1. Introduction to Belt and Road Initiative
Belt and Road Initiative (BRI) is a complex project of China that is based on way of the historical Silk Road. The project was unveiled in September 2013 in Kazakhstan by current president of China Xi Jinping and includes up to 65 countries. It’s a wide-ranging endeavour that stands to create a significant economic boost to more than 65 countries that represent 70 % of the global population, more than half of global GDP and 24 % of global trade.1 The project aims to build a New Silk Road, also known as Silk Road 2.0 and to create two new ways – land route known as Silk Road Economic Belt and south maritime route called 21st Century Maritime Silk Road. The name of the project is also significant: The belt symbolises the land trade route linking central Asia, Russia and Europe, the road refers to a maritime route via the western Pacific and Indian Ocean. Emphasis on infrastructure highlights the importance of linking projects of maritime ports with land routes to Central and Western Europe. Countries located along the belt are listed in the Table 1. BRI includes several projects along different corridors, namely high-speed rail connections, trans-national highways and pipelines. According to the EU-Asia Economic Governance Forum, all central sub-projects relating to the Silk Road could be completed by 20492, right on the 100th anniversary of the foundation of the People's Republic of China.
“The Belt and Road Initiative is a systematic project, which should be jointly built through consultation to meet the interests of all, and efforts should be made to integrate the development strategies of the countries along the Belt and Road.”3 It´s not limited to areas outside of the ancient Silk Road but it´s open to all countries, international and regional organizations for engagement. BRI promotes peace and cooperation, openness and inclusiveness, mutual learning and mutual benefit. BRI respects the purposes and principles of the Five Principles of Peaceful Coexistence of UN Charter. At first, it grants mutual respect for each other's sovereignty and territorial integrity. It supports mutual non-aggression and tolerance among civilizations. It respects international norms and promotes mutual non-interference in each other's internal affairs. Lastly, it guarantees quality and mutual benefit for
1 (Lehmacher, et al., 2017)
2 (Bessler, 2015)
3 (National Development and Reform Commission, 2015)
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all countries involved, seeking complementary advantages of benefit sharing and achievement of common development. It accommodates the interests and concerns of all parties involved.
According to the Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road4, the BRI is open for cooperation, promotes practical cooperation in all fields, and works to build a community of shared interests, destiny and responsibility featuring mutual political trust, economic integration and cultural inclusiveness. It focuses on five main cooperation priorities, including coordination, facilities connectivity, unimpeded trade, financial integration and people to people bond, described as a determinant social factor for public support necessary for the successful implementation of the initiative. Policy coordination is the cornerstone of this initiative, especially intergovernmental cooperation, exchange of intergovernmental macro policies. However, all communication should be based on mutual political trust and involved parties should strive for reaching shared interest on the regional or on the global scale.
Facility connectivity has the highest priority for this initiative. Later on, the initiative is seen as an attempt to enhance trade and political relations amongst China, Europe and Asia, as well as allowing China to boost its growth by exporting its capital, technology and capacity globally.5 Bridging trade flows between Asia and the EU with rail network is a huge trade opportunity for both China and European countries. It will remove investment barriers between regions. It will lead to boom in tourism with possibility of simplifying visa procedures and raise the interest of people from both regions in intercultural exchanges. Later on, it might enhance projects for student exchanges between regions or even create shared resource and development centres among universities.
China describes this initiative as win-win arrangements — connecting the world, helping other developing countries grow their economy and improving China’s access to resources and markets abroad. China would have quicker access to European market and European companies would have more effective route for export, as well as for import of their own China-based production. However, it must be also considered as China’s plan to build its
4 (National Development and Reform Commission, 2015)
5 (BDO SINGAPORE, 2015)
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BRI is aimed at promoting a whole range of Chinese interests. These aims can be divided into three categories: economic, political and geopolitical, represented mainly in the construction of infrastructure. I am going to deeply focus on these motivators in following three chapters.
Map plate Economies along the Belt and Road
Central Asia Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Turkmenistan
Mongolia and Russian Federation
Mongolia, Russian Federation
Southeast Asia Vietnam, Laos, Kampuchea, Thailand, Malaysia, Singapore, Indonesia, Brunei, Darussalam, Philippines, Myanmar, East Timor
South Asia India, Pakistan, Bangladesh, Afghanistan, Nepal, Bhutan, Sri Lanka, Maldives
Middle East and
European
Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Croatia,
Romania, Bulgaria, Serbia, Montenegro, Macedonia, Bosnia and Herzegovina, Albania, Estonia, Lithuania, Latvia, Ukraine, Belarus, Moldova
West Asia and the Middle East
Turkey, Iran, Syria, Iraq, the United Arab Emirates, Saudi Arabia, Qatar, Bahrain, Kuwait, Lebanon, Oman, Yemen, Jordan, Israel, Armenia, Georgia, Azerbaijan, Egypt
Table 1 Economies Along the Belt and Road
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Economic Motivators for Belt and Road Initiative
China wants to sell through BRI the excessive capacity in its construction, power generation, mining and building material industries. However, there is no official list of BRI projects available, only a public list of economic corridors. Projects are negotiated and decided jointly by China and involved countries. Many BRI projects will adopt the Public Private Partnership model, having host country government collaborating with the Chinese enterprise, with China’s stated owned enterprises (SOE) investing or carrying out investment and construction simultaneously in the host country. After the agreement on terms of the project with a host country, funds from Chinese bank institutions are transferred directly into the Beijing-based bank accounts of China’s state-owned enterprises.
Whilst allocating their resources worldwide, China realizes the need to be competitive in the global economy and to improve operational efficiency of national enterprises. Most of China´s SOEs are still in the early stage of overseas market development; it means they are just starting the process of internationalization. According to the top-level government policy paper entitled “Guidelines to Deepen Reforms of SOEs” China’s SOEs should begin their internationalization to achieve a socialist market economy that combines dominance of state owned enterprises with open market economy. SOEs need to learn how to grow in scope and size and be competitive in international environment but they mainly need to concentrate on delivering better management.
SOEs is given an opportunity to grow, improve their operations management, enhance their global competitiveness etc. because although BRI is a national strategy, companies are choosing projects in which they want to participate and government is providing necessary support services to them. For example, SOEs benefit from inexpensive lines of credit6 supplied by the Chinese state banks, followed by Chinese private companies that act as subcontractors, especially in the energy and mining sectors. To demonstrate surplus of industrial capacity and help to promote BRI abroad, Beijing launched a dramatic wave of mergers among central SOEs in 2015 as a part of SOEs reform. Having larger merged and
6 (Sanderson, 2012)
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complex companies might though negatively impact efficiency, competition, and the quality of goods and services.
SOEs play important role in the whole initiative: the ability of SOEs to screen out positive net present value projects, evaluate and face all risks connected with international business and to run those projects with profitability will ultimately decide the success of BRI initiatives. The greatest difficulties come with unfamiliarity with tax system in the host country and strict regulation for Chinese enterprises. According to the Deloitte research7, SOEs prefer mergers and acquisitions as the method of internationalization; followed by overseas construction contracts and establishing overseas branches to advertise and promote domestic business products. The most favourable regions for Chinese SOEs are Southeast Asia and South Asia;
followed by Central and Eastern Europe.
There are eight big enterprises active along BRI8: world’s fourth largest container fleet China COSCO Holdings Co Ltd, largest public port operator in China named China Merchants Port Holdings, constructers China Railway Group (CREC) and China Railway Construction Corporation (CRCC), port operator DP World, German DHL using fully the advantage of all outstanding corridors to perform their business, American company HP operating cargo trains, and energy provider General Electric.
Financial integration plays an important role in the support of the initiative. China seeks deepening financial cooperation, underpinning their currency stability system, investment and financing system. The second reason from the economic point of view is the reason that China aims to expand the international use of their currency renminbi: BRI should trigger a regional infrastructure boom by linking China with Asia, East Asia, Europe and Africa by land and sea and boost internationalisation of renminbi by encouraging its use in both trade and financial transactions. Internationalization of renminbi will raise prestige and influence, resulting in reduced currency risk and trading costs for China and countries involved in the same production network.
7 (Sze, et al., 2016)
8 (Shepard, 2017)
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Together with internationalization, more and more foreign companies have already begun using Chinese currency and China believes that many countries along the belt will accept the renminbi as a trading currency in the future. The scale of BRI will increasingly push the Chinese currency to serve as a vehicle to raise capital in overseas financial centres to fund various infrastructure projects.9 The International Monetary Fund added renminbi to the basket of currencies that determine the value of the Special Drawing Right and renminbi formally became a reserve currency in September 2016.10
Because of their currency internationalization, China faces the volatility of the renminbi.
However, currency stability remains their policy priority. The main reasons that influence managing the currency internationalization are fear from lower economic growth, higher return on investment outside of China and redirection of excess savings.11 To fight the volatility and keep the economy from slowing down at the same time, The People's Bank of China uses often following instruments: foreign-exchange intervention, interest rates and capital controls.
To support BRI development, three financial institutions have been set up - Silk Road Infrastructure Fund (launched 02/2014), Asian Infra Investment Bank (founded 10/2014) and New Development Bank (founded 10/2014). Up to that, in September 2016 Hongkong Dagong Global Credit Rating Group and International Capital Market Association presented plan about bond issuance for countries along the belt, called Silk Road Bonds. The initiative also cooperates with financial partners such as the Shanghai Cooperation Organization (SCO) and strengthens China-ASEAN cooperation because they both have the same interest in building the infrastructure in South East Asia region. In addition, financially capable private actors are being invited and encouraged to join the initiative and take part in the key projects.
Creation of Asian Infra Investment Bank (AIIB) is often understood as an attempt to challenge global governance norms and become a new international organization, using
9 (Moon, 2016)
10 (Mitchell, 2016)
11 (Islam, 2016)
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renminbi as the main currency. AIIB membership consists of 70 countries from the whole world. China holds 26 percent of voting shares12 in the institution, keeping the de facto veto level since AIIB requires a three-quarters majority for certain decisions.
However, this enormous Chinese project is very costly and even China´s deep pockets have limits. The estimation of Asia Development Bank formerly stated that Asia needs US$ 8tn13 to fund infrastructure construction in period of 2010-2020. To fund infrastructure construction in foreign countries, China is loaning hundreds of billions of dollars even during an economic slowdown at home. If China fails to stimulate their economy, it might be a huge problem.
Beijing has already set aside nearly 1 trillion USD14 to make concessionary loans to about 60 developing countries via its banks’ policy to underwrite the construction of approximately 900 infrastructure projects. This might be very risky because it is based on the assumption that poor countries will pay China back. Many developing countries are just enjoying cheap Chinese loans now and leave the pay back to future leaders and citizens but China cannot write off bad loans ad infinitum. The risk is high especially at loans to countries with speculative ratings (BB+ and lower).
Geopolitical Motivators for Belt and Road Initiative
BRI emphasizes infrastructure improvement along the Belt. It focuses on building the connectivity in all regions in Asia and step by step on bridging Asia, Europe as well as Africa.
It´s described as an overland connection extending towards the West. Chinese BRI strategically aims to get to Europe.
Infrastructure constitutes a central component of the BRI initiative – projects include mainly railways, ports, pipelines, telecommunications and IT infrastructure. It focuses on the key passageways, junctions and projects. It prioritizes linking up unconnected road sections, removing transport bottlenecks or advancing road safety facilities and traffic management
12 (Panda, 2017)
13 (ADB, 2016)
14 (Eisenman, et al., 2017)
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facilities and equipment. In addition, it aims to improve international cooperation and easer postal services, unite customs and quality inspection. Later that connectivity might lead to the development of modern service trade facilities and create boom in cross-border e-commerce.
Infrastructure investments themselves account for large shares of China’s foreign direct investments and aid programs. “The power and potential of the Belt and Road lies in its versatility. This emerging network of revitalized transportation routes and new trading hubs, which stretch between China and Europe, finds efficiency, security and healthy competition in the fact that it is not a single route but a network of multiple, interconnected trans-Eurasian corridors.“15 It is one of the most ambitious undertakings in the economic history of the world.
Land route infrastructure
Land route infrastructure spans from Xian in Central China via the mainland into Central Asia to Samarkand, Tehran, Istanbul, Moscow, through Eastern Europe to Duisburg and finally to Rotterdam. There are three operational rail corridors connecting China and Europe: currently booming northern and central corridor, both linking three large customs zones. The southern corridor is under establishment. Along each corridor the transport time is roughly 10,5 to 16 days. The northern corridor goes mainly through Russia, and for the most part follows the route of the Trans-Siberian Express. It goes through Poland to Germany and further to the west. One of the interesting projects on this corridor is Moscow-Kazan high-speed railway.
The central route goes all the way across Kazakhstan before linking into the northern route in the west of Russia. Southern corridor route goes through Kazakhstan to Aktau and is linked with ferry to cross the Caspian Sea or goes around to Iran, Azerbaijan, Georgia, and Turkey before connecting into European rail network; with project to build the high-speed rail corridor through Belgrade to Budapest.
15 (Shepard, 2017)
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Concerning the most current launches, on December 30, 2016 Chinese government launched a rail freight service between China and London as the first direct rail link between China and Great Britain.16 The 18-day journey of 7456 miles of railways crosses Kazakhstan, Russia, Belarus, Poland, Germany, Belgium, France and the UK.
Maritime infrastructure
The maritime route focuses on sea routes, with substantial investment in port facilities in various locations. Maritime infrastructure is linking South East Asia with the Middle East, East Africa and Europe. It starts in Chinese Fuzhou and goes along the Chinese coast southwards to Hanoi, Jakarta and Kuala Lumpur, and through the Strait of Malacca into the Indian Ocean. It goes through the Horn of Africa over the Red Sea and the Mediterranean via Athens, with the strategic port of Piraeus, and continues to Venice. Greek Piraeus is meant as terminus of the China-Europe land-sea express route and is under operation of China.
China is also planning investments in port facilities and shipyards, for example in Bangladesh, Sri Lanka, the Maldives and Pakistan (strategic port of Gwadar is already under Chinese management).
There are many further projects under discussion or under construction, connecting land and maritime route. China-Pakistan Economic Corridor encompasses highways, pipelines, coal-based electricity generation, and the Chinese-operated Gwadar port. A lot of investments for road and port development go also to Sri Lanka due to its geographical middle location in the Indian Ocean. In the Eastern Europe, new strategic project of the Riga Freeport, connected to the Trans-Siberian railway, has the potential to make a connection through Latvia to Poland.
Another new project in the beginning phase of implementation is an extension of the Lithuanian port of Klaipeda and building connections to the industrial park being built by Chinese investors in Minsk (Belarus). In 2018, China plans to start building a standard gauge railway to connect ice-free Russian port of Zarubino to Jilin Province and the Chinese railroad network.
16 (Webb, 2017)
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Gas and oil pipelines
Energy security is one of the next geopolitical reasons for BRI initiative. China built three lines of Central Asia-China gas pipeline (A-C) from Turkmenistan/Uzbekistan border to Jingbian in China. The last projected line D is currently delayed, even though China signed agreements with Uzbekistan, Tajikistan and Kyrgyzstan in 2013. Line D is expected to raise Turkmenistan’s gas export capacity to China of 30bn17 cu m per year.
Telecommunications and IT
New opportunities for BRI arise from digitalization and investments into IT sector. BRI envisions the construction of fibre optic cable connections from China to Europe since most of the telecommunications rely on undersea connection. It will also provide safer internet routings. A digital revolution and sharing economy inspired by big data might level the playing field for small and medium enterprises in the future. 18 On-demand manufacturing and warehouse management platforms could connect makers with factories aiming at dynamics of production plans responding quickly to supply and demand. Secondly, real time advertisement of the space available in the container cars travelling across countries along the belt could attract new potential shippers looking for a low-cost way to send their wares.
Countries along the belt could also leverage such advances as 3D printing to develop their manufacturing industries by selling intellectual property (than from shipping end products to customers).
China´s BRI can change the geopolitical history. Infrastructure is for many countries of Eurasia the most important public goods as well as cornerstone for the economy development.
This geopolitical change will lead to the expansion of communication and information exchange between all countries, fasten trade routes and facilitate business. Apart from that, China believes that BRI might also support Chinese underdeveloped provinces situated along
This geopolitical change will lead to the expansion of communication and information exchange between all countries, fasten trade routes and facilitate business. Apart from that, China believes that BRI might also support Chinese underdeveloped provinces situated along