This is the first article in a two-part series on the Belt and Road Initiative (BRI). The second one deals with the politics surrounding the BRI.
China’s prompt withdrawal of its troops and armour from the eastern part of the grey zone around Pangong lake between the Indian and Chinese defined Lines of Actual Control has confirmed the hypothesis advanced in several previous columns on this platform, that its purpose, from the start, was not to nibble Indian territory away in small slices but to force the Modi government to reconfirm India’s commitment to the agreements on Peace and Tranquility in the Border region arrived at in 1993 and 2005.
But, why should China be so intent upon re-establishing a durable peace with India, when this sentiment is clearly not reciprocated by either the Modi government or the Indian populace? The short answer is that China needs the backing of India’s ‘soft power’ to prevent the intensifying struggle for hegemony between it and the United States from spilling over into a war from which no one, least of all China itself, will emerge as a winner.
China also covets deeper economic engagement with India, because, after the end of its Fiscal Stimulus programme, it needs to find new avenues of investment to keep its factories busy and workers employed. India can provide both.
But most defence analysts in India discount these motives and have swallowed the Western view of China as a relentlessly expansionist power bent upon reshaping the international order and establishing its hegemony over the Asia-Pacific, if not the whole world.
However, two books published a year before its May incursion can help us to do get a better view of its motives. The focal point of both is the Belt Road Initiative (BRI), but one looks at China’s motives for establishing it from inside outwards, while the other does the opposite.
Understanding the motive
Bruno Macaes’ Belt and Road: A Chinese World Order suggests that these lie in China’s attempts to avoid the “middle income trap” that, many economists believe, develops when rapidly industrialising, export-led, economies move from the early, low-income phase of their industrialisation to its middle-income phase.
The BRI, the China-Pakistan Economic Corridor (CPEC), and its ports in and around the Indian Ocean are not therefore offensive but defensive projects, designed to safeguard the international trade that is the source of its growing wealth.
By contrast, Bertil Lintner’s book, The Costliest Pearl: China’s Struggle for the Indian Ocean, examines the tectonic shocks that China’s growing involvement with the littoral states of the Indian ocean under the banner of the BRI is giving to the settled structure of power in the region.
Both books throw much-needed light on China’s motives, but do so from polar opposite directions. 2013 is the pivotal year in both books because it is the year in which the concerns of the West about China’s growing hegemonistic ambitions began to take concrete shape.
Early in that year, Xi Jinping became the President of China. In the same year, he announced the creation of a Belt and Road, Maritime Silk Road that involved building a string of ports in the Indian Ocean. 2013 was also the year in which the first Chinese nuclear submarine entered the Indian ocean, and when China decided to lease a tract of land in Djibouti and build a naval base there, to support its anti-piracy task force in the Arabian Sea.
The base was built in a record period of two years and became operational in 2016. Since then a Chinese anti-piracy task force has been paying about 10 visits to the port every year but has kept a low profile. Chinese submarines have also made seven more such sorties till 2018, and visited Sri Lanka and Gwadar in Pakistan on two of those occasions.
Today there are seven such ports/container terminals being constructed, or on the drawing boards, in the immediate vicinity of India: two in Malaysia, one each in Myanmar and Bangladesh (Chittagong). Two in Sri Lanka (Hambantota and a container terminal at Colombo) and one in the Maldives on Gan island in the far south.
In addition, China has taken up four ports and container terminal construction projects in the Red Sea, and six more down the East coast of Africa in addition to Djibouti, through Kenya and Tanzania to Mozambique and Madagascar. In all, therefore China is now involved in 18 major port and railway construction projects around the Indian Ocean.
What brought about this sudden change in 2013? Lintner is content to give a one-sentence answer: It is China’s overweening desire to “bolster its geo-strategic influence” in the region. This is an uncritical acceptance of what Germany, France and the US (but not the UK) have categorically declared the BRI to be. Xi Jinping’s lineage — his being the son of a Long March General — fits neatly into the formers’ construction of him as a new Mao Zedong.
The thesis of ‘middle-income trap’
Bruno Macaes’ answer is more fine-grained: the BRI, according to him, has been born out of China’s need to safeguard, and expand, the structure of trade relations that it has built since the 1990s, and upon which its internal stability and prosperity now rests. This need has become especially acute since China’s growth began to slacken in 2011. Macaes attributes this to its having, in per capita income terms, entered the “middle income trap”.
The middle-income trap is the stage of growth in which rising labour costs start pushing export-led economies out of the most labour intensive sections of the global production chain and forcing them into entering the more technology-intensive middle sections where technology becomes a more and more important component of the final product.
The BRI is an attempt to create the infrastructure that China will need in order to move progressively up this chain of production. His chapter on this issue gives the best insight into Chinese thought upon the evolution of its role in the 21st century world, that I have read.
In his analysis, Macaes implies China became fully aware of the middle-income trap only when wage rates rose by 12% a year from 2009 till 2013. This is what trigged the attempt to move up the production chain, which is at the base of the BRI.
His explanation resolves several of the anomalies that the hawks in the strategic analysis community are unable to explain above all its universality of focus: even the 24 projects in the Indian Ocean and the Red sea mentioned earlier, and the three giant railway networks it is building across Central Asia are only a part of the Chinese global outreach, for there are another 60 port and rail/road projects spread across Latin America, Europe and the Mediterranean, of which five are in the USA.
But Macaes’ analysis is incomplete because it does not explain the timing of Xi Jinping’s announcement of the One Belt One Road initiative, (as the BRI was originally called), and his hurry to make it only months after coming to power.
China did not descend into the middle-income trap suddenly, and it certainly was not taken by surprise. As far back as 2002, it had forged a Framework Agreement on Comprehensive Economic Cooperation between the Association for Southeast Asian Nations (ASEAN) and the Peoples Republic of China. Through 15 subsequent refinements, it had hammered out a free trade agreement whose purpose was to source components for their manufactured exports from the cheapest source.
How far this strategy broke the middle-income trap can be judged from the trade data for the first quarter of 2020. In this quarter, it was ASEAN, not the US or the European Union, which became China’s largest trading partner. What is more significant, while its trade with ASEAN as a whole grew by 6%, its trade with Vietnam and Indonesia within ASEAN grew by 24% and 13% respectively. China’s imports from ASEAN, therefore, include products that incorporate cheap labour and those that incorporate sophisticated technology.
The timing of Xi’s announcement was dictated by the fact that when he came to power, China was in the midst of a crisis such as few countries have had to face in recent times: The Communist party had reached the nadir of its standing with the Chinese people. Coming on top of almost two decades to gradually rising public disenchantment, the Bo Xilai affair had severely damaged its image.
As a result, the Party was about to lose its Mandate from Heaven. As if that was not enough, the economy was in a shambles. Hu Jintao and Wen Jiabao’s 4.3 trillion Yuan fiscal stimulus to counter the impact of the global recession of 2008 had gone completely out of control. In the 27 months of the stimulus from October 2008 till December 2010, the country invested not 4.3 trillion but 24.5 trillion yuan – more than 3 trillion dollars.
China’s production of steel soared to 683 million tonnes in 2011, 45% of the entire world’s output. Newly constructed steel plants had to be moth-balled because there was no demand. The producers resorted to dumping steel on the world market at throwaway prices, incurring the US’ wrath. Under severe US pressure, the Central government cut back 290 million tonnes of this capacity.
Much of the steel produced had gone into construction. As a result, by June 2014, there was 544 million square metres of unsold private housing space, almost half again as much as the space that had been sold till then, in earlier years.
A similar scramble had taken place in the power sector. In the five years from 2009 till 2013, China added 300,000 MW to its coal-based generating capacity, when there was no power shortage in the country. As a result, existing power plants had to reduce their capacity utilisation to below 50% to accommodate the new ones.
When the stimulus finally petered out China’s huge heavy-machine building sector, it found itself virtually without orders. As a consequence, the local governments that owned or partly financed them found themselves not only short of revenue but forced to lay off workers. In China, this is a far more serious issue than in market economies because it strikes at the roots of the legitimacy of the Communist party— at its Mandate from Heaven.
According to China’s National Bureau of Statistics, employment fell by 80 million after the end of the fiscal stimulus. But the number may be higher because a large proportion of its millions of migrant workers also did not get letters of re-employment. One of the BRI’s main purposes has been therefore to provide the infrastructure projects that could keep these enterprises working and their workers employed.
Its second purpose has been to bring some discipline into China’s investment both at home and abroad. The fiscal stimulus had overshot its mark ruinously because two-thirds of this investment was made by the provincial and prefectural parastatals, with loans obtained from the second tier of banks that had come up after the banking liberalisation of 1998 to 2006, and over which the Central government had little control.
For instance, 190 out of the 290 million tonnes of steel output that China had to cut back had not been authorised by the National Reforms and Development Commission. Xi Jinping was determined to make sure that this did not happen again. That was one of the reasons for his bringing all new projects abroad under the umbrella of the BRI. Only the projects sanctioned by the NRDC could avail of the financial and other assistance that the state was prepared to provide.
Prem Shankar Jha is a Delhi-based former journalist and editor. He is the author of Managed Chaos: The Fragility of the Chinese Miracle, and Crouching Dragon, Hidden Tiger—Can China and India Dominate the West.