projects are financed by Chinese companies, and foreign firms have long expressed frustration with a lack of reciprocity and a lack of access to Chinese markets. Although China has branded the BRI as “win-win cooperation,” the country's reluctance to welcome foreign investors and further liberalize its markets could prompt greater criticism from the EU and other governments.

China responded in a Press Conference claiming that these reports and clarification are not confirmed with facts. The spokesperson stated that China has repeatedly stressed that the BRI is a global public product that seeks mutual benefits and common development, and transparency of BRI is always highly insisted. Read more here.

Chinese tax evasion in Europe?

EU authorities are investigating instances of tax evasion and tax fraud by Chinese firms through new routes developing with the Belt and Road Initiative. At the core of the investigation is a suspected wide-scale tax fraud scheme by Chinese importers via the Greek port of Piraeus, a trade gateway between China and Europe. The European Anti-Fraud Office asserts that there is evidence that Chinese-owned firms have been fraudulently avoiding import duties and the value-added tax (VAT) on large shipments of goods through Piraeus. Italian and Greek investigators are also independently investigating cases of tax fraud on the part of Chinese firms in Mediterranean ports.

Belt and Road debt concerns

Based on news from Chinese government researchers, the Belt and Road Initiative is currently facing serious financial challenges. Li Ruogu, former chairman of the Exim Bank of China, stated that most countries along the BRI have no money to pay for projects they participated in. These countries are already heavily in debt and are needing to take on private loans. He continued by saying that the average liability ratio and debt ratio in these countries have already reached beyond 10-20 percent of the globally recognized risky percentages.

India still opposes BRI

India has consistently held an opposing view toward the Chinese led BRI, stating that BRI’s flagship project, the China-Pakistan Economic Corridor, “passes through the Pakistan-occupied Kashmir region which concerns India's sovereignty.” At a recent strategic dialogue meeting, India once again refused to participate in BRI, yet Beijing will continue its efforts to persuade India to join due to its important position in South Asia and its huge market potential.

The Asian Infrastructure Investment Bank

As the original sponsor of the Asian Infrastructure Investment Bank, China has played a leading role in decision making and preparation process, keeping about 30 percent of the Bank's shareholding and about 26 percent of the voting power. This author makes three points about China's leadership in AIIB. First, the author believes that China's dominance and leadership within the AIIB is formed objectively rather than deliberately. Second, China's high share of the AIIB and its high voting power is a phenomenon of phase, and it will adjust as more countries join in the future. However, China will not deliberately give up its leading role. Third, there is no need to avoid the fact that the good performance of the AIIB reflects China's rapid progress in multilateral diplomacy and that China had promoted a series of groundbreaking foreign policy practices.

ADB and AIIB cooperation

Takehiko Nakao, president of the Asian Development Bank (ADB) stated at a press conference his desire to increase “cooperation over competition” with the Asia Infrastructure Investment Bank (AIIB). In reference to the AIIB's relative inexperience, Nakao stated “it is also important to cooperate with the AIIB in order to draw them toward international standards.” In response to a question regarding the possibility of ADB assistance for North Korea, he stated “it would be the prerogative of the member states, but no such talks are currently in place.”

Asian Development Bank Updates

Afghanistan

The ADB and Afghanistan signed three energy contracts to support the country's energy security and efficiency. The contracts, totaling 80 million USD, are part of a 415 million USD grant with numerous other cofinancers. Afghanistan relies heavily on energy imports from neighboring countries. The contracts and grant are aimed to expand the country's energy producing capacity by building new stations and expanding the current grid.

Healthcare in Laos

The ADB is providing a 30 million USD policy-based grant to the Lao People's Democratic Republic (Lao PDR) to expand healthcare coverage. The grant is the second part of the government's Health Sector Reform Strategy to achieve universal health care coverage by 2025. The project will support enhancing healthcare for the poor, especially women and children by improving health human resource management and the sector's financial management system.

Georgia

The ADB is expanding projects into the Eurasia region by increasing investments in Georgia. ADB will work on improving the water supply, sanitation, and wastewater systems in Georgia’s ski resort in the Caucasus mountain range, Gudauri. Werner Liepach, a director at ADB, says that the bank intends to pursue a long term partnership with Georgia, and that urban and water development are of high priority to the bank. In addition, ADB will be invest in Georgian infrastructure to improve transit and tourist potential.

MDB collaboration

Seven Multilateral Development Banks (MDBs), including the ADB, launched a new platform to collaborate on economic migration and forced displacement. In response to a request by the G7, the MDBs involved are continuing to cooperate on the project. Four priority areas include refining a common framework for MDB engagement with the two issues, advancing cooperation on knowledge and data, ensuring strategic coordination of efforts with fellow MDBs, governments, and NGOs, and using better-targeted instruments and products.

China provides disaster relief to Pakistan

China has supported the United Nations Development Programme's (UNDP) project in Balochistan and the Federally Administered Tribal Areas (FATA) in Pakistan to provide disaster relief from past flooding. Chinese aid, provided under the framework of the South-South Cooperation Fund, offered food assistance to affected families. This is the first Chinese contribution to the World Food Programme (WFP) in Pakistan.

China looks to Mexico

China looks to invest in the Lázaro Cárdenas Port in Michoacan, Mexico after Chinese officials met with Mexican officials. The port is a good avenue to expand trade relations with Mexico because it already has nearly all infrastructure needed to be successful and lies in a location that is geographically advantageous for importing and exporting manufactured vehicular goods, minerals, and other bulk cargo.

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WEEKLY DIGEST: April 10-April 17, 2018

4/17/2018

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New York City, New York. United Nations Flags. Max Pixel.

Updates from the Belt and Road

UN interest in the BRI

José Graziano da Silva, Director-General of the United Nations Food and Agriculture Organization (UNFAO), commended the Belt and Road Initiative and highlighted opportunities for the United Nations to cooperate with China through the Chinese development framework. The UNFAO has developed a BRI umbrella program, identifying four key areas where the UNFAO and China can work together: food system development, digital-agriculture, controlling transboundary animal and plant diseases, and protecting biodiversity. The BRI provides a unique opportunity to further integrate the global agricultural economy, as farmers will be able to reduce input and transportation costs, reach further markets in a shorter time, and gain access to information, technical services and financial advice. These opportunities will allow for higher quality products and increased productivity in the agricultural sector.

Financial woes on the Belt and Road

China’s BRI is facing some serious financial challenges, as several participating countries are starting to run out of funding to pay for the projects. With average liability and debt ratios well above globally recognized warning lines, many of the participating countries were low on funds prior to joining the initiative. Previously funded by institutions such as the Asian Infrastructure Investment Bank, China Development Bank, and the Export-Import Bank of China, some are calling on international fundraising mechanisms to provide financial support from private investors. Private investors have previously been turned off by the projects due to the complex regulations that go along with international investing.

Chinese praise of the BRI

From 2013 to 2017, China accumulated 5 trillion USD in trade goods with countries along the Belt and Road Initiative. China's direct foreign investment now exceeds 70 billion USD. Along the BRI, Chinese corporations have created 210,000 jobs, promoted the establishment of 75 economic cooperation zones, and paid 2.2 billion USD to host nations. Similarly, China has diversified its foreign trade at an accelerated pace. China's total value of imports and exports along the BRI increased by 12.9 percent in the first quarter. The BRI continues to play an increasingly important role in China's foreign trade. Read more here.

Asian Development Bank News

Large loans to the Philippines

The ADB expects a sovereign loan to the Philippines to reach 920 million USD this year. Projects to be funded by the loan include private participation in infrastructure development, poverty relief and inclusive development, increasing Mindanao governmental capacity, and enhanced public transport and traffic alleviation. The ADB’s statement mentioned that special tax privileges for investors in the country's special economic zones and free ports would end.

Public-private partnerships in Pakistan

The ADB is loaning 375 million USD to Pakistan for irrigation projects and promoting public-private partnerships (PPPs) in the Punjab province. 275 million USD will go to the Jalalpur Irrigation Project, which will draw water from the Jhelum River to the Rasul Barrage to service 384,000 people. The remaining 100 million USD will encourage PPPs in Punjab by supporting the government to enhance the commercial viability of projects and attract private sector participation.

Investment in Blockchain Technologies

During the opening of Hangzhou Blockchain Industrial Park in China, the Chinese government announced the commencement of the Xiongan Blockchain Global Innovation Fund, with around 10 billion CNY. The Yuhang District government is providing 30 percent of the funds. The Industrial Park will provide academic and financial support for the development of blockchain technologies in Hangzhou. The blockchain center establishment follows cancelled plans to create an international blockchain investment development center in China, as revealed in a proposition leaked from the Chinese Investment Association. Read more here.

Blockchain industry experts say that the successful development and implementation of blockchain investment technology will rely upon instrumental regulatory framework. China's National Internet Finance Association (NIFA) will prioritize well-designed regulation with intentions of fostering healthy and stable economic growth. Read more here.

China in Latin America

Chinese investment in the Dominican Republic

Kingtom Aluminum SRL will be the first Chinese company established in the Dominican Republic. The company will create approximately 400 direct and 1000 indirect jobs, and will export aluminum extrusions to the U.S. and its territory, Puerto Rico. The company's establishment amounts to approximately 10.7 million USD of Chinese foreign direct investment in the Dominican Republic.

Mexico

China's ambassador to Mexico visited the Port of Lázaro Cárdenas with officials from China's Industrial and Commercial Bank, Bank of China, China Development Bank, China National Offshore Oil Corp. in Mexico, China Harbor Engineering Company in Mexico, China Gezhouba Group Company Limited in Mexico, and others. Those that attended assessed the "logistical advantages opportunities" of investing in the Michoacan province in Mexico.

Chinese influence at the Summit for the Americas

U.S. President Donald Trump was absent during the Summit for the Americas, which was held in Lima, Peru. Attending Japanese observers expressed concern of Chinese influence expanding in the Americas. This article notes Chinese developmental assistance for a 450km Panamanian rail project as one facet of China’s expanding influence, and the fact that Chile joined the AIIB in 2017 as another indicator of Chinese influence expanding in the Americas. The observers also noted that Russia is strengthening its ties with Cuba and Venezuela.

News from around the world...

Australia limits foreign aid

According to recent research conducted by Australia’s International Development and the Pacific Ministry, up to 80 percent of Australians do not support further spending on foreign aid. The minister, Concetta Fierravanti-Wells, admitted that the findings reflect Australia's massive cuts of foreign aid. She also called on Britain to support infrastructure development in the Pacific, something interpreted as an attempt to counter increasing Chinese influence in the region through development aid.

China’s presence in Germany

Despite that Chinese foreign investments have been increasing for years, many western businesses and politicians have not recognized the extent of China’s influence. With a combination of Maoist control techniques and capitalist corporate governance, China’s BRI has been extremely successful – “the next WTO” according to Siemens CEO, Joe Kaeser. China is more active than ever in the European market. As a member of European financial institutions such as the European Investment Bank (EIB) and the European Development Bank (EBRD), Chinese companies have invested more money than ever before in German companies. This worries the Office for the Protection of the Constitution as they are concerned that there is an unequal outflow of information and technology to China.

Solar Energy in Nepal

Nepal’s government administrative headquarters, Singhadurbar, will be powered by solar energy provided by Chinese aid starting April 17. The project symbolizes the opportunities that Chinese aid provides Nepal to modernizes and diversify Nepal's energy sources.

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Indonesia is in need of infrastructure investments

4/14/2018

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West Sumatra, Indonesia. Max Pixel.

Indonesia needs infrastructure. The Southeast Asian island nation lags behind other developing nations by 1.5 trillion USD in infrastructure assets according to the World Bank’s October 2017 Indonesia Economic Quarterly report. Indonesia ranks 62nd in the 2015-2016 World Economic Forum Global Competitiveness Report rankings for infrastructure, behind fellow ASEAN members, Singapore and Malaysia. According, when President Joko “Jokowi” Widodo was elected in 2014, he made infrastructure a key priority of his administration with a focus on obtaining energy, transportation, and water infrastructure investments.

President Joko Widodo is turning to both public and private investments to meet Indonesia’s infrastructure gap. China is an increasing presence in Indonesian investment deals, and even though Chinese-Indonesian relations are not completely rid of past suspicion and tension, mainly due to sovereignty disputes over the South China Sea, both nations are actively moving forward to strengthen their political and economic relations.

Indonesia is looking to China for investments and economic growth, while China knows the benefits of having good ties with Indonesia as a source of support for its new economic initiatives, like the Belt and Road Initiative, and as an ally nation in ASEAN.

China is Indonesia’s largest trading partner. In 2016, Indonesia exported 16.1 billion USD in goods to China and imported 32.1 billion USD, resulting in a trade deficit between the two nations. Still, Indonesia promotes Chinese sourced investments and is an ardent supporter of the Chinese-driven Asian Infrastructure Investment Bank as a way to develop the nation.

Promoting the AIIB has paid off, and President Widodo is beginning to fulfill his promise to increase infrastructure investments in Indonesia. The AIIB has approved three projects located in Indonesia, all of which focus on developing infrastructure, water, and energy capacities. In 2016, the AIIB approved a 216.5 million USD loan for a National Slum Upgrading project that will improve urban infrastructure and services. The bank has also approved a Regional Infrastructure Development fund that will finance investments for urban transport, water supply, and waste management in Indonesia. Finally, the AIIB is continuing investments in hydroelectric power with the Dam Operational Improvement and Safety Project Phase II, which will continue to improve Indonesia’s hydroelectric capacity, resilience, and management.

The AIIB is not the only source of Chinese-driven investments in Indonesia. In 2016, China beat out Japan in a bid to finance the Jakarta-Bandung line by offering guarantee-free loans to Indonesia while Japan wanted Indonesian Government funding. The 5.5 billion USD project is funded mainly by a loan from China and is being constructed by PT Kereta Cepat Indonesia China, joint venture between Indonesia state-owned enterprises and China Railway International. The rail line will be 150km long, connecting Jakarta to Banjung by 2019 and reducing travel time from three hours to 40 minutes.

The Jakarta-Bandung project has already faced numerous difficulties and construction delays, and there is skepticism that the project will be completed by 2019. Difficulties in constructing the Jakarta-Bandung railway reveals the regulatory burdens that the Indonesian government presents for infrastructure investments and development. Not only has land acquisition problems delayed the project, but China has halted the release of its loan to the project developer in response to the red-tape shrouding the project implementation. Still, Indonesian and Chinese authorities claim that financing is not a problem, and instead claim that the project has been halted because of Indonesia’s uncertainty over the necessity of a high-speed railway.

President Joko Widodo will likely rely on Chinese development finance in the future as he pursues his administration's infrastructure promises. For Indonesia, and similarly to other Southeast Asian nations, the benefit of China’s economic influence seems to outweigh the economic and geopolitical consequences that comes with an increased reliance on China. But with infrastructure investments as a priority domestic policy, Indonesia needs to simultaneously pursue policy reform that will allow for timely and sustainable infrastructure development and not stall massive infrastructure projects.

Elizabeth Teare

Elizabeth is a fourth-year student studying International Relations and Rhetoric at the University of Texas at Austin.

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Breaking the Ice: China and the Arctic

4/11/2018

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Icebreaker in the Arctic, Flickr.

On January 26, 2018, the State Council Information Office of the People’s Republic of China published a white paper titled “China’s Arctic Policy.” The report outlined the nation’s overarching goal to “promote peace and stability in, and the sustainable development of, the Arctic.” China’s Belt and Road Initiative has transformed into a global paradigm of international development and governance. For China, the Arctic provides a new opportunity to expand the Belt and Road Initiative, which will undoubtedly have far-reaching consequences for the region. Specifically, China’s concept of a “Polar Silk Road” has the potential to reshape economic development and reorder the balance of power in the region.

Receding ice sheets and warmer waters have opened up around a quarter of the world’s deposits of fossil fuels, as well as a host of other minerals and resources, including gold, silver, diamond, copper, titanium, graphite, uranium and other rare earth elements. Altogether, the value of natural resources in the Arctic is estimated to exceed 35 trillion USD.

Additionally, new maritime and shipping routes could save both time and costs for transportation, which is crucial for an export-oriented country like China. Ninety percent of global trade occurs between North America, Europe, and Asia, and new Arctic maritime routes along the Northern Passage could cut transportation time by 40 percent. Currently, the Arctic is sparsely populated and lacks the conditions needed for sustained economic growth, a result of underfunded and underdeveloped infrastructure. This could all change, however, as more countries are beginning to take advantage of changing geographies. In the United States, President Donald Trump has overturned previous restrictions on exploration in the Arctic, and in Russia, President Vladimir Putin has prioritized Arctic development as a part of the country’s broader security strategy.

China’s Arctic ambitions have become clear to the rest of the world, and Beijing is already forging new partnerships with countries across Eurasia. In recent years, the Belt and Road Initiative has permeated European markets, creating new avenues for joint ventures in the Arctic region between China and European countries. In 2016, the Industrial and Commercial Bank of China announced the creation of a 10 billion EUR investment fund to help finance development projects in Eastern and Central Europe.

China’s presence in Europe has also attracted the Nordic countries, consisting of Denmark, Finland, Iceland, Norway, and Sweden. Not only do these Northern European countries border and have direct interests in the Arctic, they are also all members of the Asian Infrastructure Investment Bank, meaning that the Nordic countries and China could potentially engage in new partnerships through the Belt and Road Initiative. Finland will assume chairmanship of the Arctic Council in 2019, and has overseen new partnerships with a number of Chinese firms. Sunshine Kaidi New Energy Group, for example, plans to invest 1 billion EUR in Finnish industry by 2019. China happens to be an observer state within the Arctic Circle, and while observer states do not have voting power, closer ties to Finland are no doubt part of a larger strategic calculus of commanding a more assertive role in regional decision-making.

When examining China’s Arctic policy, it is impossible to ignore the immensely consequential partnership between China and Russia. Russia has not only been one of the largest players in Arctic development, but has also cemented itself as one of China’s most important investment partners in the Belt and Road Initiative. In fact, China’s first major Arctic infrastructure investment was in a Russian firm. In 2016, China’s Silk Road Fund acquired a 9.9 percent stake in the Russian Yamal LNG project, with the China National Petroleum Corporation assuming an additional 20 percent stake. At the time, Yamal LNG was Russia’s landmark liquified natural gas project in the Eurasian Arctic. China’s interest in Russia is centered around access to commercial shipping lanes that run through the Northern Sea Route along Russia’s coast, as well as access to liquified natural gas. China is especially interested in liquified natural gas because of rising domestic demand, and has been asserting itself in the Arctic region in part to meet that demand.

China’s Polar Silk Road, and the Belt and Road Initiative in general, is indicative of the fusion between geoeconomics and statecraft that drives Xi Jinping’s Chinese foreign policy. However, the use of economic tools to achieve geopolitical goals is risky, and the growing presence of China in the Arctic has the potential to dramatically reorder the balance of power in the region and reshape prevailing security dynamics.

Criticism of China’s Arctic ambitions stem from the fact that China is not an Arctic state and has no territory within the Arctic Circle; thus China’s desire to connect what it calls the “Northern Link” can be interpreted as a power move for geopolitical clout. For Arctic nations, greater Chinese influence presents two potential risks: an undermining of international maritime laws and potential militarization of the region.

A complex web of international laws and regional governance frameworks oversee inter-state relations, sovereignty disputes, and commercial zones in the Arctic. Over the last few years, China’s increasing maritime and naval presence has raised the possibility that Beijing may be unwilling to abide by prevailing norms. China has found itself in a plethora of naval disputes, and its response to international pressure has indicated that it would be willing, if necessary, to withdraw from maritime agreements such as the UN Convention on the Law of the Sea. However, despite Chinese assertiveness in these regions, China has kept its cool in the Arctic. Beijing has thus far adhered to international laws governing the Arctic, indicating a commitment to prevailing norms and institutions. Whether or not China abides by this in the future is uncertain, which continues to risk geopolitical stability in the Arctic.

It is important not to ignore the potential of militarization, especially given China’s track record in other security hotspots like the South China Sea. The United States possesses an Arctic base, and Russia has built up a plethora of airfields, naval ports, and military outposts in the last several years. Therefore, it is not unprecedented to assume that China too has military ambitions in the Arctic. While China has not publicly announced such plans as of yet, Chinese militarization of the Arctic could jump start another global arms race, this time including the three most powerful militaries in the world.

China’s Arctic ambitions are clear, with access to new markets and the expansion of the Belt and Road at the forefront. Overall, Chinese development finance in the Arctic has the potential to produce sustainable economic growth and development in the region. If China is able to successfully mitigate security risks and uphold international law, it will undoubtedly pave the way for a more interconnected and prosperous Arctic.