Chinese capitalism’s westward march

During the Han dynasty, the
imperial court was heavily involved in the development and protection of its
economic interests along the Silk Road where Chinese silk was one of the major
trade commodities. Such state-led efforts have begun once again as China seeks
to take its regional clout to a new level.

Most recently, Mr. Xi has
just ended his visit to Pakistan last week, resulting in a shower of
infrastructure investments worth $28-billion, a down payment out of an expected
$46 billion. The initiative undoubtedly adds further momentum to the launch of
the Asian Infrastructure Investment Bank in March—a major diplomatic coup for
China that has seen major European economies as well as staunch U.S.-allies
fall over each other for the curious status of “prospective founding members”.

AIIB is expected to be a
major multilateral complement to the financial fire power behind the project
which will be backed by the $40 billion Silk Road Fund, as well as policy banks
like the China Development Bank and the Ex-Im Bank, which have bankrolled
China’s entry into Latin America and Africa.

The vast majority of the
projects will be carpeted along the “China-Pakistan Economic Corridor”, a 3,000
km route that stretches from Kashgar in Xinjiang, western China to a port town
in the Balochistan region of Pakistan: Gwadar.

Gwadar’s deep-water port is
one of the more important nodes of the 21st Century Maritime Silk
Road, the sea component of the “One Road, One Belt” initiative that Beijing
says will improve connectivity between Asia, Europe, and Africa. The idea was
first floated in Mr. Xi’s speech during his visit to Indonesia, with
specifications being released this March. It calls for a host of objectives
including improving and paving new trade and transport routes, as well as
deepening financial integration so as to bring Beijing’s “win-win”, “mutual
benefits” to the region.

Geopolitics

Security analysts in the
U.S. and India have fretted about an impending Chinese plot to use Gwadar and
other ports in South Asia as a launching pad of the Chinese navy in order to
dominate the Indian Ocean. The port of Colombo, Hambantota, Chittagong, and
Gwadar together compose what has been first coined in a U.S. Department of
Defense report, “string of pearls”.

The attempt to make Gwadar a world-class
shipping hub started in aftermath of the 9/11 attacks when the US was absorbed
in the war on terror. Pakistani military leaders asked China to assume the task
of turning into their own Dubai. In 2013, Chinese Overseas Port Holdings Ltd, a
subsidiary of China State Construction Engineering Corporation acquired the
contract to operate and upgrade the port that officials say will be open next
month. With the U.S. pivot to Asia, Chinese activities in the region have increasingly
garnered attention.

But so far, Chinese-financed ports in Indian
Oceans have served no more than commercial purposes, fuelling the argument that
China prefers to pursue its geopolitical goals with not military but economic
power. Indeed, the consensus seems to be that the Belt and Road
initiative is China’s grand strategy to integrate Central Asia and Southeast
Asia into its economic orbit—a new focus on its neighbourhood. Should the
corridor become fully operational, some of the core objectives of this
strategic vision can be realised.

An alternative route for China’s hydrocarbons

 

Everyday, China’s crude oil
imports from Middle East and Africa, which make up about 80% of its total crude
import, have to go through the Malacca Strait—a chokepoint between Indonesia
and Malaysia. The opening up of the corridor will offer up an alternative land
route for energy imports and the flow of other trade goods alike.

Given an upwards trajectory
of oil consumption, Chinese leadership has long been trying to divert its
energy supplies away from waters where the US navy prowls. Building pipelines
in Myanmar has been another one.

Go Global!

Pakistan also represents a
new market for Chinese state infrastructure enterprises, at a time when the
domestic market for infrastructure has been stagnant. Indeed many of the projects
will be undertaken by Chinese enterprises, which, by going abroad will also
fulfill the state objective of making Chinese companies globally competitive.

Notable projects include,
the 720,000-kilowat hydroelectric power project to be run by China Three Gorges
Corp to be financed by the Silk Road Fund, and the
Karot Hydropower Project, which will be partially funded by the China Ex-Im
Bank.

Furthermore, foreign
currency lending and financing overseas project is better than keeping China’s
forex reserves mainly invested in low-yielding US treasuries.

All of this can also contribute to
soft-landing China’s slowing growth. The Belt and Road initiative can potentially provide employment
opportunities to the 15 million graduates and 3 million additional labour
joining the workforce this year, as was pointed out by Alvin Lim a research
fellow with the Longus Institute for Development and Strategy,

Sharing destinies

And it won’t be China-takes-all. Chinese
investments represent twice more than the FDI Pakistan received since 2008, and
more than the entire US assistance since 2002. The influx will be largely
welcome in an economy rife with unemployment, poverty, and sectarian violence. In
particular, some $34 billion going into energy projects will help Pakistan
overcome its chronic power shortage problem. Parts of the country are without
electricity up to 18 hours a day during peak summer time, according to the Farhan
Bokhari, FT’s correspondent in Pakistan.

The party is expected to spill over into
the relatively underdeveloped region of Xinjiang. New trade routes can create
new businesses and construction of infrastructure can start “a virtuous growth
cycle”, said Lim.  But unlike many
reports suggest, it remains to be seen whether economic development will also
quell tensions between the underprivileged Uighurs and the Han majority.

Ethnic tensions

“Often tensions are liable to be even greater
when people see lots of new money, jobs and investments and feel they’re
missing out on the benefits”, said Andrew Small, the author of The China-Pakistan Axis:
Asia’s New Geopolitics
.

With
Pakistan too, only time will tell whether the relationship is “as sweet as
honey”. Despite the sheer potential for a rejuvenated economy, there are
already concerns that fruits of the deal will only amalgamate
to

the better-off Punjab and Sindh provinces. The biggest security challenge lies
in Balochistan, where Gwadar is, due to a deep-seated resentment amongst the
Baloch minority against Punjabi rule. Baloch separatist militants have opposed
any developers working with the Pakistani government and have a record of attacking
personnel and fuel tankers linked to
Chinese multinationals.

“There is the thinking that by doing
this, they want to disrupt the working of the economy, disrupt the
administration, challenge the administration in the area”, Siddiq Baloch,
editor of the Balochistan Express newspaper, told the AFP. Although the
Pakistani government did promise a 10,000-strong special forces, Small said
that the routes to-and-fro Gwadar would be very vulnerable.

But
there are of course other more stable regions, and less complex infrastructures
like roads or investments like power plants that can help Pakistan deal with
energy crisis can be successful despite the security problem, Small said, “in
the long-term, economic development will likely bring greater levels of
stability [in Pakistan], but transition periods can often be the hardest of
all.”

Although
it is unclear how improved stabilization of security threat in Pakistan will
also spill over into Xinjiang, Small said that “things in Xinjiang could,
however, be severely affected if the situation in Pakistan were to deteriorate,
so from a long-term perspective it’s certainly important for China to maintain
stability there.”

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