Another BRI Challenger Enters The Lists

FORGIVE THIS BYSTANDER’S world-weariness, but the Partnership for Global Infrastructure and Investment (PGII), the $600 billion plan for infrastructure and investment to challenge the Belt and Road Initiative (BRI) launched at the G7 summit in Bavaria, seems a bit old hat.

The US government’s statement that President Jo Biden (seen above announcing the PGII at the G7 summit) would announce flagship PGII projects ‘along with additional projects that have been undertaken over the past year’ — and links to a list of ten of them — is a bit of a giveaway.

Not that this would be the first time for governments to wrap up existing initiatives and past promises, tie a bow around them and announce a shiny ‘new’ package.

The PGII intends:

…to develop a values-driven, high-impact, and transparent infrastructure partnership to meet the enormous infrastructure needs of low- and middle-income countries and support the United States’ and its allies’ economic and national security interests.

What worthier and worth-laden circumlocution of intent to counter Beijing’s growing poured-concrete diplomacy could one imagine?

In one sense, the PGII is no more than a rebranding of the Build Back Better World (BBBW) plan rolled out at the G7 meeting in the UK a year ago. BBBW was a play on Biden’s domestic infrastructure plan.

The PGII’s four major categories for investment — clean energy, health systems, gender equality and information and communications technology — will sound familiar from his 2020 election campaign. Cynics might say that having failed to get much traction domestically with his infrastructure plans, the US president is now trying his luck internationally beyond the obstructivism of Congress.

The BRI has had at least a decade’s head start on the PGII. Its investment total is in excess of $1 trillion, although how much in excess is moot as there has been a tendency until recently to slap the BRI label on any overseas Chinese investment.

In many cases, the transparency and effectiveness of that investment and the loans supporting it have not been of the highest standards. However, Western criticism has not been accompanied by much by way of an alternative that does not come with the conditionality typically required by multilateral institutions such as the IMF, the World Bank and the IFC.

The $600 billion over five years that the G7 is now offering will not all be government money. The intention is to combine government funding with private capital from long-term investors such as pension funds, private equity funds and insurance funds — much as large companies augment China’s government overseas direct investment in BRI.

Those large Chinese companies can be state-owned, such as Zijin Mining, CNOOC, China Three Gorges and China Railway Construction, or private such as Alibaba, Boyu Capital and the metals and mining group Tsingshan.

In 2021, 560 new BRI projects worth at least USD100mn were signed, according to Ministry of Commerce data. The average value was USD355mn, compared to USD585mn in 2015. BRI activities are shifting to smaller, less costly and more creditworthy projects that are easier to manage and are less likely to concern recipient countries about the risks of taking on what turns out to be unmanageable and politically contentious debt.

This Bystander assumes that the PGII will subsume the EU’s standalone counter to BRI, its Global Gateway project announced late last year and which we described as ‘at least half a decade late and more than a euro short’. That would give needed financial buklk to the PGII.

Yet, how well the PGII competes with the BRI will depend on its implementation and how well the G7 governments can rally private capital to their cause to give substance to the headline number of $600 billion.

EU’s Global Gateway Opens A Small Development Door

AS A COUNTER to the Belt and Road Initiative, the EU’s Global Gateway project is at least half a decade late and more than a euro short.

Brussels plans to spend 300 billion euros ($340 billion) over the next six years through loans, guarantees and grants to be invested in strategic industries in Latin America, Africa and Asia. There is no official figure for China’s BRI investment, but the most conservative estimates put it at $500 billion since its launch in 2013. 

Projects with an estimated value of $2.5 trillion have had the label slapped on them, although far from all have been realised. That speaks, however, to the power of the BRI brand.

The EU aims to spread its influence and values through Global Gateway. Thus, the initiative has heavy elements of transparency and sustainability to it. Target industries include technology, energy, transport and health. Tackling climate change and global health security will be priorities.  

Specific projects remain to be identified, and probably hostage to various EU member companies varying relationships with China, which is adept at picking off individual EU members when it feels its interests threatened. The stance of the new German coalition government, which is divided on how tough to be on Beijing, will be critical in this regard.

Efforts to counter the BRI by the EU and others are not new. Most recently, the United States put forward its Build Back Better World (B3W) Partnership. However, its openly anti-China stance and US leadership worried some European leaders sufficiently to ensure G7 support was watered down.

Yet even before B3W, there was the Japan Partnership for Quality Infrastructure (2015), the EU’s Asia-focused Connectivity Strategy and the Australia-Japan-United States Trilateral Infrastructure Partnership (both 2018) and the US Blue Dot Network (2019). 

All lacked coordination, shared ambition and a joint strategy. In short, they lacked a brand, and certainly one as powerful as the BRI. In a nod to that, European Commission President Ursula von der Leyen said Global Gateway should become a trusted brand. Easier said than done.

China is anyway reining in its ‘debt-diplomacy’ as it re-evaluates the risks of making high-interest loans to countries that cannot afford to repay them, such as in Africa, and expands its use of Western financing concepts like public-private partnerships.

Beijing’s strategic aim will be to discourage the EU from joining the United States in a common infrastructure drive against the BRI. Just the announcement of the Global Gateway does that. However, Beijing will also seek to draw specific EU nations into its regional development initiatives where they already have interests: France and Italy in Africa, Spain and Portugal in Latin America and Germany in the Balkans and the Caucasus. 

A Trail Of Hidden Debt Along The Belt And Road

A REPORT ON Belt and Road Initiative (BRI) funding crosses our desk. It comes from AidData, a development aid research centre at the US university William and Mary, which has compiled a database of China’s international development finance covering 13,427 projects approved between 2000 and 2017 worth $843 billion across 165 countries, of which some 140 have signed onto the BRI.

Among its findings are that China has used debt rather than aid to establish a dominant position as a provider of international development finance, and the political sway that comes with it. That is less of an eye-opener than the estimates that the loans extended to recipient countries — primarily low- and middle-income nations — are far more extensive than generally realised, to the tune of $385 billion of ‘hidden debt’.

The reason for this hidden debt — hidden in the sense that it is not captured by institutional debt monitoring mechanisms such as the World Bank’s Debtor Reporting System (DRS) — is that Beijing’s loans are increasingly going to state-owned companies, banks or other entities that benefit from implicit or explicit, host government guarantees. 

Thus the debt does not show up in counts of sovereign debt, yet the liabilities for the recipient governments do not magically disappear.

The true magnitude of the debt is one concern. By AidData’s estimates, 42 low and middle-income countries now owe China the equivalent of more than 10% of their GDP.

Factoring in their hidden debt could cause reassessments of credit ratings, potentially raising borrowing costs.

A third concern is that hidden dent complicates debt management. Recipient governments may not have a good handle on their debt service requirements. That may complicate making the interest payments and debt restructuring where necessary.

Five key points emerge from the report:

• the sheer growth of China’s overseas development finance since 2000, outspending traditional Western and multilateral providers by 2-to-1 or more (an average of $85 billion a year for China against the United States’ $37 billion, for example), and doing so with semi-concessional and non-concessional debt rather than aid;

• a transition from direct sovereign lending pre-BRI to lending to state-owned companies, state-owned banks, special purpose vehicles, joint ventures, and private sector institutions, which, as already noted, keeps the loans off the balance sheets of the governments in the recipient countries but still provide explicit or implicit host government guarantees;

• the increasingly central role of China’s state-owned commercial banks — including Bank of China, the Industrial and Commercial Bank of China, and China Construction Bank — have played in the transition, including organising lending syndicates and other co-financing arrangements that make it possible to undertake BRI mega-infrastructure projects (financed with loans worth $500 million or more);

• the growing use of collateralisation to offset increasing credit risk, allowing Beijing to pursue a high-risk, high-reward credit allocation strategy to secure energy and natural resources, with the loans secured against future export receipts, or, for infrastructure loans, physical assets; and 

• masking from international institutional monitoring, eg, the DRS, the extent of Chinese debt burdens on some recipient countries, estimated to be underreported by an average equivalent to 5.8% of their GDP, which is complicating international debt restructuring talks, which have become as much competitive as collaborative between China and Western donors and creditors of late as Chinese state-owned policy banks can restructure loans on their own terms outside the well-established forums of sovereign debt renegotiations.  

Nor do China’s loans come cheap. The average interest rate is 4.2%, with a repayment period of less than ten years, AidData says. By comparison, a lender like Germany, France or Japan would typically charge 1.1% with a repayment period of 28 years.

A further intriguing point to emerge is that more than a third of BRI infrastructure projects have encountered significant implementation problems—corruption scandals, labour violations, environmental hazards, public protests and the like. In contrast, non-BRI infrastructure projects are less troubled, as are BRI projects undertaken by the host country rather than China. That fits with widespread anecdotal evidence of local resentment when China ships in everything from raw materials to labour.

Whether such concerns amount to a tipping point in a BRI backlash is moot, and may provide only a slither of an opening for the two new Western counters to the BRI, the United States’ Build Back Better World Initiative and the EU’s Global Gateway Initiative.

China may well now have a sufficiently firm foothold in development finance that it will not be dislodged by rival and not necessarily wanted offers of sustainable and transparent financing and good governance. A tweak to Beijing’s messaging,already being rehearsed — no vanity projects and cleaner and greener projects — may suffice.

WHO Gets Trampled

THERE ARE SEVERAL interpretations of the Trump administration’s latest attacks on the World Health Organisation (WHO): they are a diversionary tactic to deflect scrutiny of the United States’ response to the Covid-19 pandemic; they represent an expansion of this particular front in ‘the new Cold War’ between Washington and Beijing; or they are a central plank of the president’s re-election campaign for November. Whatever view you hold, there is no escaping that they were predictable.

The WHO and the Donald have previous.

In 2016, the WHO urged then-President-elect Donald Trump to expand ‘Obamacare’, the signature health insurance legislation of his predecessor President Barrack Obama, whose enabling legislation, the Affordable Care Act, Trump had promised on the campaign trail to repeal immediately he took office. This did not bode well for the relationship doing the Trump presidency.

His administration from its outset embarked on a decrease of US support for global healthcare assistance in line with the ‘America First’ agenda on which the president was elected and campaign promises to end what the president described as other countries taking advantage of the United States and ‘failing to pay their fair share’. Its first budget, the administration proposed a $4.6 billion cut in humanitarian assistance and global health spending. Some $2.2 billion was accounted for by the latter.

This signalled the United States intent to remove itself from a two-decade-long role as the leading funder for preparing for and responding to global infectious disease outbreaks and basic health care delivery to low-income countries. The cuts included reducing funding for national disease surveillance systems, training and infrastructure.

At the time, there were plenty of warnings that these would put at risk rapid and coordinated responses to infectious disease outbreaks that recognise no borders. Nonetheless, barely a year after taking office, the president made the National Security Council’s global health and biodefence team redundant. This had been established by the Obama administration, with pandemic preparedness part of its remit. In a streamlining of the NSC, in which the directorates for arms control and nonproliferation, weapons of mass destruction and terrorism, and global health and biodefense were combined, the administration cut the pandemic preparedness team. Its role was subsumed within the NSC and given a more national security cast.

Nor has the Trump administration been enamoured with the WHO’s director-general, Tedros Adhanom Ghebreyesus, who has been an enthusiastic endorser of the healthcare component of President Xi Jinping’s Belt and Road Initiative. In a 2017 speech, Dr Tedros described the Health Silk Road as ‘visionary‘. The WHO had just signed a memorandum of understanding on a strategic health partnership with China along the Belt and Road and in Africa, The MOU included additional Chinese funding of the WHO.

China’s contributions to the WHO have been steadily climbing, though they still fall far short of the $400 billion-500 billion a year the United States pays in assessed dues and voluntary donations — or had been; even before Trump suspended payments it was almost 70% in arrears for 2019 and hadn’t handed over a dime of this year. While the US is on the hook for around 27% of the WHO’s member-nation dues, its share of the WHO’s total budget falls below 20% once voluntary contributions are factored in.

China has again offered to up its contributions to the WHO by $2 billion over the next two years to fight the pandemic, including making China the hub of global supply chains for anti-epidemic equipment and products, and to share any vaccine that it develops. The offers are efforts to defuse international criticism of its early response to the outbreak, but put the WHO in a tight spot.

Dr Tedros could call the United States’s bluff, and risk Washington walking away from membership as Trump has threatened. However, this Bystander does not reckon Trump would carry through the threat because of the win it would give Xi in expanding China’s global influence. Beijing would then be in pole position as the WHO’s lead funder and patron. However, it would also give substance to Trump’s allegations that the WHO is in Beijing ‘pocket’. That will concern a significant number of the WHO’s other members, including some who would not see themselves as in the first rank of allies of the United States.

It would also cut the WHO off from the United States’ technical expertise in public health and medical research — not to mention future funding under a different US administration. Setting up a review of its handling of the pandemic (update: now agreed in principle), some cosmetic distancing from Beijing and possibly the premature departure of Dr Tedros before his term of office is due to expire in July 2022, seem more likely.

The WHO may also look at the state of the World Trade Organisation and be reminded that when elephants dance, it is the grass that gets trampled.

China’s Western March Into The Middle East

CHINA’S INTERESTS IN the Middle East are quietly expanding, driven by the region’s growing role as a source of energy and as a recipient of Belt and Road Initiative (BRI) investment.

The eighth meeting of the China Arab States Cooperation Forum, (pictured above) held with some fanfare in Beijing this month, brought that into focus, with Beijing promising $23 billion of funding to its guests.

Such large-headline-number funding packages (not that $23 billion is that large by the standards of these things) tend to comprise money already spent or committed and money that will never materialise. But $150 million that will likely be shelled out is the sum allocated to ‘social stability’. As in Africa, Chinese investments in the Middle East are at risk from social and political developments in the region. (See Libya, Zambia and Angola for precedents.)

That $150 million promise will probably manifest itself as sales of Chinese security equipment and the training to use it. Afghanistan provides a rudimentary model.

And, as in Afghanistan, China is recognizing it has to play a more active diplomatic and security role in the Middle East, and has been doing so — incrementally — since at least 2012-16, part of the ‘March West’ to counter the ‘Pivot East’ of the then US administration of Barak Obama. This was outlined in a policy paper published at the start of 2016.

The bulk of the latest tranche of offerings, $20 billion, is earmarked for loans for reconstruction and development, though that is a relatively modest sum in overall BRI investment. What the money also does is help Beijing straddle the historical rift in the region between Saudi Arabia and Iran.

China is unlikely to break its ties with Tehran and will continue to be a market for Iranian oil as restored and new US sanctions cut off sales to the West. The Trump administration’s withdrawal from the Iran nuclear deal, which Beijing played an instrumental role in setting up, is likely to leave Chinese firms better positioned commercially than they were on the ‘last man standing’ principle as Western firms are driven to retreat from Iranian business by Trump’s reversal of policy.

But equally, China needs good working relations with Riyadh and its allies, whose influence in northern and eastern Africa touches directly on China’s greater economic interests in those regions, too (from oil fields and copper mines to China’s first overseas military base in Djibouti and anti-piracy operations off the Horn of Africa).

Outreach to the Gulf States also balances within the Arab world China’s long-standing relationship with Egypt. The $65 billion memorandum of understanding for investment cooperation that Saudi King Salman signed during a visit to Beijing in March last year had already underlined this.

China sells Saudi Arabia the weapons and military kit that the United States will not out of deference to Israeli objections. One of only thee Chinese armed-drones manufacturing plants outside of China is in Saudi Arabia.

One complication for the countries of the Middle East is Beijing’s repressive treatment of its Muslim minority, and particularly the Uighers. However, few Middle Eastern leaders have spoken out publicly on this — a sign of the importance of the growing ties in other areas and China’s ability to use its economic clout to dampen international criticism of its domestic policies.

The more significant issue for Beijing in the region will be the one that has confronted the other outside powers that came before it: it is difficult to maintain a neutral position in a part of the world where there are so many overlapping and longstanding rivalries and conflicts while stepping up diplomatic and security engagement beyond the purely mercantilist.