One Belt, One Trap? A debate over who benefits from China’s new silk road

HONG KONG: In Myanmar, first a China-led dam project was suspended because of environmental and social problems. Then local protests about environmental damage have made the joint development of a copper mine a stop-start affair.

In Pakistan, there are internal differences over where the China Pakistan Economic Corridor projects should take place, with poorer provinces petitioning for more projects to be directed towards them instead of Punjab.

Such snags on the ground, among other things, are raising questions about how, and whether, Beijing can deliver on the grand vision of its Belt and Road initiative ushering in a new era of globalisation in Asia, Europe and Africa.

That was an issue debated in a recent Between the Lines episode looking at the implementation of China’s multi-trillion-dollar push to connect a region with 62 per cent of the world’s population. (Watch the episode here)

One thing is clear: Lessons have to be learnt. “The Chinese authorities as well as the business community have to go through a soul-searching process,” said commentator Professor Joseph Cheng, one of four discussants on the programme.

CULTIVATE PEOPLE, NOT JUST GOVERNMENTS

Their suggestions included taking care of local communities, doing good work, such as community projects to build good relations – and not only good public relations – as well as learning the local culture.

“Certainly, some Chinese corporations working in Myanmar were or have been perceived as looking down on the local people, not showing adequate respect for the local people,” said Prof Cheng. “It isn’t enough just to deal with the government.”

Other characteristics of Chinese investment and participation in infrastructure projects have also led to complaints.

“China has a lot of manpower, so when it takes part in projects, it not only brings along engineers, it also brings along skilful technicians, skilled labour and so on,” noted Prof Cheng.

So this means very little employment opportunities for local labour.

This contrasts with, say, the American viewpoint that bringing engineers to developing countries is costly, he added.

Some of the Chinese workers also start restaurants, small supermarkets and “even take over a segment, sometimes a very substantial segment, of the restaurant business and so on”.

IT MUST BE A WIN-WIN DEAL

Mr Joe Ngai, the managing partner of McKinsey’s Greater China office, agrees that for the Belt and Road to be successful, economies must benefit through localisation and the development of local know-how and people.

He sees the local “backlash” as part of an initial trial and error period, but is hopeful the Chinese will adjust in the longer term. “I think the ability of the Chinese to understand that is pretty high,” he said.

“Just think about how China has dealt with foreign investment into China – you’ve got to share your know-how, you’ve got to share your intellectual property, you’ve got to do a lot of things to help the local guys.”

He is confident that if Beijing uses the same playbook, it would appreciate that other developing nations would ask for the same over time “when they have more bargaining power”, and that an equilibrium will be found.

At some point, it has to be a win-win situation for both. It can’t be only Chinese capital, only Chinese employees, only Chinese engineers and building something only for China.

“It doesn’t work that way,” he added.

“This is something which has to be shared, and I do think that it’s coming and has already come in many places.”

Prof Cheng also believes that China is learning from its “bitter experiences” that it must deliver at the local level. “You’re now bound to see an eye hospital, a clinic, a vocational centre somewhere near the infrastructure projects,” he said by way of illustration.

A SKEPTIC’S VIEW: ‘IT’S CRAZY’

But there is much to be done. A study done by Oxford University’s Saïd Business School found that more than half of China’s large infrastructure projects carried out for other countries delivered few economic benefits to locals in the area and to the investors.

Prof Albert Park, the director of Hong Kong University of Science and Technology’s Institute for Emerging Market Studies, fears that the rhetoric of vision might not be grounded in reality, given the “long history of failed foreign assistance”.

“US aid to many countries has been found to have a very limited impact on any type of development outcome, and it’s very conditioned by the type of local government and other factors in terms of whether it can be successful,” he said.

If China’s now playing the role the US played as the big source of foreign aid, there are a lot of old lessons – and most of those lessons are negative ones.

So this idea that China can come in and transform local economies – I think it’s crazy.”

ON THE OTHER HAND, OPPORTUNITY

People-to-people connectivity, however, is one dimension of the Belt and Road that independent China strategist Andrew Leung thinks goes further than mere sloganeering and is “very important”.

He points to the 10,000 scholarships per year for students from Belt and Road countries to study in China as well as training opportunities being offered.

Asians, especially, will see the prospects of working in China and throughout the region as the weight of the global economy moves from the Atlantic to the Pacific, said Prof Cheng.

“There will be jobs. It will mean that even Indochina will be a market …. a place where (you) can work, and this appeals to the Asean community as well,” he said. “The Belt and Road initiative is part of that globalisation and regionalisation process.”

Mr Ngai, who thinks the next decade will see the rise of 100 to 200 Chinese multinational companies abroad, added:

A lot of people need to get used to the fact that they might have to work for Chinese companies in future.

The services needed to support infrastructural and connectivity investments range from wealth and risk management to logistics management to legal services, health care and more.

“Whenever there are people who are brave enough to be leading in investment, there are lots of add-ons and adjacencies,” said Mr Ngai. “You can … figure out how to make something out of it. I do think that for professionals, it’s a very good opportunity.”

WAITING FOR THE PRIVATE SECTOR

While these are some of the hoped-for results, the Belt and Road has not passed its tests yet. And Prof Park worries that the risk assessment of projects is sometimes lacking in rigour, “lost in the rush of enthusiasm about some of the Belt and Road investments”.

He said that while a lot of the big investments will initially be led by China’s state enterprises, the test is whether they can attract private capital to “generate real development”. And he questions how many, if any, of the countries can be successful in that respect.

he hope, said Mr Ngai, is that these state-led investments will give people confidence that there is “ambition” and a long-term investment “story” for private companies to come on board.

“And they’d be the ones who bring in, I’d say, the last ounce of energy … That will change things dramatically if that were to happen. But we’re still waiting,” he added.

Nonetheless, there are signs that change is afoot. Many of Mr Ngai’s clients, for example, are looking into projects in Belt and Road countries that he had “never envisioned before”. “I never thought we’d have that conversation,” he said,

But with Belt and Road, all of a sudden it urges companies to look outward a little bit.

Their involvement will be needed for another reason too. There is a question of whether Beijing can finance enough investments to meet the needs of countries, even with the resources of the Asian Infrastructure Investment Bank.

Prof Park cites China’s declining reserves and its state banking system dealing with over-leveraged debt issues. “That’s one reason why we may be seeing a much more moderate pace of these investments,” he said.

“For China to even come close to realising the goals of investment in these countries, it’s going to have to leverage many other sources and other countries. And that means it has to attract, basically, private commercial capital.”

LEARNING CURVE FOR ALL

Prof Cheng called for a “very definite programme” of short-term, intermediate and long-term planning as well as the exercise of discipline through feasibility studies.

“It’s the actual implementation that’s the serious concern,” he said. “There’s a danger of (Belt and Road) being looked upon as a Christmas tree – everybody wants to hang something on it.”

Already, some Chinese businessmen have started to describe the One Belt, One Road initiative – coined in 2013 by Chinese President Xi Jinping – as One Belt, One Trap, suspecting that it will end up a waste of resources 10 years later.

Prof Park and Mr Ngai agree that it all points to China and its companies, state-owned or private, becoming more selective about future investments in the 60-plus countries along the Belt and Road.

Who the winners and losers might be in the development game, however, is hard to say. “Trade models show that these effects can often be quite unpredictable,” said Prof Park.

You could see countries really benefitting who didn’t make the biggest investments in some cases – and countries that did invest or are connected could lose businesses that move further along the line, et cetera.

“So I think it’s a bit unpredictable,” he added.

While he called for a “high dose of realism” to avoid the “trap of excessive expectation” on the one hand, Mr Ngai cautioned against dismissing Belt and Road as a “high-risk pipe dream that’s not going to work” on the other.

Added Mr Ngai: “Over time … many Chinese companies are going to benefit from learning and interacting with many developing countries. I think developed countries will also learn how to deal with the Chinese owners and enterprises.”

In summing up, Mr Leung said: “Belt and Road isn’t a magic formula … but it meets the challenges and opportunities of the times, when the whole world is much more interconnected and there’s a huge shortfall of infrastructure connectivity.

“There’s a learning curve for everybody. It’s early days yet.”

Watch this episode of Between The Lines here.