Xi’s Saudi Trip Underlines China Moving In Where US Disengages

PRESIDENT XI JINPING’S three-day visit to Saudi Arabia underlines China’s evolving relationship with the region and readiness to fill a vacuum left by US disengagement. 

China relies heavily on Gulf oil imports, while the Gulf states are realigning their international stance because they no longer view the United States as a reliable partner.

Xi was given a noticeably more fulsome public welcome by Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler, than that extended to US President Joe Biden when he visited in July.

During the trip, Saudi Arabia and China are signing 34 investment deals worth $30 billion covering areas such as green energy, information technology, cloud services, transport and construction. Details are sparse, but one is reported to be with the telecoms giant Huawei for cloud computing and building high-tech complexes in Saudi cities.

In the past, these all might have been classed as Belt and Road Initiative deals but that is a term less used these days as the policy is being given a lower public profile and a more pragmatic focus on resource-rich countries, such as in the Middle East.

Beijing and Riyadh also signed a strategic partnership that will include biennial heads of state meetings.

The Chinese readout of the meeting between Xi and Saudi King Salman bin Abdulaziz Al Saud referred to Saudi support for the standard list of Chinese priorities from the one-China policy to non-interference in China’s internal affairs. 

Mention of Saudi support for Beijing’s efforts to ‘de-radicalise’ align with the Saudis’ muted response to the treatment of Muslim Uighurs in Xinjiang,

The United States’ response to the visit, that China’s increased global influence is ‘not conducive to international order, will not deter Gulf states from building stronger ties with China and maintaining relations with Russia despite US concerns. 

Unlike Washington, Beijing will not raise sensitive issues such as human rights or democracy. However, closer relations with the Gulf Cooperation Council member states — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — will need careful balancing with China’s ties to their regional rival, Iran.

China’s Belt And Road Initiative Gets More Strategic

CHINA’S BELT AND ROAD INITIATIVE (BRI) has seen no new deals struck in Russia so far this year (see map above), according to a report by the Green Finance & Development Center at Fudan University in Shanghai.

This looks to this Bystander as a further example of Chinese companies’ circumspection about falling foul of Western sanctions imposed on Russia because of the war in Ukraine.

Russia and China signed deals under the BRI rubric worth about $2 billion in 2021, roughly the same level as the previous year. Pre-pandemic, the figure was more than three times as much in four of the six preceding years.

BRI investment is being redirected to the Middle East. The Center’s report says that Chinese firms signed $5.5 billion worth of mainly energy and construction deals in Saudi Arabia in the first half of the year — more than in any other country.

In general, new BRI investment has plateaued, settling at slightly lower levels. In the first half of 2022, at $28.4 billion, BRI finance and investment was 4% on the same period a year earlier, according to the Center. 

Beijing is becoming more steely-eyed about projects’ investment returns and the external reputational risks of saddling host governments with unsustainable debt. Sri Lanka and Egypt were two other countries without new BRI deals in the first half of this year, but as the map below highlights, they were far from alone.

There is also greater Western pushback over the geopolitical intent behind the BRI, particularly in Europe.

The days are over when Chinese firms could slap the BRI label on any foreign direct investment. Beijing is now more focused on the strategic value of BRI deals as it seeks to secure access to resources it will need for its new tech and green industries and the energy it needs to fuel its economy.

The Centre identifies five strategic project types:

• strategic assets, including ports:
• trade-enabling infrastructure, including pipelines and roads;
• ICT, e.g., data centres;
• resource-backed deals such as in mining, oil and gas; and
• high visibility projects like high-speed railways.

China’s Debt Diplomacy Takes A Credit Hit

SRI LANKA AND Pakistan might count as among the ‘dangerous and chaotic places’ that President Xi Jinping last November advised Belt and Road (BRI) investors to avoid. Both are strategically important waystations along the BRI that are under severe financial stress and in political turmoil.

As friends of China, both would be looking east for assistance, aid that Beijing is being slow to provide. It has not yet reissued a promised $4 billion of loans to replace those Pakistan paid off in late March. Nor has it responded to Sri Lanka’s request for $2.5 billion in credit support.

China has become the largest government creditor over the past decade. Its state-owned policy banks often best the International Monetary Fund (IMF) and the World Bank in annual lending to developing countries.

The scale of that lending and the lack of transparency as to its terms have drawn criticism for exacerbating debt problems in poorer countries and accusations of ‘debt-trap diplomacy’.

Sri Lanka and Pakistan’s optimism that Beijing will come through for them is running into a new realism in Beijing. This is already evident in China’s circumspect approach to debt relief in Africa.

At last November’s high-level BRI symposium, Xi urged a cautious approach to lending along the Belt and Road. For the past couple of years, it has been apparent to top leadership that China’s banks have taken on too much debt in countries with uncertain repayment prospects.

A slowing economy at home and the persistence of domestic financial stability concerns have only made these worries more acute.

Securing approval for new credit lines is becoming harder even for policy banks as authorities emphasise the need for improved risk management and controls.

Sri Lanka has already turned to IMF in Washington for help with preparing an economic recovery programme as a basis for restructuring its debt and emergency financial assistance. Pakistan’s new leaders also plan to work with the IMF to stabilise the country’s economy.

Sri Lanka, in particular, will have as weak a negotiating hand with the IMF as it has had with Beijing.

China’s concern will be that Sri Lanka will have to accede to IMF demands, including who should occupy key government positions. That could mean a government less well disposed to China than some of its predecessors.

Similarly, the ousting of Imran Khan as Pakistan’s prime minister may cost Beijing a friendly if not necessarily firm ally in a country that provides an essential connection between the BRI’s two halves.

China Demonstrates Hands-On Non-Interference In Myanmar

CHINA REGARDS THE military coup in Myanmar as an internal affair, and thus not one on which it needs to express any deviation from its default position on non-interference.

Given Beijing’s long-standing ties to the Myanmar military, it is safe to assume that its sympathies do not lie with the overthrown elected civilian government’s supporters. Its blocking of any action at the UN Security Council, such as imposing sanctions over the increasingly bloody February 1 coup, confirms that. So does Foreign Minister Wang Yi’s latest commitment to working with the Association of Southeast Asian Nations, as ASEAN espouses non-interference in member states’ affairs.

That is not to say that China does not have interests in the country. One is the 800-kilometre-long twin oil and gas pipelines that run from Kyaukpyu, the deepwater port that China is building on Myanmar’s Bay of Bengal coast, to Kunming, the provincial capital of Yunan in southwestern China. The pipelines, like Myanmar itself, are a key part of the Belt and Road Initiative. It gives China a short cut to the Indian Ocean, avoiding the chokepoint that is the Strait of Malacca.

The port and the pipelines are centrepieces of the China-Myanmar Economic Corridor, which passes through the rebellious Shan state. China plans several projects in the Shan and neighbouring Kachin states, which lie along the entirety of its strife-ridden border with Myanmar and where China periodically tries to broker peace.

These projects include three cross-border economic cooperation zones, the Myitkyina Industrial Zone in Kachin state and the railway from the Shan border town of Muse to Mandalay, which will provide a through rail link from Kunming to both Kyaukpyu and Myanmar’s largest city, Yangon, where China is also building residential, commercial and industrial facilities.

Many Chinese enterprises are also involved in resources extraction, including jade mining. China is Myanmar’s largest trading partner. The total value of two-way trade was $12 billion in 2019-20, with China running a $1.3 billion trade surplus, according to Myanmar’s Commerce ministry. There is also a lot of cross-border smuggling.

Anti-Chinese sentiment –never far from the surface in days of the former junta — has risen across Myanmar. In the face of threats to blow up the oil and gas pipelines, Beijing reported moved troops to its border opposite Muse at the beginning of the month, although it is unclear what they will do beyond providing a show of force. Moving troops into the country would require a tortuous twisting of the definition of non-interference.

So far, Beijing has just sought assurances from the Myanmar military about the pipelines’ security. With some cause. Fighting between the Kachin Independence Army and Myanmar’s military is reported across Kachin and northern Shan states, where Naypyidaw’s rule is mostly in name and requires repeated military crackdowns.

The Brotherhood Alliance, which includes the Myanmar National Democratic Alliance Army, Ta’ang National Liberation Army and Arakan Army, all of which are based along the Chinese border, says it is ready to join forces with all ethnic minorities to fight the regime if the killing of protesters continues.

The military has for decades fought ethnic armed organisations across Myanmar. Intensification of those conflicts was always likely to be part of the coup’s fallout, a development that Beijing will find difficult to ignore. Quietly, it will continue to provide its old friends in Myanmar’s military with diplomatic, financial and military support while continuing to warn against external interference in an internal affair.

China Extends Its Sway Over Mekong River

NOT FOR THE first time, there is concern that China’s hydro dam-building on the Mekong river is causing environmental harm upstream and low water levels downstream. And not for the first time, Beijing is pouring money on troubled waters.

Multiple hydroelectric dams are being built along its course and its tributaries, mostly in China, which calls the upper reaches of the river the Lancang, but also in Laos, which aims to be the ‘battery of Asia’.

Beijing rejects the accusation that it causes drought conditions downstream, where the low water levels are damaging agriculture and fisheries. The Mekong is the world’s largest inland fishery.

However, two days ago, Premier Li Keqiang (seen in the screenshot above) told a video meeting of the China-led Lancang-Mekong Cooperation (LMC) initiative that Beijing was willing to offer more assistance on water resources, road, rail and river transport connectivity and public health to its Southeast Asian neighbours.

He also said that China would share data on the river waters year-round, and not just during flood season. The intergovernmental Mekong River Commission (MRC) — which involves Thailand, Cambodia, Laos and Vietnam and has mostly been elbowed aside by the LMC — has called for year-round data for some time.

Mekong river nations’ leverage over China is limited. Water shortages would have to get far worse for the downstream countries to risk jeopardizing their relations with Beijing by pressing it over its dams.

Laos is unlikely to compromise on its hydropower ambitions, since electricity exports bring in much-needed foreign currency. At the same time, Thailand and Vietnam will be keen to keep importing Lao hydroelectricity to power their industrial development.

Undoubtedly, it is Beijing’s vision that is driving the development of the river. This encompasses not only dams but also development projects, special economic zones and trade that will integrate the region into the Belt and Road Initiative.

At some point, that might tempt the United States to look for means to deter companies and banks involved.

China-Malaysia Relations Pass Into A Chilly Phase

RELATIONS BETWEEN MALAYSIA and China have a history of blowing hot and cold. Malaysia’s new prime minister, if new is an appropriate adjective for the 93-year old Mahathir Mohamad, has brought a renewed chill, even though he has been a longtime friend of China by dint mainly of his criticisms of the West.

Mahathir has halted several high-profile, big-ticket infrastructure projects involving Chinese firms for review, including:

• the $20 billion East Coast Rail Link under construction by China Communications Construction Co. and mostly financed by Export-Import Bank of China;
• the $10 billion Melaka Gateway project , which involves three artificial islands and a cruise ship terminal, being developed by PowerChina International; and
• the $2.5 billion trans-Sabah natural gas pipeline led by a subsidiary of China National Petroleum Corp.

Restrictions have also been imposed on the sales of units in Forest City, a $100 million real estate development on four artificial islands aimed at buyers from China.

There is also a report that three pipeline projects suspended in July have been cancelled outright, an oil and gas pipeline in peninsula Malaysia and another on Borneo, and a pipeline linking a Petronas refinery and petrochemical plant in Johor to Malacca. They had a combined cost of $2.8 billion.

Mahathir has several reasons for applying the brake.

One is purely financial. The first three are expensive projects that saddle the country with even more debt. Malaysia can just about manage its foreign-currency debt, but only just about. It cannot afford to let its financial position deteriorate, which, if the troubles of Argentina’s peso and Turkey’s lira spillover into other emerging market currencies, it could do quickly. Furthermore, Mahathir had long held that the country’s debt holds back its development. Nor does he want to risk Malaysia going the way of Sri Lanka, which had to yield control of a new port to China to settle debt it could not repay.

A second is political. In the wake of the 1MDB scandal. Mahathir is cracking down on what it believes is a whole raft of corruption-tainted deals struck during the previous administration of Najib Razak. The three deals mentioned above were all made within Najib’s time, and Mahathir has criticised them for being opaque.

A third is geopolitical. Mahathir is concerned about China’s increasing activity in the disputed waters of the South China Sea, where Malaysia has claims of its own over a dozen Spratly islands and a large acreage of oil and gas. Being in hock to China, which is also Malaysia’s largest trading partner, weakens Kuala Lumpur’s hand in pushing back against Beijing’s maritime assertiveness. Mahathir is strengthening relations with Japan and Australia to counterbalance China’s influence.

A fourth reason Malaysia’s relationship with its city-state neighbour, Singapore. The two nation’s relations with China tend to be the inverse of each other. Singapore’s relations with China are currently on the up.

Mahathir has said he will hand over the presidency to his deputy Anwar Ibrahim at some point, but may choose to make that point further into the future than he initially indicated (within two years). Anwar, though he has backed the review of the Chinese investments, would likely be more favourably disposed towards China. The further out the hand-over, the longer Malaysia-China relations will remain chilly.

Update: The Financial Times is reporting that Pakistan is initiating a similar review of the China-Pakistan Economic Corridor. That would have greater weight for Beijing than Malaysia’s review because of the corridor’s strategic importance, including its access to Gwadar, the port on Pakistan’s south coast on the Arabian Sea.

Trump’s 3-D Re-engagement with Asia: Development, Defence and Diplomacy

THE BELT AND Road Initiative and the United States’ vision for the Indo-Pacific have a common end if different means.

Both are critical components of establishing the two powers’ respective influence over a region that is already well on its way to becoming the world’s economic centre. The former uses state-led infrastructure; the latter seeks to unleash the commercial might of private business, primarily US private business.

The Trump administration’s withdrawal from the Trans-Pacific Partnership, one of its earliest acts, cemented regional fears among the United States’ allies that the ‘America First’ rhetoric of the Trump campaign in 2016 presaged US withdrawal from the region, leaving a vacuum that China would need little encouragement to fill.

Whatever the validity of that fear — and US commercial imperatives were always going to mitigate against significant disengagement — Washington has had a struggle to reassure its traditional regional allies, who, after all, still have to live cheek-by-jowl with their huge neighbour, regardless of the tweet-du-jour coming from Washington.

The uncertainty surrounding the outcome of both Trump’s putative trade war with Beijing and his intervention in North Korea through a summit with North Korean leader Kim Jong-un have kept nerves taught.

While the political scientists hijacked the term Indo-Pacific from the marine biologists and oceanographers slightly more than a decade ago, it has only been over the past five years than it has gained currency with political leaders in the four key Into-Pacific powers, the United States, India, Japan and Australia. In the past year, it has started to take shape as an economic entity.

Today, US Secretary of State, Mike Pompeo, put some more flesh on those bones by announcing $113 million of investment in technology, energy and infrastructure investments in the region. This was, he said, a ‘down payment’ on a new era of US economic commitment to peace and prosperity in the region.

US officials say that this commitment is not aimed at countering the Belt and Road Initiative, but the underlining of the transparent and commercially led nature of the investments and the choice of phrases such as ‘strategic partnerships, not strategic dependence’ speak for themselves, as does Pompeo’s assertion that the United States would oppose any country that sought to dominate the region.

The money will go to improving partner countries’ digital connectivity and expanding US technology exports to the region ($25 million), helping regional energy production and storage (some $50 million) and creating a US government agency to support infrastructure development ($30 million). Much of the remainder of the money will go to a fund to let regional nations access US private legal and financial advisory services.

There will not be, it seems, a return of the United States to TPP. Pompeo said that the Trump administration would only be doing bilateral trade deals in the region.

He did, though, trail a coming announcement by US President Donald Trump on regional security assistance, reaffirming the administration’s emerging three-D approach to the region: development, diplomacy and defence.

Compared to, say, the $62 billion that China is providing for the China-Pakistan Economic Corridor and the estimated $1 trillion of Belt and Road Initiative projects underway, $113 million looks like small beer, and especially as much of the money will end up delivering export sales of goods and services to US firms. An America First foreign policy is still an America First policy.

The question becomes then, can US business leverage that into a credible competitive alternative model for regional development. Washington’s traditional regional allies will still take some convincing as much as they would like to have a strong counterweight in the United States to China’s growing regional power and influence.