The situation with China is deteriorating as the Western and regional Asian nations struggle with how to respond to the latest political developments emanating from China.
The Chinese state is built on the importance of the North China Plain for its development. This is where historically the most fertile land of the country was to be found, double cropping was possible, and communications were relatively simple. It was the cradle of the Han civilisation and over the years expanded its borders to provide security from invasion. This was achieved in the south by the sea, in the west by the expansion into Tibet and Xinjiang and in the north by the great plains and deserts of Mongolia and central Asia. The plains’ and deserts’ openness allowed for high visibility of any incursions and rapid logistical response. The west and south west are mountainous, making invasion difficult.
The flaws in this geopolitical security network are in the East and South East. This was confirmed by the invasion and occupation of large parts of China by Japan in the 1930s. In the North East, the threat is from Vladivostok, the Russians’ Pacific military base. In the current confusion over COVID-19, China dropped a little bombshell. The Russian Embassy posted a video on the Chinese social media website ‘Weibo’ celebrating the 160th Anniversary of Vladivostok.
Chinese internet users, including state journalists and quasi-government officials waded in and claimed that Vladivostok is Chinese and was wrenched from the Qing dynasty by Russia after Britain and France defeated China in the second opium wars. According to China, Russia annexed it via the “unequal” Treaty of Beijing.
It would appear that China doesn’t want friends. It does need strong borders and not necessarily peaceful borders either. The recent dispute with India just demonstrates that military confrontations are being pushed further and further away from the heartland. The only thing that China wants is territory and more of it. (What’s the Mandarin for Lebensraum?) China is putting pressure on its neighbours by encroaching into and claiming territory, islands, and lumps of rocks within the internationally recognised territorial waters and Exclusive Economic Zones (EEZs) of other countries in the South China Sea. It claims Japanese islands in the East and land in the Himalayas. China is encroaching on Nepalese villages and trying to push the LAC (Line of Actual Control) further west along the Indo-Tibetan border in Ladakh. All while it is promoting the benefits of participating countries in the BRI (Belt and Road Initiative),
This (the BRI) is a key driver of Beijing’s push for security and power. Unfortunately for China, it has unsurprisingly seen delays and disruption due to the quarantine and containment measures required by COVID-19. This slowdown is expected to continue in the near future as countries react to the threat from COVID-19 with different levels of lockdown and control. Even given the possibility of future waves, the Chinese government remains “as confident and determined as ever” to advance BRI “cooperation” as a driver of growth (for whom?) in a global economy facing a prolonged recession.
According to the Chinese, the BRI is not aid but is an investment initiative that requires returns on its investments (just like capitalists): They need to recover the principal and a ”moderate” rate of interest. However, data released by the OECD shows that China’s non-performing assets (impairment) had reached $101.8 billion by the first half of 2018. It is reasonable to assume that this has grown significantly since then. This forms a huge part of China’s BRI portfolio since 2013 and is estimated to be anywhere between $450 and $600 billion.
BRI lending peaked in 2015. But 2019 saw not a single infrastructure loan issued by any of the four biggest lenders participating in the BRI (all Chinese banks). A backlash from BRI participating countries, as well as a reduced appetite for risks to China’s own reserves and economic wellbeing, has caused more discretion in the selection of projects to support. Some projects have been cancelled, renegotiated, scaled back, delayed, or simply put on hold.
China’s practice of ill-disciplined lending purely for political or strategic gain is unsustainable. The dilemma for China is that even as BRI investments have decelerated, the initiative itself continues to expand. Because of developing internal fiscal issues, Beijing has recently attempted to tighten capital outflows. This has had obvious implications for the funding of BRI projects. To attempt to dilute the effect on the Chinese economy there have been efforts to engage with non-Chinese banks and financial entities, even to seeing the launch of a few bilateral funds.
All this is coming too little and too late. Chinese officials and senior politicians have privately acknowledged BRI as a loss-making enterprise; Chinese bankers and researchers have acknowledged the inability of BRI countries to fund projects or repay debts on time. Political influence comes at a price. With the COVID-19 pandemic prompting fears of recessions and sovereign debt crises, many BRI countries are in no position to repay project loans. Displaying true capitalist avarice, and despite much criticism, China is unlikely to forgive these debts, seeing as it has reportedly already faced losses through loan restructuring, write-offs and deferments. This has major political implications for China and its expansion throughout the world, leaving an opportunity for the West. And an opportunity for smart Less Developed Countries to play one off against the other.
There are claims of an annual BRI funding gap of $500 billion, giving some idea of the extent of China’s ambition. But who will foot the bill — or even simply sustain existing projects? If China, then how will they fund it, if not China then where will the funds come from to maintain China’s BRI? The problem is that BRI’s potential to earn returns, given an unsound financing approach to the projects, remains limited. Understandably, China expects to achieve gains in the form of favourable political and strategic outcomes, and these may influence Beijing’s calculations on some projects at the expense of commercial and financial viability. However, China’s capacity to financially sustain an over-reaching BRI is not unlimited.
President Xi has gambled that by becoming more aggressive he can take advantage of the world situation brought on by COVID-19 and rescue some of China’s strategic objectives. He is also driven by the need not to lose face in all this. His political future is at stake, hence his tightening his grip on the country. Unfortunately, the BRI was primarily his baby.
I will follow this up with the impact on the UK in a couple of days after I have done a little more research.
