Analysis

Can China build its way back to the Middle?

  • Global
  • Asia Pacific
  • China
Michael Humphreys

Michael Humphreys

Can China build its way back to the Middle?


For thousands of years, Chinese people have thought of themselves as the Middle Kingdom. Being in the “middle” has connotations of political, economic and cultural power, yet in recent centuries, Europe and more recently the United States were the centres of global power. China’s New Economic Silk Road and the Belt and Road Initiative (BRI) are names for the strategy to re-establish China as the Middle Kingdom. Announced by President Xi Jinping in 2013, the BRI plans to improve connectivity and economic cooperation between China and all points west and south. It aims to achieve this through the construction of infrastructure along six land and four maritime corridors, terminating in key centres in Europe, the Middle East, South and South East Asia and Africa. This new infrastructure would put China back at the centre of Eurasia and make it economically and geopolitically indispensable. Yet, the BRI also faces impediments. Some of these are technical, but the most challenging concern how China deals with local stakeholders and ensures that they buy in to the initiative.

In addition to large scale infrastructure projects, the BRI establishes cultural exchanges, city and university linkages, and tax advantageous zones to promote trade. New, high quality infrastructure is needed and welcomed by governments in all regions for obvious reasons. So what could go wrong?
 

The BRI is breath-taking in its ambition, scale and audacity, but it will have to contend with:
 

  • Technical engineering challenges

  • Geopolitical issues

  • Community and security issues

  • Financial sustainability issues

 
The BRI land corridors will traverse vast mountain ranges, plains and deserts where extremes of climate, gradient and isolation will test machines, materials and designs. While not to be underestimated, technical engineering difficulties may end up being the least significant of these challenges.

The BRI weaves its way through many areas that have historically fallen under Russian influence. For the time being, Russia seems to be accommodating BRI but most of the Central Asian projects are yet to start. India is opposed because part of BRI travels through territory in Kashmir which is under dispute. In October the US supported India’s position. The strategic implications of BRI are yet to be fully acknowledged or responded to by geopolitical stakeholders. BRI’s scope and scale in time and distance risks direct and indirect challenges from competitor states.

China tends to establish BRI projects via government to government agreements and has already has successfully concluded over sixty such agreements. However, the actual on-the-ground implementation of these projects is reliant on China’s large state owned enterprise (SOE) construction companies. Building on someone else’s land and staying friends is fraught. While technically proficient, Chinese construction sector SOEs will also be required to deal with provincial and local governments, and communities in recipient countries. In many regions, these sub-government entities do not take orders from central governments. Big infrastructure projects tend to create winners and losers in local communities as some gain jobs and contracts and others miss out. Big projects also consume scarce local resources such as land, water, power, road space and skilled labour, creating tensions with local communities. When this happens, losers tend to bite back in forms that range from non-cooperation, to regulatory changes and, in extreme cases, violence. These types of issues have already delayed and in some cases caused the cancellation of projects.

In addition to community pushback and regulatory issues, the BRI has attracted attention for the financial burden it places on recipients of infrastructure projects. For example, loan terms in the China Pakistan Economic Corridor have been the subject of much investigation by Pakistan’s press, concerned that the country’s outflows to service loans will be larger than inflows from an operational Economic Corridor. In Laos, one of Asia’s poorest countries, the USD 7bn cost for the China-Laos railway was more than half its 2015 gross domestic product, according to Reuters. China’s Development Bank has provided much of the finance and claims that loans are at lower rates than could be obtained from commercial banks. While this may be true, there is a risk that some countries will struggle to pay back the loans, particularly if hit by unexpected catastrophes such as widespread insurgency or large scale natural disasters.

Large infrastructure projects always attract controversy even when being constructed by local companies with the support of local governments. Resolving issues always requires communication, negotiation and compromise. Leading infrastructure companies will require the organisational mechanisms to work out compromises with foreign stakeholders on the ground. This will mean changes to organisational structure and financial modelling. There are many examples of successful Chinese-led projects and these tend to be oil and gas sector projects such as pipelines and refineries and energy investor projects where the Chinese party finances and provides technical expertise, while local companies are sub contracted to carry out construction. At the same time, however, Chinese infrastructure companies have an incentive to employ Chinese workers and subcontract less to local companies, since one of the subordinate aims of BRI is to soak up over capacity in China’s construction sector. Many BRI projects are thus largely constructed using Chinese labour, to the long-term detriment of recipient countries. On top of loan repayments, recipient countries will be required to maintain infrastructure for decades, which will require skills transfer, technical support and careful financial modelling if it is to work.

Finally, there has been much focus on security for Chinese workers building projects. The Pakistani government, for example, has provided 15,000 troops to protect Chinese workers. In other countries, security is provided by hiring local private or public sector security organisations. Security is a spectrum with physical aspects such as guards, walls and electronic security at one end, and problem solving by communication at the other end. Over-reliance on physical security measures often isolates Chinese companies from the communities which need to use and pay for the infrastructure. The resulting lack of communication tends to build mistrust, leading to negative outcomes. Also, sophisticated modern infrastructure relies heavily on cutting edge computer technology during construction and operation, particularly in power generation, rail and communication systems. Without attention to information security, BRI projects are potentially vulnerable to cyber-attacks from competitor nations, disaffected stakeholders and criminal elements.

Over time the BRI holds great promise. Improved connectivity and modern infrastructure has the potential to enhance the lives of millions but political, social, security and financial sustainability risks must be overcome. So far, despite some delays and a few project cancellations, BRI is achieving its objectives. We are starting to see green shoots of new road, rail, port and power generation operations in Pakistan, South East Asia and Africa.

Chances of success for Chinese companies and their foreign partners will be improved by deeper research into project risks during the feasibility stage and a focus on risk management, including stakeholder management, during project implementation. Relatively small investments in these areas could significantly improve the chances of China realising its dream of once again becoming the Middle Kingdom.

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