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WEEKLY DIGEST: February 20-February 27, 2018

2/27/2018

Jeddah, Saudia Arabia. Pixabay.

The AIIB and Islamic Development Bank team up

The largest Muslim development organization, the Islamic Development Bank is looking to partner with the AIIB to address the infrastructure gap in Africa and other developing countries. Since its establishment, the AIIB has been constantly expanding its international relationships with other development banks.

ADB and AIIB continue cooperation

Last week, the AIIB's Director Commissioner, Zhang Wencai, expressed interest in continued cooperation with the ADB, noting past collaborations in Pakistan, India, Bangladesh, and Georgia. Meanwhile, Chinese experts pointed out that while the overall economic development in the Asia-Pacific region has been accelerating in recent years, there is still a disparity in regional development.

The Asian Development Bank

Tonga

The ADB is granting an additional 1 million USD in emergency funds to Tonga in the wake of Cyclone Gita. The recent cyclone affected around 80 percent of the country's population, destroyed and damaged around 2,000 homes, and damaged the electricity network in Nuku'alofa. The grant will add on to the initial 6 million USD ADB provided to Tonga after the cyclone.

Bangladesh

The ADB is loaning 360 million USD to buy rolling stock and support reform in Bangladesh Railway. The loans will be focused on investment and modernization needs of Bangladesh Railway. The project includes freight and passenger capacity increases, reduced diesel consumption, construction of maintenance facilities, driver training, and a new IT system. A technical assistance grant of 500,000 USD will be used for training and energy efficiency plans.

ASEAN

The ADB signed a 235 million USD loan agreement with B.Grimm Power Public Company Limited, one of the largest power producers in Thailand, for renewable energy development in ASEAN member countries. The loan will fund B.Grimm Power's part in the ASEAN Distributed Power Project which will support development of solar, wind, biomass, waste-to-energy, gas-fired power, and energy storage. Member countries benefiting include Cambodia, Indonesia, Lao People's Democratic Republic, Myanmar, the Philippines, and Vietnam.

Latin America

China’s soft power

China will open a bookstore that focuses on Chinese culture development in Buenos Aires.The store will be a part of the "Bookuu Nuevo Continente" network, a multi-city program. The Zhejiang Publishing United Group will partner with the National University of Mar Del Plata. In addition, China International Press will establish a space for Chinese traditional texts translated to Spanish. These moves intend to spread the narrative of Chinese culture and are interpreted China implementing soft power alongside China's global commercial endeavors.

Economic growth

The World Trade Organization's most recent report estimated that world trade would continue to grow at a high rate of 3.2 percent in 2018, a figure similar to 3.6 percent in 2017. Exports from Latin America grew 13.1 percent in 2017, which correlates with Asian countries purchasing increasing by 5.8 percent. The report highlights that trends could continue to be positive with China’s economic agenda coupled with the One Belt One Road initiative.

Peru

The Ministry of Energy and Mines' and the World Bank's joint release of The Hydroelectric Atlas informed the public that, as of 2011, southern Peru has 300 megawatts of hydroelectric power. In response, the Technical Operation Committee of the Interconnected Electrical System pointed out that only 1/66th of all hydroelectric potential is utilized. Though new hydroelectric projects are on the table, the San Gabán III project is the only one progressing. The installation will have a capacity of 205.8 megawatts after the China Development Bank granted 438 million USD of investment to China's Three Gorges Corporation and Energías de Portugal.

China’s European Relations

Belarus

The Belt and Road Initiative, while mainly focused on economic and infrastructure development, has produced several positive externalities for China. In creating economic ties with nations across the world, China has acquired greater access to foreign markets and their resources. This has created favorable conditions for China to import goods and services in order to meet growing domestic demand. With annual consumption rates exceeding 7.9 million tons, China is the third largest importer of beef, and through the Belt and Road Initiative China has accessed new beef markets like Belarus. With a well developed animal husbandry industry and a reputation for quality beef, Belarus exports over 130 thousand tons of beef every year, and following a July 2017 deal will export beef to the China for the first time.

Germany

China is Germany's most important trading partner for the second year running, with imports and exports combined totalling 186.6 billion EUR last year. As early as 2016, China passed up the U.S. and became Germany's largest trading partner. Following China is the Netherlands with 177.3 billion EUR from the U.S. with 172.6 billion EUR.

Concerns and Alternatives to the Belt and Road

The Belt and Road Initiative has gained international support in part because of China's promise of shared benefit for all countries involved. However, China has pursued an asymmetric policy of foreign direct investment (FDI), which makes it difficult for foreign firms to gain access to Chinese markets. The imbalance between FDI inflows and outflows could jeopardize external support for the Belt and Road Initiative, potentially creating a competitive atmosphere that could undermine the spirit of collective benefit.

For example, the Trump administration has proposed a system of reciprocity, which would impose the same regulations on Chinese investors in the U.S. as American investors face in China. The European Union has also raised concerns about investment imbalances in European markets. The success of the Belt and Road Initiative is contingent on China being able to access foreign export markets, and growing backlash on investment flows could incentivize China to further liberalize its own economy and make FDI more symmetrical in the future. Read more here.

Many countries including Germany and France are skeptical about the One Belt One Road initiatives, claiming it hinders Western values and prejudices democratic freedom. Several countries hold a more ambiguous attitude, saying that they do not oppose the OBOR but are starting a new program that is an alternative to OBOR. Read more here.

The U.S., Japan, India, and Australia look for an alternative

China is pushing ahead with a huge infrastructure project, the New Silk Road with billions of dollars of investments. Several Western and Asian countries fear Beijing's new influence. Therefore, countries like the U.S., Australia and Japan are seeking alternative programs to counter China's growing influence. Read more here.

Australian Minister of Foreign Affairs Julie Bishop stated that the U.S., Japan, India, and Australia are currently researching to create a joint Asian infrastructure project. Australian Prime Minister Malcolm Trunbull intends to discuss this plan with U.S. President Trump during their meeting. Turnbull emphasized that this project is referred to as an alternative of the OBOR and not a competitor. Read more here.

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What China's OBOR means to Taiwan

2/26/2018

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Skyline of Taipei, Taiwan. Max Pixel.

As China extends its economic and political reach with the One Belt One Road Initiative (OBOR), Taiwan has kept a low profile. While other states have established varying manners of addressing the OBOR, the Government of Taiwan has been unable to arrive at a clear consensus on a proper approach to the OBOR. There are several reasons for this indecision, including is conflict between China and Taiwan regarding the Asian Infrastructure Investment Bank (AIIB), the current economic condition of Taiwan, and political disputes fueled by internal polarized opinions centered around Cross-Strait relations.

AIIB membership dispute

The connection between the Asian Infrastructure Investment Bank (AIIB) — with its strong influence on the OBOR — and the latest presidential and ruling party change in Taiwan is important to note. Former President Ma Ying-jeou of Taiwan expressed a strong desire to join the AIIB in March 2015. This resulted in the country applying for AIIB membership as “Chinese Taipei” (official name was never disclosed but is speculated). Two complications soon emerged that fueled Taiwan’s hesitancy to make any official statement on the OBOR. The AIIB rejected “Chinese Taipei’s” application, and Tsai Ing-Wen was sworn in as the new president of Taiwan.

As reported by CNBC in 2015, China’s State Council Taiwan Affairs Office rejected Taiwan’s application to become a founding member of the AIIB because of Taiwan’s name choice, but future membership is welcome if applied “under an appropriate name.” This boils down to the Cross-Strait conflict between Taiwan and China. This conflict is reflected in the approach the former and current presidents have taken to resolve Taiwan’s economic concerns. Former President Ma aimed to strengthen ties with China during his presidency and current President Tsai is intent on diminishing Taiwan’s economic dependency on China. As shown, China plays a significant role in shaping Taiwan’s economic policies.

Taiwan’s economic woes

Despite rejection from the AIIB, Taiwan’s persisting economic problems forces Taiwanese politicians to still consider the OBOR as an option of economic support. In the recent years, Taiwan struggled to adapt to the changing economic landscape. The country went through a huge economic boom between the 1950s and the 1990s, also known as the Taiwan Miracle, yet it has been speculated that this ‘miracle’ might never occur again.

Pointed out by Forbes, Taiwan’s economy is highly dependent upon tech-based exports but the country’s software industry has not been faring well. One speculation for the economic struggle is that low industry wages have been keeping university-graduate students away. Taiwan has not been able to provide reasonable wages to citizens, which is highly protested by Taiwanese labor groups on numerous occasions. A concern stemming from the inequivalent wages is the country’s housing price-to-income ratio that now sits at 9.4 (San Francisco has a value of 9.1), Taipei is currently one of the most unaffordable places to live in in the world.

Both citizens and policymakers have been attempting to find solutions to growing concerns surrounding the country’s economic situation. There are two ‘solutions’ attracting attention, but simultaneously prompt, either join the OBOR established by the Government of China, or push forward with the implementation of the New Southbound Policy as proposed by the current Government of Taiwan.

Polarized opinions centered around Cross-Strait relations

Launched a few months after President Tsai was elected in 2016, the New Southbound Policy is a initiative devised to broaden Taiwan’s relation with 18 nations in the Southeast Asian Nations (ASEAN), South Asian nations, as well as New Zealand and Australia. President Tsai seeks to diversify the country’s economy and international relations reacting to concerns that Taiwan is over dependent on China for trade, which currently constitutes more than 20 percent of the country’s total trade. The initiative has resulted in success as Taiwan’s has renewed investment with the Philippines under the New Southbound Policy. Further, the country’s new foreign policy of granting ASEAN tourists visa-free entrance into the country has created a positive outlook on improving the country’s economy.

Subsequently, this shift in Cross-Strait relations has led to vocal disagreements from China. David An, a senior research fellow at the Global Taiwan Institute, wrote an analysis on the relationship between the New Southbound Policy and the OBOR in the weekly publication for the Global Taiwan Institute. The Tsai Administration clarified that the New Southbound Policy is purely for economic purposes. Meanwhile, the establishment of a more independent Taiwanese economy has led to conclusions that the New Southbound Policy may be a form of establishing overall independence away from Mainland China.

The coexistence of the China’s OBOR and Taiwan’s New Southbound Policy has led to a stalemate in the Taiwanese parliament. Supporters for the OBOR present rhetoric similar to those who supported Taiwan’s application to join the AIIB: they wish for a positive change in the country’s economy and do not want Taiwan to be economically excluded. Of course, critics of Taiwan’s joining the OBOR initiative also have their own rationale. Chienwu (Alex) Hsueh, an assistant professor at the National Chengchi University in Taiwan, concludes that Taiwan’s membership in OBOR would not lead to greater economic advantage. As pointed out in his article, Taiwan does not have strong economic relationship with the other 26 participating Asian countries and that the OBOR will not guarantee a positive economic change.

Nevertheless, the main conflict preventing a consensus on the OBOR lies within conflicting opinions on the Cross-Strait relations, which can be directly observed through party polarization. Parties of the Pan-Blue Coalition and Pan-Green Coalition hold differing perspectives regarding the one China rhetoric and often vote differently when policies have the possibility of affecting the political status of Taiwan, which is why it’s difficult to achieve an unanimous consensus on the exact way to approach the OBOR. Important figures of major political parties have provided an example of this complication.

One exemplary conflict took place at the 2017 Asia-Pacific Economic Cooperation (APEC) CEO Summit in Vietnam. James Soong, Founder of People First Party (a smaller party within the Kuomintang-led Pan Blue Coalition), expressed opposing views towards the Tsai Administration’s New Southbound Policy, praised China's OBOR, and voiced Taiwan's desire to hopefully join in on the initiative one day. In response, former vice president and member of the Democratic Progressive Party, Annette Lu, expressed strong disapproval for Soong’s actions and commented that based on reports from the Summit, the expected exclusion of Taiwan from the 2018 investment plans proposed by other countries may mean not achieving any of the nation's greater goals (such as the New Southbound Policy).

Taiwan’s uncertain role in the OBOR

Despite Taiwan’s political hesitancy and divided opinions on the OBOR, it simply is not Taiwan’s top priority to resolve the disagreement. Currently, Taiwan is focused on building a good relationship between the citizens and the new president, though paying attention to political and economic shifts in foreign nations is still urgent. The approach the Government of Taiwan will take towards the OBOR is uncertain, despite the fact that this initiative is central to Taiwanese politics and the Cross-Strait conflict.

Amelia Hsieh

Amelia is a third-year undergraduate student majoring in Psychology with a minor in Sociology at the University of Texas at Austin.

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WEEKLY DIGEST: February 13- February 20, 2018

2/20/2018

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Pokhara, Nepal. Pixabay.

Conflicting views of China’s global influence

President Xi has proclaimed that China is on the verge of becoming a great global power, thanks to its economic growth. Despite this, China is still the largest recipient of loans from several multilateral development banks (MDBs), including the World Bank and ADB. It is argued that China still requires the loans to make up for the structural issues of its domestic banks, which keep them from providing sufficient credit for public projects.

Additionally, it is said MDBs need China to absorb financial assistance since smaller and poorer countries do not have the capacity to absorb too much capital. All of this contradicts China's self-proclaimed economic power, especially displayed in its leadership in the Asian Infrastructure Investment Bank (AIIB) and the BRICS Development Bank. As China continues to rise, it has to decide whether it will continue to play by its own rules, acting as both a borrower and a lender, or if it will follow the actions and norms of the world's other nations. Read more here.

The U.S. is concerned about changes in China's geopolitical influence and military power over the past five-years. The main cause for this rapid growth in geopolitical influence is China's use of infrastructure investment and trade. In response, Trump stated in the National Security Strategy released in December 2017 that the U.S. will increase its four-way cooperation with Australia, Japan, and India with a focus on infrastructure plans. Jonathan Hillman, a researcher at the Center for Strategic and International Studies, advised the U.S. to not focus on implementing policies to counter China's OBOR. Hillman also stressed that the U.S. needs to cooperate with countries in Eastern and Central Europe. Despite India and Japan's current skepticism of China's OBOR, the U.S. is concerned that as long as projects are in line with international standards, neighbouring countries of China will all join the OBOR. Read more here.

Counter to the One Belt One Road?

Spectators speculate that the U.S., Japan, Australia, and India are increasingly looking toward a "Indo-Pacific Strategy" to counter China's One Belt One Road initiative. This speculation comes ahead of the Washington D.C. summit between Australian Prime Minister Turnbull and U.S. President Trump scheduled for February 23. Read more here.

Further, according to an anonymous U.S. official, there is discussion of a joint infrastructure project among the U.S., Australia, India, and Japan that has a purpose of controlling China's growing influence. The plan has not yet been officially announced, because it is not mature enough. He added that it is an alternative to China's One Belt One Road initiative rather than a competitor. Read more here.

Observers expect Japanese Foreign Minister Taro Kono to report the 2017 white paper on its Office of Developmental Aid at a Cabinet meeting on Friday. As part of the plan, Japan is expected to provide Southeast Asian countries with patrol vessels and related equipment to help strengthen their ability to enforce maritime law. These measures are part of Japan's "free and open Indo-Pacific" strategy. Read more here.

Concerns over the Polar Silk Road

China's plans to create a "Polar Silk Road" as a component of its overarching Belt and Road Initiative has sowed concern and discontent in Japan, especially as China's northern ambitions reflect its increasingly expansionist posture in the East China Sea and Arctic Ocean. Beijing has made it clear that it plans on utilizing the "Polar Silk Road" in order to accomplish key national objectives such as accessing maritime routes, natural resources, and fishing zones. Japan has become concerned that this economic ambition could translate into a security dilemma, similar to that in the South China Sea. China could expand its military presence in the region in order to protect its economic interests, which would bring China's military ever closer to Japanese shores.

The Asian Infrastructure Investment Bank

The Investment and Operation Bureau of the Asian Infrastructure Investment Bank, Pan Yuen, claimed that the bank has received positive responses from the international community since its establishment. He highlighted that the AIIB is similar to other multilateral development banks, following strict disciplinary principles and systems to maintain a neutral position in project decisions.

According to him, the AIIB is not created for China’s political purposes. He also pointed out that the AIIB has financed over 4.2 billion USD in development projects in just two years of establishment, showing good potential and highlighting the significant financing demand in the Asia market. Further, he claimed that the AIIB will never invest “white elephant” projects, which are associated with huge resources but low practicality. The Bank conducts extensive feasibility studies before make any investment. Finally, he said “as a Singaporean, we are efficient, transparent, systematic, and neutral, and I will keep these Singaporean spheres in my work in AIIB.”

The Asian Development Bank

Nepal

ADB is loaning 100 million USD to Nepal for the Rural Connectivity Improvement Project. The project aims to improve rural road infrastructure through weather resilience and better connection for the agricultural sector. ADB is also separately providing 1 million USD to Nepal to restructure the Department of Local Infrastructure Development and Agricultural Roads.

Philippines

The ADB-backed Infrastructure Preparation and Innovation Facility (IPIF) has contracted the first of three consulting packages to support Philippines infrastructure projects worth over 11 billion USD. The first consulting package was made between the Philippines' Department of Public Works and Highways (DPWH) and Ove Arup & Partners Hong Kong Ltd (Arup). Arup will support DPWH in preparing and designing inter-island infrastructure. The remaining two contracts, concerning DPWH's flood management projects and Department of Transportation projects, will be finalized shortly. IPIF, along with a recent 5 million USD technical assistance grant, will support Philippine operating and management abilities in the infrastructure sector.

Laos

Laos, in collaboration with the ADB, has been working on marketing and promotion initiatives in order to boost Laos’ and the city of Vientiane’s tourism industry. Focused primarily on developing an infrastructure for the project, the ADB published a two year Destination Management Plan. In doing so, ADB and the country of Laos hope to generate more jobs, increase income, and improve the overall Laotian economy. This tourism initiative marks a rare collaboration between the government, the private sector, and non-government organizations in the region.

The European perspective of Chinese development finance

With the development of the One Belt One Road, China's trade relations with European nations are rapidly developing. The constantly improving trade channels and trade methods have led to a rare opportunity for the development of China Railway Express (CR Express). There are currently three "iron silk roads" between China and Europe and these three routes have helped reduce the distance needed to transport trade goods.

Germany

German Foreign Minister Gabriel Sigmar expressed his concern of the One Belt One Road. He views China's rise as a huge threat to Europe, claiming that China and Russia are trying to "test and destroy" the balance of the liberal western world. He called for unity in Europe and stressed the importance of cooperation between Europe and the US. In response, Chinese Foreign Minister insists that One Belt One Road is inclusive and the goal is to achieve common developments in countries along the line and that China will never seek to establish a state-led rule.

State Grid Corporation China is about to buy 20 percent of the north German network operator 50 Hertz. The Berlin company operates a "critical infrastructure," providing power to all of east Germany and Hamburg. Read more here.

France

In northern France, the Franco-Sino relationship has been reinforced. Through a partnership with the Zhejiang, the region of Hauts-de-France now has the base for an increasing economic cooperation, especially in the context of the One Belt, One Road.

At the recent MedPorts Forum held at the Port of Marseille Fos, France, the Port of Algeciras was signed into incorporation in MedPorts. Members also discussed the role of Mediterranean ports as the middleman for European-African interactions and the evolving incorporation of the One Belt, One Road initiative in the Mediterranean. Liu Yuli a representative of the Ministry of Foreign Affairs of the Republic of China attended the forum pushing for stronger relations between China and Mediterranean countries. Read more here.

China’s Relations in Latin America and the Caribbean

PetroChina Investigation

Following recent changes in the investigation of the presale of oil to PetroChina, the Ecuadorian comptroller confirmed signs of apparent financial misconduct. The deal under investigation cost the PetroEcuador oil company 47.8 million USD, the company did not receive 26.2 million USD from PetroChina and 21.6 million USD from UNIPEC, both Chinese corporations. The investigation indicates that the deal involving PetroEcuador, Finanzas, PetroChina, UNIPEC, and the Chinese Development Bank was hastily performed with vague terms that caused injury to Ecuadorian finances, and may lead to revelations about corruption involving Ecuadorian officials.

Venezuela

Venezuelan officials, Ricardo Menéndez, Manuel Quevedo, and Simón Zerpa, met with representatives of the China Development Bank, the China National Petroleum Corporation (CNPC), Shandong Kerui and Honghua Groups, and the Chinese ambassador. The meeting included reviewing progress of joint projects and evaluating opportunities for future joint projects.

Panama

China's optimistic and aggressive foreign development agenda is swaying many countries to accept deals with the nation. Recent works in Panama are exemplary of this new economic diplomacy. China is currently managing and building ports on both sides of the Panama Canal and building the fourth bridge over the isthmus. The bridge is estimated to cost 1.5 billion USD. China's business in Panama exceeds 5.2 billion USD and draws questions about infamous corruption related to Latin American infrastructure projects. Recently, the Odebrecht corruption scandal shook the continent as a result of large bribes were uncovered. With large price tags on new projects, deals with Panama must be evaluated to determine legitimacy.


Chinese investments in Africa

China saw its investments in Africa rising above 100 billion USD in late 2016, becoming Africa's first partner. This follows a growth of 10 percent over the last decade. In this context, the Chinese diplomacy is very active on the continent with over 79 visits in 48 countries in 10 years. The most visited countries are South Africa, Tanzania, and Zambia. In Africa, China fully deploys its strategy of “guanxi”, where interpersonal connections organize political and business relations.

Tanzania

According to The Citizen, China will finance the construction of an university, specialized on transportation, in Tanzania. The Chinese participation is expected to be around 62 million USD.

Togo

Following an economic partnership established in February 2018, China is going to support development projects in Togo. This bilateral cooperation begins with more than 16 million USD in Chinese financial. This seems to be key partnership at a moment when a political crisis is shaking the African country's economy.


In other news...

Chinese altruism in Iran

The Chinese embassy in Tehran signed a certificate with the United Nations World Food Programme (WFP) to signify the end of a 1 million USD refugee aid project. China donated funds to buy food for refugees in Iran, mainly from Afghanistan and Iraq, for the project which started in August 2017. The WFP used the donation to purchase 1,200 tons of food for 30,000 refugees.

Chinese influence in Sri Lanka

Recent local elections in Sri Lanka marked the victory of the Sri Lanka People's Front led by former President Mahinda Rajapaksa, a staunchly pro-China politician. While the ruling political establishment in Sri Lanka has generally leaned towards India and the West, Rajapaksa's victory could challenge that as he advocates for closer economic ties with China. Sri Lanka has already been a large recipient of Chinese aid and is home to numerous Chinese-led development projects. However, some in Sri Lanka are concerned that this increasing dependence on China and Chinese projects could exacerbate financial problems in the country. The Sri Lankan rupee has fallen to a record low over the political uncertainty, and the island nation is also 65 billion USD in debt, equal to 70 percent of GDP. 8 billion USD of debt is owed to China, and as Sri Lanka continues to receive loans from Chinese development banks, this could promote a cycle of dependence and worsen Sri Lanka's debt problem.

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The Power Balance between China's Government and Private Initiatives

2/14/2018

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Great Wall of China. Pixabay.

The former President of The People’s Bank of China, Jun Ma lectured at the Sino-U.S. Economic Cooperation and “The Belt and Road” Forum about the need to attract global capital to fill the immense gap of infrastructure investment along the One Belt One Road (OBOR). Jun Ma proposed mobilizing private capitals from China and other AIIB member countries.

In December 2016, after meeting with UNECE PPP department, the Chinese government agreed that the private-public partnership (PPP) model provides an opportunity for secured private-government partnerships to make riskier investments. After a phase of case studies, in May 2017, the Chinese National Development and Reform Commission (NDRC) issued three major policies on the financial, legal, and environmental aspects of PPP. This included the Memorandum of Understanding, which calls for the creation of international laws, an expert library, and a dialogue mechanism to be set up among One Belt One Road (OBOR) countries. However, things are not as simple as the regulations indicate. As China uses PPP models more extensively, we want to examine a few drawbacks and potential threats around this economic and politically-charged term. In our view, PPP in OBOR-settings is a hybridization of Chinese-domestic PPP and Middle-East-traditional PPP. The latter model has a 20-year history of operation, and in contrast with OBOR PPP model, the power of surveillance lies solely in the hand of local government.

First, we wondered, how much control does the Chinese government have over the OBOR programs after the recent policy shift towards public-private partnership (PPP) as the primary financing tool?

Indeed, this decision was made because of the huge gap in infrastructure investment on the global market. According to the OECD, 5,500 billion USD is needed to close the infrastructure investment gap, yet only 14 billion USD has been put forth directly by the Chinese government. Further, PPP is the standard approach to infrastructure construction in various western countries due to the large sum of initial investment, the long program cycle and the natural tendency of monopoly in this field.

China’s shift to the PPP model makes even more sense considering that PPP has been used in the North Africa-Middle East region for decades. This includes the Amman's 1994 Independent Power Generation Project (IPP), Tavira A-2 IPP in Abu Dhabi and the Ajman Sewage Treatment Project financed in 2003. However, the new policies such as the Circular on Issues Relevant to the Cooperation Project of Insurance Funds Investment between Government and Social Capital, establishes an external experts risk assessment mechanism to fully reveal investment risk, and sets up special business acceptance and registration green channel for programs that are of vital importance to the national development strategy. It implies PPP to be under the surveillance of Chinese government, and as a result, the OBOR PPP would differ from the precedents set by partnerships between global companies and local governments.

To better understand China’s new PPP model, there is a need to analyze how PPP has functioned domestically in China. In particular, under Chinese urbanization programs in 2015, PPP showed a contrastingly government-oriented character and embodied more of the traditional BT (Buy-Transfer) model, which hands the power of program evaluation, pricing, and monitoring to the government as indicated by the Smith Street Analysis graph.

In those programs, Chinese local governments witnessed a low participation rate on the private companies’ part, with private capitals reaching a signing rate of under 20 percent taking only 22 percent of all programs in the first round of PPP investment. This is done because a variety of reasons: 1) a low rate of return, 2) a lack of bargaining power against the government, due to the legal ambiguity of whether administrative or civil litigation would be applied to this matter, and 3) the spirit of contract remaining questionable since oftentimes new regulations come up and interrupt ongoing programs.

As a result, state-owned companies are often tagged as private capital to boost the outward appearance of the PPP programs, and 59 percent receive subsidies from the deal they cut with the local government (Abound). This reality raises two problems. First, the mechanism of risk-distribution is not in play, and as a result the Chinese government takes all the risks. Second, with new opportunities opening up in OBOR, most companies participating are still going to be state-owned companies, whose huge size slow the decision-making process. The sacrifices made on flexibility and individuality make PPP meaningless, since those two things are precisely the greatest advantage of the PPP model.

So, another good question is, why doesn’t China fully adapt the standardized legal procedures of Western PPP to solve the problems mentioned above?

One reason might be the differences between the legal structures of Civil Law (Chinese) and Common Law (UK, US, Singapore, Australia). PPP has certain conflicts with the Civil Law code, so the regulations and policies formulated by all the ministries and commissions oftentimes have low legal effectiveness. As a result, these laws are often introduced under the names of "notice" or "policy,” which is often perceived as a political risk by private entities. A second reason would be the lack of expertise in the Chinese administration to fulfill the requirements for conducting contract review and program evaluation as demanded by the law. Topics such as risk allocation, method of evaluation and the calculation of flexible costs demand highly specialized knowledge which the government currently doesn’t possess.

In conclusion, let’s revisit the question presented in the first paragraph: “how much control does the Chinese government have over the OBOR programs after the incorporation of PPP?” The government certainly still maintains control over the course of OBOR even if the PPP model is being implemented. But, by incorporating the state-owned corporations as tools to further its governmental goals, as stated in the 2006 Beijing Consensus, the Chinese government will likely encounter more obstacles in the future, because of lacking legal protection for its private sector partners and its lacking expertise to fully monitor and regulate the PPP projects.

Yanrong Zeng

Yanrong is a third-year undergraduate student majoring in International Relations and Middle Eastern Studies at the University of Texas at Austin.

Shuming Chen

Shuming is second-year undergraduate student majoring in Economics and Japanese Language at the University of Texas at Austin.

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WEEKLY DIGEST: February 6-February 13, 2018

2/13/2018

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Kuala Lumpur, Malaysia. Pixabay.

The One Belt One Road in Malaysia

President of the Asian Infrastructure Investment Bank (AIIB), Jin Liqun, announced that the AIIB and Malaysian Prime Minister Najib Razak have agreed to cooperate together for global infrastructure development projects. He highlighted transportation, seaport, and power plant projects as sectors both parties are interested in potentially working on together. The two states are looking to improve infrastructure in the ASEAN region. Read more here.

The president of Malaysia's largest Chinese political party, MCA, expressed support for the OBOR by initiating a "One Belt One Road" 2.0 plan that formulates five targeted strategies. These strategies include creating a platform for OBOR education and training, actively promoting the initiative. Liao Zhonglai believes that OBOR initiative brings positive benefits to Malaysian economy, enterprises, and the general public. Read more here.

Hong Kong in the Belt and Road Initiative

The Hong Kong government and the OBOR General Chamber of Commerce attended a seminar in Beijing to discuss Hong Kong's role in the OBOR. Zhang Dejiang, Chairman of the Standing Committee of the National People's Congress, expressed that Hong Kong will continue to play an important role in the China’s development despite the OBOR’s role as a new method of expansion. Hong Kong Chief Executive, Carrie Lam, pointed out the Hong Kong government will participate in the initiative by facilitating and promoting the OBOR.


News on Asian Development Bank

India and Nepal

The ADB is supporting India and Nepal in a pilot project to implement an electronic cargo tracking system (ECTS). The system uses satellites, cellular communication, radio frequency identification, and other software to track cargo. The initiative comes from a June 2017 memorandum between India and Nepal to develop a tracking system to improve cargo security and efficiency, something especially valued by the landlocked country of Nepal. The project is part of the South Asia Subregional Economic Cooperation program, with ADB as the secretariat.

Bangladesh

The ADB signed an agreement with Eastern Bank Ltd (EBL) to loan 20 million USD to Bangladesh to support its textile and garment sectors. The loan will fund socially and environmentally sustainable projects in both sectors, namely in enhancing health and safety standards. The loan also brings Bangladesh's textile and garment sectors into the EBL lending portfolio.

Samoa

Samoa now has access to high-speed internet because of the completion of an extensive connection project. The project created a new submarine cable system that will help encourage low-cost broadband services, facilitate communications, and support e-health investment in the country. The ADB provided 25 million USD, the World Bank gave 16 million USD, the Samoa Submarine Cable Company provided 18.8 million USD in equity, the Government of Samoa covered 6.73 million USD in taxes and duties, and the Government of Australia provided 1.5 million USD.

ADB 2018-2020 Plans

According to ADB's 2018-2020 Country Operations Business Plan, commitments to member countries will total over 75 billion USD in the next three years. Most of the money will likely be issued through lending windows, less than 5 percent will be grants and technical assistance. A major portion of funding will cover transportation projects. Other important sectors include energy, governance and institutional development, and climate financing. Data is still incomplete and plans are subject to change, but these are the major trends from the plan.

News from around the world

Belarus

The Export-Import Bank of China is providing  Belarusa loan from of 1.75 billion CNY for the implementation of an agriculture project.

The China-Pakistan Economic Corridor

CHINA Power Hub Generation Company (CPHGC) has reached financial close on its Independent Power Project in Pakistan, one of the largest projects within the China-Pakistan Economic Corridor initiative.

Investigation in Ecuador

The highest prosecutor in Ecuador questioned former President Rafael Correa about the ongoing investigation into a presale of crude oil to PetroChina that reportedly cost Ecuador 2.2 billion USD. The scandal was revealed by the former oil unionist Fernando Villavicencio, who recently gave his testimony.

Opinions on the AIIB

Jin Liqun, the president of AIIB, argues that AIIB doesn't pose a threat on ADB for the following three reasons: First, after the AIIB’s founding, the Chinese government didn't withdraw from the WB and the ADB, but instead added soft donations to the banks; Second, in order to work within certain countries, the AIIB needs partners such as ADB and it's complementary capacity (such as co-financing) to better implement the program; third, the ADB has been AIIB's mentor during the AIIB’s foundation era, providing experiences on organizational structure, policy and business models.

Japan

Jiang Yuechun, the director of the Department for World Economy and Development Studies, China Institute of International Studies (CIIS) points to the voices in Japanese scholars and officials urging the government to join AIIB, or they will be left out in the competition on deeper engagement in Asian economics. The reason behind their opinions comes from the overlap on the programs that the ADB and the AIIB fund. Russian scholars also predict that American lobbyists will further push this effort.

In his op-ed, Fujiyoshi Yukimura, a Japanese professor of economics, questions whether the AIIB has sufficient financial and human resources to carry out their current projects. Yukimura cites the AIIB's recent co-financing of projects with the World Bank and the Asian Development Bank as signs that there may be a shortage of talent. Yukimura cautions that the may encounter unexpected pitfalls despite good intentions. Read more here.

Iran

Mohammad Khazaei, the Deputy Minister of Finance and Economy of Iran, holds a positive attitude towards the AIIB and the BRIC Bank, due to their capacity on structural reforms, including the implementation and monitoring of monetary policy, as well as financial investment. Iranian economics is moving towards a more open market. Following the successful reduction of inflation and with crude oil production rising, the country will likely to achieve a 8 percent GDP growth in the coming year.

Concerns and praise for the Belt and Road

A recent study by the Center for Strategic and International Studies, an D.C.-based think tank, concluded that 89 percent of the 34 New Silk Road projects are executed by Chinese firms, despite Chinese rhetoric claiming that the projects would vastly benefit foreign firms. The largest Chinese firms report growths of over 21 percent. Coal and metallurgical corporations have seen benefits grow by 290.5 percent and 177.8 percent, prompting concerns of deregulation among those industries.

Sri Lanka

Former Ambassador and Permanent UN Ambassador to Sri Lanka, Dr. Palitha Kohona details how other countries, notably Sri Lanka, can have a mutualistic economic relationship with China via China’s One Belt One Road (OBOR) initiative. Compared to the United States’ post World War Marshall Plan, China’s OBOR will contribute the equivalent of 4-8 trillion USD to the regional economy. As a member of the Asian Infrastructure Investment Bank, combined with the island’s desirable geographical location along the Maritime Silk Road, Sri Lanka has the opportunity to propel its’ lagging economy forward by becoming an ideal place for investment, assuming this opportunity is leveraged properly by policy makers.

Afghanistan

China is negotiating to build a military base in Afghanistan near the shared border in order to foster security for the commercial interests of the One Belt One Road project. Chinese militants also supposedly performed recent joint patrol exercises with Afghan soldiers in the Wakhan Corridor. This has been denied by Chinese and Afghan officials, but confirmed by surrounding neighbors. Over the past three-years, China has paid Afghanistan over 70 million USD in military aid.

Estonia

An advisor from the Estonian Investment Agency praised China's Belt and Road Initiative for its influence and impact on global economic development. Estonia is interested in furthering cooperation with China under the Belt and Road framework because of the country's desire for new markets. Estonia sees China as a potential major economic partner. In particular, Estonia hopes to strengthen economic ties in fields such as smart technology, energy, materials, and telecommunication.

The US Perspective

The U.S. has become increasingly aware of China's growing influence in global affairs, and the Trump administration has begun to formulate a strategic framework for engagement with China and the Indo-Pacific. President Donald Trump's national security strategy outlines goals including strengthening quadrilateral cooperation with Australia, India, and Japan, as well as stepping up cooperation on foreign investment and bilateral trade. Secretary of Defense James Mattis outlined in his national defense strategy that China is a growing geopolitical adversary and that the United States must continue to leverage its hard power in the region. A recent Congressional hearing on China concluded that certain steps must be taken by the U.S. in order to ensure that China does not reorder the geopolitics of the Asia-Pacific. These steps include alternative models of trade and investment, increasing military and economic ties with partners, and putting the pressure on China to follow international norms.

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WEEKLY DIGEST: February 20-February 27, 2018

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