The Asia-Pacific Journal | Japan Focus Volume 17 | Issue 1 | Number 5 | Article ID 5233 | Jan 01, 2019

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China’s Long Term Trade and Currency Goals: The Belt &Road Initiative

John A. Mathews

Abstract

While all eyes have been focused on theevolving US-China trade war, China has beenpursuing multiple initiatives of which its long-term global investment strategy known as theBelt and Road Initiative (BRI) is the mostambitious – and now (finally) being addressedby mainstream media and US Congressionalhearings. China’s BRI, encompassing the land-based Silk Road Economic Belt and the sea-based 21st Century Maritime Silk Road, is theworld’s largest multilateral infrastructure-building project. This initiative is now creatinga community of states that have commoninterests in the building of infrastructure withChina’s financial assistance and in setting rulesand standards for international trade within theBRI area. Through this process, the BRI iscreating the world’s largest trade andinvestment area, and one with clear securityimplications as China’s geopolitical profilerises. Enjoying the highest level of politicalsupport in China, the multiple projects of theBRI utilize Chinese finance provided primarilyby state development banks in an extensionoverseas of the industrial development modelfashioned at home. Critical commentary hasfastened on the possibility of countries entering“debt traps” as they sign up for BRI projects.Such claims need to be scrutinized from theperspective of China’s own debt-fuelledeconomic development strategy and the mutualgoals tying China to dozens of industrializingcountries in a new arc of Chinese economic andfinancial diplomacy. The wider significance ofBRI explored here includes its role inpromoting the internationalization of China’scurrency and reinforcing China’s industrial and

energy strategies abroad.

Keywords

Belt and Road Initiative (BRI), Maritime SilkRoad, US-China trade war, infrastructuredevelopment banks, China industrial strategy,internationalization of RMB

Introduction

The evolving US-China trade war, whichreached a dangerous level of US tariffs beingimposed on $200 billion worth of imports fromChina, has been holding center stage ininternational relations discussions in 2018. ButBeijing’s tit-for-tat response to the US is farfrom the only strategic weapon it has beendeploying. What is less discussed in the contextof the US-China strategic conflict, and isarguably of greater significance, is Beijing’sBe l t & Road In i t ia t ive (BRI ) , whichencompasses projects involving over 70countries and counting (in Eurasia, South Asia,Southeast Asia, Africa and now in LatinAmerica), in infrastructure projects worth morethan $1 trillion and counting. Strategically theBRI draws countries into China’s orbit, throughthe building of infrastructure financed throughloans from Chinese and China-promotedbanks.1 The initiative is now just on five yearsold and already encompasses countries thataccount for half the world’s economic activity.These countries now form the world’s largesttrade and investment area. The BRI has comein for much criticism, with articles in both theFinancial Times and the New York Times

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among others querying its long-termviability.2 By contrast, an evaluation publishedby The Economist provides a balanced accountof the BRI and its prospects, while pointing tosome clear sources of concern (that will beelaborated below).3

The US Congress recognized the significance ofthe BRI’s five-year milestone by staging Senatehearings on the initiative – the first by the USlegislature on this significant foreign policychallenge to the US. Leading scholarsadvanced testimony at these hearings of theCongressional US-China Economic and SecurityReview Commission (staged on Jan 25 2018)providing a summary and analysis of theprogress achieved in the first five years of theinitiative.4 Most commentary on the Belt &Road Initiative recognizes the grandeur of thevision and the scale of its execution, but alsothe challenges it poses for other great powers,in particular the United States.5 But there isalso much critical commentary, mainly focusedon the issue as to whether countries engagingin BRI projects are entering “debt traps” or,even worse, whether they are settingthemselves up to become constituent parts ofan emerging Chinese empire.

One recent commentary from the Washington,DC-based Center for Global Development,identifies eight developing countries (allrelatively weak or marginal players, apart fromPakistan) that are said to be in particulardanger of falling into debt arrears – thesecountries being Djibouti, Kyrgistan, Laos, theMaldives, Mongolia, Montenegro, Tajikistanand Pakistan.6 The eight include smallcountries that have long wished for closerrelations with China, like Tajikistan and othersthat are buttressed by very large andsubstantial commitments on the part of China,such as Pakistan. The issues raised aresubstantial and call for some engagement. Thecase of Sri Lanka raises particular concerns,with its transfer to China of ownership of theHambantota port as Sri Lanka was unable to

meet debt repayments on the project.7 This andother projects deserve scrutiny.

This article provides an assessment of thedesign and implementation of the BRI,recognizing it as an important extension abroadof China’s development model, and viewing itas an important element of China’s soft powercomplement to its growing hard power militarydevelopment, before addressing the issue as towhether it represents a series of “debt traps”for the countries involved.8 I begin by seekingto understand the BRI from the perspective ofChinese planners– what is it aiming for, how isit going about achieving these aims, and whatexpertise and resources is it bringing to thetask? How does the Belt and Road Initiativebuild on, and affect, China’s own developmentstrategy, in particular the balance betweendebt-fuelled infrastructure development andstrategic industry development? This providesthe context for asking what are the risks beingrun by the countries that are signing up forinvolvement with the BRI – as well as the risksbeing run by China itself.

It is widely recognized that China has broughtabout a far-reaching urbanization andindustrialization on its own soil, in the 40 yearssince Deng Xiaoping ushered in the “reformand opening” period after 1978. In decade afterdecade of unprecedented growth, averagingclose to 10% per annum, China built cities andlaid down infrastructure at a scale never beforeattempted, or accomplished, by any developingcountry. China’s strategy of state-led growth,with the Chinese Communist Party firmly incontrol, and state-owned enterprises leadingthe way, initially at home and then increasinglyabroad, has established a new norm fordevelopment that is attracting great interestfrom other developing countries in South,Southeast and Central Asia, Africa, and LatinAmerica, many of whom had been strugglingunder the weight of the nostrums of the WorldBank and IMF and the “Wash ingtonConsensus”. Central to China’s performance

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has been its rapid build-up in export earningsand foreign exchange reserves, which haveenabled its policy banks like the ChinaDevelopment Bank (CDB) and Export-ImportBank (China Exim Bank) to provide Chinesefirms with long lines of credit as they ventureabroad. This has reinforced their position ininternational competition and most recently hasenabled Chinese firms to gain positions ofleadership in emerging sectors such aselectronics, renewable energy and electricvehicles, widely viewed as strategic industriesfor the future.

The BRI now proposes to achieve similarlyimpressive results outside China, exportingChina’s model of infrastructure- leddevelopment and providing Chinese-led financeas the driver. Funds are being channelled bythe 70-plus participating countries into suchprojects as building bridges, railways,pipelines, hydroelectric dams, highways, powergrids, with Chinese banks as well as newmultilateral development banks such as theChina-sponsored Asian InfrastructureInvestment Bank (AIIB) and the BRICS NewDevelopment Bank (NDB) providing themajority of funding.9 Here China is providingfinance via lines of credit created by thesefinancial institutions, in the same way that ithas financed its own domestic development.The difference this time, of course, is that theChinese State and Chinese Communist Partyare not able to control the process directly, aswas possible in the domestic setting.10 The NewYork Times characterized the BRI as a“modern-day version of the Marshall Plan,America’s reconstruction effort after WorldWar II” – except that China’s strategy is“bolder, more expensive and far riskier”.11

In this article I seek to characterize the modelof state-led development pursued by China asprelude to discussing its internationalization asthe New Silk Roads strategy, or “Belt and RoadInitiative”.12 How are we to characterize thisexpansion of China’s influence across its

neighboring countries and now extendingglobally, e.g. to Latin America and Africa?China’s expansion poses unique issues since itsrise is clearly backed by hegemonic ambitions,at least within its own region. In the case ofChina’s BRI there is the persuasive power offinance (provided by the Chinese policy bankslike CDB and China Exim Bank and the newmultilateral banks like AIIB or NDB) backed bynon-financial elements of Chinese diplomacy –such as student scholarships offered abroad, orthe efforts of the Confucius Institutes topromote Chinese culture.13

Finance of course can be very persuasive.Countries accepting Chinese largesse could bemaking well-informed decisions with a view tobuilding their infrastructure as basis forgrowing their output and exports – or theycould be lured into making short-sighted or ill-advised judgments that can end in some formof ‘debt bondage’ (or locked into projects thatmight have little relevance to the countryconcerned, and might be mere vanity projectsfor a country’s ruler). Countries with records ofpolitical unrest and terrorism might find Chinataking steps to secure its own companies’operations and personnel, in ways that mightseem to contradict China’s expressed principleof non-interference in others’ affairs. China’sinterests are generally well protected since theloans advanced are frequently tied tocontrac t ing wi th Ch inese f i rms forconstruction, and they frequently employChinese suppliers and labor. The BRI is apragmatic initiative and must be viewedthrough the lens of China’s own developmentalambitions; it is far from being merely acharitable exercise.

The name BRI

Like other commentators (e.g. Leverett and Wu2016) I will refer to China’s grand strategy thatis officially known as “Belt and Road Initiative”as its New Silk Roads strategy. Indeed, as

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announced by President Xi Jinping in 2013, theInitiative consists of two components, one theland-based Silk Road Economic Belt, and onethe sea-based 21st Century Maritime Silk Road.These became integrated as the “One Belt OneRoad” strategy and now, officially, as the “Beltand Road Initiative”.14 It makes abundant senseto call this what it really is – namely a New SilkRoads strategy, or initiative – with the provisothat its geographic scope now extends farbeyond what was historically called the “SilkRoad”.

This is the story that China is now telling theworld to boost its soft power. It is carefully andastutely crafted to take advantage of moves bythe US as the current hegemon. When the USannounced its “pivot to Asia” under the ObamaAdministration, this spelt intensified US focuson the Pacific – and so China’s BRI has turnedwestward, to Central Asia (where the US islargely absent), the Middle East (West Asia)and Africa.15 China has found ready acceptanceof its influence in the “-stan” countries, with itsprovision of financing and technical expertiseto support construction of pipelines, roads,railways and high-speed rail (HSR), dry portsand airports, hydroelectric dams, which bothimprove communications between China andthe region (and beyond, to Europe) and provideunparalleled opportunities for development forthe countries concerned. This is emerging asone of the central features of US-China “greatpower rivalry”.16

The infrastructure proposals under BRI

The land-based corridors bundled together asthe Silk Road Economic Belt cover a variety ofroutes. There is a “northern” route, going fromwestern China via Xinjiang province throughKazakhstan and Russia to western Europe; anda “southern” route again leading from Xinjiangthrough the Central Asian countries Kyrgistan,Uzbekistan and Turkmenistan, via Iran and

Turkey , in to southern Europe . Thecomplementary sea routes are called the 21st

Century Maritime Silk Road, expanding sea-based commerce between China and SoutheastAsia, South Asia (e.g. Sri Lanka and Pakistan)and Africa, in ways that diminish China’sreliance on the Malacca Strait betweenSingapore and Malaysia, and the moresoutherly Sunda Strait and Lombok Strait (Fig.1). A “Polar Silk Road” traversing the Arctic,was added in 2018.17 But enumerating all thecorridors is not all that significant since it is bynow clear that the scope of the project isglobal, with new projects in South America andAfrica being signed up in 2017/2018.18 Soalready the BRI has moved beyond a“westward” or “Go West” initiative toencompass global ambitions to assist countriesin securing financial assistance from China inbuilding local infrastructure (via trade andinvestment as well as traditional aid activities).

Figure 1. The Belt and Road Initiative –land corridors and sea lanes

Source: Wikimedia

There are in fact six economic corridors makingup the land-based Silk Road Economic Belt. Theland corridors include the New Eurasian landBridge, encompassing many new rai lconnections across Eurasia; the China-

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Mongolia-Russia corridor (a north-southconnection); the China Central Asia-West Asiacorridor; the China-Indochina PeninsulaCorridor; the Bangladesh-China-Myanmarcorridor; and the most ambitious of all, theChina-Pakistan Economic Corridor. The largestand most ambitious of these is the CPEC, whichpromises to make Pakistan a long-term partnerof China with clear benefits for Pakistan itselfin terms of its own industrialization anddevelopment, and for China in the form ofdevelopment that promises to stabilize thepolitical situation in Pakistan and ease itsfostering of radical Islamist terrorist initiatives.(Note how this counters the Soviet and laterRussian tilt towards India.) The CPECencompasses proposals that together amount toapproximately $62 billion in transport, powerand infrastructure projects. Notably the CPECalso counts a strategic port in the western tipof Pakistan, bordering on the Arabian Sea, atGwadar.

Gwadar and Hambantota

Two port developments in Pakistan and SriLanka illustrate some of the positives and clearnegatives in the BRI. Gwadar is a port at thewestern extremity of Pakistan, bordering on theArabian Sea and linked to Kunming insouthwest China by rail, road and pipelineprojects that are viewed as part of the ChinaPakistan Economic Corridor. The contract toexpand the port of Gwadar has been won by theChina Overseas Port Holding Company(COPHC). The whole project involves not justthe port but an associated Export ProcessingZone as well as road and rail projects and aninternational airport. It is thus a project towhich China attaches great significance, andwhich potentially holds great promise forPakistan. So far it has evaded “debt trap”implications, but these remain at the forefrontof international concern.

The Hambantota port has been open since2010, but facing debt distress the Sri Lankan

government made a debt-for equity swap,extending a 99-year lease to the Chinese state-owned company China Merchants Ports (CMP),for a price of $1.3 billion.19 After incurringheavy losses, a debt-for-equity swap wasproposed in 2016, granting the China state-owned port operator CMP, an 80% stake in thecompany, in return for guarantees that it wouldmake substantial investments to make the portprofitable (totalling $1.12 billion in a public-private investment structure, and divesting20% to a local Sri Lankan company within tenyears. In July 2017 a settlement was reachedleasing 70% of the port to CMP rather than theproposed 80% for a 99-year leasing period.20 Sothis is a case where a Sri Lankan governmentoverstretched itself and ended in debt arrearsto China – a situation that had to be remedied(in a fashion) by a subsequent Sri Lankangovernment through an arrangement with itsChinese counterpart.21 Of course India isdisturbed by these developments because it isembroiled in security disputes with bothPakistan and Sri Lanka. Gwadar is probablymore important from both China’s and India’sperspective because of the overland links itoffers (rail, road, pipelines) between the portand western regions of China.

Fig. 2. Chinese port projects as part ofthe BRI

Source: C4ADS report22

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The Hambantota port in Sri Lanka and theGwadar port in Pakistan, bordering on theArabian Sea, are clearly two of the “string ofpearls” that China has been sowing along the21st Century Maritime Silk Road. (See Fig. 2, achart taken from C4ADS report, May 2018.23)There are ample reasons for China to want tohave a measure of control over thesedevelopments. In the case of Gwadar the newport and the associated communication routesfrom southwestern China open up possibilitiesfor oil to be brought direct to China overland orvia pipeline. In complementary fashion, exportsfrom southwest China are to be shipped out viathis Indian Ocean port rather than from theeast coast of China and the extended sea lanesthat go to Europe, South America andAfrica.24 These are all attractive in geopoliticalterms. In this way the BRI initiative involvingGwadar can be seen to encompass China’sgeopolitical interests complementing thetransport and economic interests served by theport. China has accepted proposals from therelevant governments but refused to make theconditions of the loans public or to make thetendering processes transparent – which leadsto well justified suspicion that these processeshave something to hide.25

The international political economy ofChina’s rise

What light does International Relations theoryshed on the BRI and looming China-US powerrelations? The influential US internationalrelations theorist John Mearsheimer deploys hisframework of “offensive realism” to argue fromthe historical record that China is likely to beimitating in the 21st century what the US did inthe 20th century. The US rose to become aregional hegemon in the western hemisphere inthe 20th century and then forcibly kept otherstates from becoming hegemons themselves –

first Imperial Germany, then Nazi Germany,then Imperial Japan and then the Soviet Union.Mearsheimer argues that this is what the USactually did – despite its liberal rhetoric. Heargues that China has understandableaspirations to be a Great Power – and that thiswill lead it to seek to become a regionalhegemon in Asia, which will be its base fromwhich it will be able to roam the world, just asthe US roams the world today because it issecure in the wes tern hemisphere .Mearsheimer argues that China has been asmart player in seeking to reassure everyone –and in particular the US – that its rise ispeaceful (while if its reassurances on this pointhave less credibility, even under Obama, andcertainly under Trump).

Mearsheimer most recently argues (inconversation with Peter Navarro, a leadingChina hawk in the Trump administration26) thatthe Chinese understand full well whathappened to Imperial Germany, then whathappened to the Soviet Union – and they do notwant to end up committing national suicide. Sothe Chinese are thinking how best to maximizetheir power in smart and sophisticated ways.Mearsheimer’s argument is that, given the“tragedy of Great Power politics”, the Chineseare likely to pursue regional hegemony but doso in a smart way, without disturbing orantagonizing their neighbors or the US. Hesees China as being only moderately successfulin this (a bit too trigger-happy over islands inthe South China Sea, and perhaps provokingthe US into a tariff/trade war).27

The BRI – or more generally, the New Silk Road(NSR) strategy – is a smart and sophisticatedstrategy of this kind. It enhances China’seconomic power and brings a number ofcountries into China’s economic orbit, withoutdeliberately antagonizing or threatening the USin doing so. The hegemonic ambitions of boththe US and China (as recognized by realists likeMearsheimer) play out in a multi-facetedrelationship, which gives rise to open conflict at

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times (such as in the current trade war) but hasfurther implications such as in the negotiationsover North Korea, a Korean War peace treaty,and nuclear weapons control, and much elsebesides. Without involving the cumbersomemachinery of a treaty, or a new internationalorganization, the NSR strategy aligns dozens ofcountries with China in a common quest forimproved communications infrastructuredevelopment while seeking to leave USinterests nominally intact.

Joseph Nye also uses an alternative concept of“soft power” – which was developed to explainthe capacity of the US to maintain its globaldominance through aligning interests withallies and at the same time seeking to crushmilitary rivals. Now Nye uses the same conceptas a means of evaluating China’s strategy, andwhy it has been so far successful in moderatinginternational reaction to its rise. Nye tooargues that countries deploy both “hard” and“soft power” but that they increasingly do so ina smart way – what he calls “smart power”.28 Inthis context, China’s BRI is an interesting caseof a country seeking to enhance its “smartpower” – but meeting determined resistancefrom the incumbent – in this case the US withTrump’s trade war initiatives.29

The security dilemma – and how China ismoderating it

The field of international relations certainly hasits share of sweeping theories – like “offensiverealism” and “soft power”. But a nuancedapproach is also perfectly feasible to moderatethe sweeping claims of structural realism – asin the case of the theory of the “securitydilemma”. This theory holds that structuralrealism explains much of the endless search forsecurity on the part of nation states – but it isfocused on the case where “one state’s effortsto increase its own security reduces thesecurity of others” (as elaborated in ForeignAffairs by Charles Glaser).30 If states in ananarchic international system face a strong

security dilemma, then actions taken toenhance their own security could and probablywill be viewed as hostile acts by other states.

But if the security dilemma can be moderated,then states face less chance of their security-enhancing actions being misinterpreted byother states. This is, I suggest, the case ofChina’s Silk Roads initiatives. This initiative isone of creating a community of states that havecommon interests in the bui ld ing ofinfrastructure with China’s financial assistance– perhaps the central feature of the Belt andRoad Initiative. Provided China does not mis-manage the consequences of states falling intodebt arrears, the multiple projects promisebenefits for China as well as decidedly for thecountries concerned. If China were todemonstrate creditor restraint, and notthreaten to acquire assets where repaymentshave fallen into arrears, there would be littleprovocation of other states or a fear of neo-imperial aggrandizement. But if on the otherhand China views indebtedness as a “debt trap”leading at the first opportunity to a conversionof debt to equity, with assets passing into thehands of Chinese state-owned enterprises, thenother states would be justifiably alarmed atChina’s aggrandizing intentions, and the speedat which the transition is taking place. Itremains to be seen how China will handle theseissues.

The international relations and internationalpolitical economy lens is focused on greatpower relations, but to really comprehend themagnitude of the New Silk Roads strategy wehave to bring the funding mechanisms intoclear focus, and in particular the role played bydebt, or the credit supplied by China’s policybanks.31

Debt -- and the New Silk Roads strategy

What are the credit arrangements provided byChina to neighboring countries as part of the

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BRI, and what is the record so far with thedebts created? There have been some high-profile cases of assets involving repaymentarrears where debt has been converted toequity. The cases of Pakistan, with the Gwadarport, and Sri Lanka with the Hambantota port,are signal instances. This is the downside.

But there have also been cases where Chinahas demonstrated restraint. According to arecent report from Nomura, China extendeddebt relief to 28 out of 31 of the most heavilyindebted countries in the world – and totallycancelled the debts owing in the cases ofAfghanistan, Guinea and Burundi.32 Chinacontinues to handle these incidents on a case-by-case basis – but the flexibility and toleranceshown in many cases is surely important. Anhistorical example is relevant. China’sapproach is conducted in more or less the sameway that Rome used to handle cases over 2000years ago, refusing to generalize solutionsfound in one case to others. Scholars haveargued that this pragmatic approach was oneof the factors involved in the seeminglyunstoppable rise of Rome. This latitude offlexibility of course favors China with its largetrade surplus – and China continues to go itsown way in terms and conditions imposed aspart of its lending activities. (Efforts to bring itinto line with groups of creditor countriesrecognizing common rules and procedures,such as the Paris Club of creditor countries,have so far been unavailing.)33

Senior Chinese officials in finance haveexpressed concerns regarding this somewhatloose approach being taken by Chinesefinancial institutions (i.e. not being toughenough with creditors). The former governor ofthe People’s Bank of China (PBoC), the centralbank, has framed the discussion in terms of thescale of the anticipated lending. He seesinvestment demand in the Asia Pacific regionas totalling around US$500 billion each year –with government-backed funding being able tocover $200 billion, leaving $300 billion for the

private sector to cover. In the case of the BRIthe investment gap would be more like $600billion per year. So far Chinese banks haveinvested $200 billion in loans to 2600 BRIprojects.34 New institutions like the AsianInfrastructure Investment Bank (AIIB) and theBRICS bank, the New Development Bank, alongwith entities like the Silk Road Fund, are allpouring funds into BRI projects – withimplications that remain to be analyzed.35

Prominent critiques like that mounted by theCenter for Global Development (Hurley et al.2017) turn on somewhat arbitrary criteria fordefining a “debt trap”. The CGD reportidentifies 23 countries involved in BRI projectswhich appear to be at risk of debt distress; itthen constructs a lending pipeline for eachproject; and on the basis of this chooses eightcountries as being vulnerable to debt arrearsproblems. But the theory behind thismethodology is based on analyses of countriesthat have gone into default, or IMF analyses ofsovereign debt risk – not on analyses of China’sown development experience involving thepower of debt. So it is only sensible to examineChina ’s exper ience o f debt - fue l ledinfrastructure development as prelude toexamining the methodology of the BRI.

Theory underpinning BRI: China’s evolvingdevelopment strategy

Before discussing the significance of the debtprovisions of the various projects bundledtogether as the Belt & Road Initiative, we mustexamine the state-led development model thatChina has pursued, and the role played bypolicy development banks in the process suchas the China Development Bank (CDB). Chinahas risen to prominence in the wake of theprior success of other East Asian countries,starting with Japan in the 1960s and 1970s,followed by that of South Korea, Taiwan, HongKong and Singapore in the 1970s and 1980s(the East Asian Tigers). Debate over the source

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of their success has been sharp, culminating inthe contested conclusions of the World Bankstudy published in 1997 as “The East AsianMiracle”.36 Of course the key to these EastAsian successes was the role played by thestate – in this case, following the terminologicalinnovation of Chalmers Johnson, the“developmental state”. But China is no mereextrapolation of the developmental states andtheir strategies pioneered by Japan, Korea,Hong Kong and Taiwan.37

For a start China is a very large country, andits central state has relations mainly withprovincial governments and not directly withChina’s businesses or cit izens (whileacknowledging that China’s state banks providesuch a link and dominate lending to business).If anything, China may be conceptualized ash a v i n g a c o o r d i n a t e d p o r t f o l i o o f“developmental states” operating at theprovincial level, many of which are comparablein size and scale to the national developmentalstates that emerged in East Asia (specifically,Korea, Taiwan, Singapore et al). SecondlyChina has a very large domestic market whichit has been able to use to great effect inattracting foreign direct investment and insome cases imposing the requirement oftechnology transfer, particularly via jointventures, in a way that was not feasible for theearlier and developmental states of EastAsia.38 Thirdly China has not been content topursue simply the goal of “catch-up” as waspractised initially by the earlier East Asiandevelopmental states, but it has explicitlystated its goal of leapfrogging to thetechnological lead, particularly in areas judgedto be strategic industries of the future such asrobot ics , art i f ic ia l inte l l igence andpharmaceuticals (known as Industry 4.0 afterthe nomenclature favoured by the WorldEconomic Forum) and green industries such asrenewable energy, batteries and electricvehicles.

Recent analysis of China’s evolution from

“imitation” to “innovation” by China specialistsindicates that China is moving towards higherproductivity and higher levels of innovation – asmeasured for example by patent filings.39 Thereseems little likelihood that China will find itselfthwarted by the so-called “Middle-IncomeTrap” where a rising country finds itself unableto break into higher levels of productivity andinnovation. But the aspect of development thatdoes not appear to be given sufficient emphasisin these analyses is the question of debt.

The role played by debt in China’s developmentstrategy looms larger than in earlier East Asiandevelopmental states. This is closely linked tothe fact that China’s modernization andindustrialization have been strongly associatedwith urbanization, to an extent that dwarfs thechallenges faced by earlier industrializers.Debt-fuelled and state-driven urbanization hasbeen the signature of China’s development – asnow transferred across to an international andglobal setting in the form of the New SilkRoads strategy.40 Urbanization in China hasinvolved a central focus on the building ofinfrastructure – at a scale and pace that makesChina an outlier amongst developing countries,even granting that infrastructure building wasan important component of developmentstrategy in East Asian countries like Korea andTaiwan. China is now one of the world leadersin the building of new cities and the rail androad transportation projects that link them.

China’s debt-driven infrastructure developmentof recent decades finds its theoreticalcounterpart in the theory of growth in urbanland values that can be captured by publicauthorities for investment in infrastructure.This process, dr iven by state-owneddevelopment banks like the China DevelopmentBank, seems to be one important engine ofChina’s debt-driven domestic infrastructuredevelopment. The scholarly consensus inChina’s case is that this pattern of developmenthas been pursued as a high priority, withemphasis on the role played by local and

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provincial governments in driving their ownlocal growth metrics. The scholarly literaturehas focused on the impact of local debt build-upand its potential long-term consequences.41

While China has fashioned this combination inits own domestic setting, the BRI represents acolossal project to apply the same theory in aninternational setting, where it is not theChinese state driving the process in its owndomestic setting but China financing a processthat spans multiple national jurisdictions.Never has an international project beenattempted before at such scale. The risks areenormous – as are the potential rewards bothfor China’s status as an international leaderand the development fillip the projects promiseto give the participating industrializingcountries.

In China urban developments have been basedon the creation of local government financingvehicles (LGFVs) which capture improvedvalues in land acquired at agricultural rates.Development banks like the China DevelopmentBank have led this process, setting up theLGFVs which acquire land at agriculturalprices in their local government area and thensell it to developers, utilizing the profits tofinance infrastructure building.42 This isbasically how China has been able to urbanizeand industrialize at such a rapid rate over thepast several decades. It was the CDB under itsgovernor Chen Yuan that developed the theoryand practice underpinning this process – withits dual emphasis on privatization of publicassets and debt-driven development.43

A central theoretical strand that underpins theBRI is this idea of debt-driven development – aprocess of universal significance andrecognition in both public and private sectors.It is widely recognized in business that anunderperforming asset can be transformed intoa high-performing asset and source of profit bymaking a capital investment that improves theasset, financed by debt. From the perspective

of the lender, the collateral for the loan is thefuture profits to be achieved by the activitiesthat make use of the improved asset. From theperspective of the borrower, the asset is turnedinto a source of profit by the investment that isfinanced by the debt. The debt fuels growth,which generates profits. This is how smartbusinesses view the process of growth andinvestment, and why smart businesses alwayscarry some debt on their balance sheets.

In the case of the CDB and Chinese industrialdevelopment, it has been the CDB and itscapacity to provide long credit lines that hashelped to turn Chinese firms like Huawei andZTE into internat iona l champions –complementing their clear strategies of shiftingrapidly to innovat ion and capabi l i tyenhancement. Huawei was able to move intointernational competition in the 21st centurybacked by a line of credit from the CDB of $30billion, while ZTE was likewise backed by a lineof credit of $15 billion. The CDB was able tocreate these impressive lines of credit byissuing bonds on the China and internationalmarkets, backed by its state-owned status thatmeant that the bonds carried low risk becauseof their quasi sovereign security status.44

Development banks are policy banks, usuallystate-owned, that direct their activities towardsachieving pol icy goals of growth anddevelopment. There are national DBs, some ofwhich grow to be very large like the ChinaDevelopment Bank (CDB) and the BrazilianDevelopment Bank (BNDeS); and there aremultilateral development banks, led byinstitutions like the World Bank, the EuropeanInvestment Bank (EIB), the Asian DevelopmentBank (ADB) and the new banks created byChina and others to accompany andcomplement the Belt and Road Initiative,namely the BRICS-based New DevelopmentBank (NDB) and the Asian InfrastructureInvestment Bank (AIIB). All these institutionsare able to mobilize finance for infrastructuredevelopment.45

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So, China and its leading policy banks like theCDB and China Exim Bank have longexperience of utilizing debt as the fuel thatdrives growth and future profits. It would beperverse to view a smart company formulatinga business strategy to invade a new businesssegment, where the invasion is to be financedby debt, with the intent of repaying the loan interms of capital and interest through the profitsthereby earned, as entering a “debt trap”. Such“debt traps” abound in capitalism for the verygood reason that this is how entrepreneurialfirms can challenge incumbent firms to createnew surges of business development.Schumpeter explained how such debt placesthese entrepreneurial firms on a ”level playingfield” with large, established firms, allowingthe smaller firms to creatively destroy theolder, established firms and make way for thenew.46

Now in the case of the BRI, all this experienceby China and the CDB in a domestic setting, orin the international setting where the CDB ispromoting and assisting Chinese firms in ‘goingout’ into international competition, is being putto use in a completely new foreign setting. Inplace of the Chinese state managing theprocess in its own domestic arena, it is Chinaand its lending institutions seeking to influencethe behavior of 60-plus foreign governmentsand guiding the process of developmentthrough arms-length financing, again eitherthrough the CDB or through new multilateraldevelopment banks like the AIIB or the newBRICs deve lopment bank , the NewDevelopment Bank (NDB), launched in July2014 with initial capital of $100 billion.47

In the case of the BRI China is entrustinginvestment funds to projects that are under theultimate control of national governments thathave their own agendas as well as seeking towork on positive terms with China. Chinesefinancing executed through the CDB and ChinaExim Bank will of course carry provisos like therequirement that Chinese firms be involved in

carrying out a certain proportion of contractualworks, such as engineering for high-speed railprojects or the building of bridges, or pipelinesor hydroelectric dams. In his new study High-Speed Empire, journalist Will Doig provides onthe ground reportage from Southeast Asia onhow this process of mutual advantage unfolds,in the context of the long-discussed Pan-AsiaRailway – where decisions do not always goChina’s way, as in the recent roll-back ofChinese loans taken by the new Malaysiangovernment and the more cautious approachbeing taken to Chinese loans by the Myanmargovernment.48

The link with industrial strategy: The BRIas an outlet for China’s excess capacity

There are many strategic goals that can beviewed as being fulfilled by the BRI. One aspectof the BRI that has attracted internationalcomment is the potential for China to extendand elaborate on strategic industrial goals bylinking them to the BRI. Take the case whereoverseas projects may be viewed as providingan outlet for excess capacity being experiencedin China’s domestic market. During China’sown industrialization (from the period of US-China opening in the 1970s), it was thebeneficiary of export of industrial capacity fromadvanced countries like Germany or Japan,which saw it in their interest to offloadfactories and manufacturing equipment thathad become surplus to requirements. Now theChinese can see the potential for behaving inthe same way where the recipients of its excessmanufacturing capacity could be in SoutheastAsia or Central Asia, via projects brought underthe umbrella of the BRI (and involving theexport not just, e.g. of steel, but of steelmills).49

China’s State Council, for example, hasidentified the BRI as a means through whichthe domestic steel industry may “export”excess capacity, while enhancing its

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international competitiveness. One meansthrough which this economic strategic goalmay be accomplished is through the supply ofsteel for new railroads to be constructed underthe BRI.50 In line with the State Council’sdirective, the Ministry of Industry andInformation Technology has identified 20,000km of new railroads to be constructed underthe BRI, potentially creating export demand for85 million tons of Chinese produced steel. Atthe same time, the MIIT views BRI as a meansof diversifying exports to countries likeVietnam, Turkey, Iran and Saudi Arabia.China’s Premier Li Keqiang is on the record asstating that a main objective of the governmentis to reduce industrial over-capacity throughpromotion of the BRI.51

The export of surplus capacity is one aspect ofChina’s industrial strategy where the BRI canbe viewed as providing complementary projectsat an international level, consistent with thegoal to globalize China’s industries. Moreambitiously, BRI projects can be viewed asproviding opportunities for the export ofChinese technology, know-how, and standards.High-speed rail projects are the exemplarycases of such a strategy, where China haspoured huge efforts into securing technologyfrom the EU and Japan and is now biddinghard, via the BRI, for HSR projects such as theDjakarta to Bandung railway in Indonesia.China fought hard against Japan to win thiscontract from the Indonesian government, andwhile it is likely to lose money on the deal, it isviewed in Beijing as an opportunity to extendChinese technology and standards into theinternational domain and win good will, via theBRI. It is not without merit to describe China’sBRI strategy as one involving the quest tocapture not just overseas markets, but overseassupply chains themselves.52

Monetary dimensions of BRI: One Belt,One Road, One Trade Area, One Currency

An important Chinese aim for the BRI as wellas the associated financial institutions, theBRICS New Development Bank (NDB) and theAsia Infrastructure Investment Bank (AIIB), isto promote the use of the Chinese currency(yuan, or RMB) as a vehicle of trade. It has longb e e n a s t r a t e g i c g o a l o f C h i n a t ointernationalize the yuan, but the tradingvolumes have worked against this in the past,as well as the limited convertibility of the RMB.Now with the BRI the condi t ions forinternationalization are more favorable. Thecountries aligned with China through the BRIform a significant monetary bloc, and manyalready accept the yuan as payment forcommodities supplied to China, and as meansof payment for goods supplied from China.52 InPakistan with its large China PakistanEconomic Corridor the yuan is already thedominant currency held by the central bank inits reserves. At the end of June 2018, thecumulative total of China’s commodity tradewith countries aligned with the BRI reached theequivalent of US$5 trillion – with the yuanbeing the primary vehicle for this enormoustrade volume.

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According to the HSBC, the BRIis likely to add an extra $2.5 trillion in newtrade internationally each year.

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A significant boost to the internationalization ofthe yuan has been its use in trade in oil, withcountries like Russia, Iran (China’s two mostimportant oil suppliers) and Venezuela alreadyaccepting the yuan in payment for oildeliveries, and China making the yuan moreattractive by ensuring that it is fully convertibleinto gold on the Shanghai and Hong Kongmarkets. There is wide speculation that SaudiArabia will be induced to follow suit, ensuringthat a significant proportion of global trade inoil is conducted not in the US dollar but inChinese yuan. These moves are complementedby China’s issuing a futures contract for oil onthe Shanghai International Energy Exchange,which has been trading in significant volumessince its launch on March 26, 2018. In theirfirst four months of trading these futures

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contracts (by the end of July) had reached acumulative total of 3.67 tri l l ion yuan(equivalent of US$538 billion) in transactionvalue. It is widely anticipated that this futurescontract will provide a yuan-denominated crudeoil benchmark that rivals the Brent and WestTexas Intermediate (WTI) current benchmarksthat are traded principally in London and NewYork.56

BRI trade and investment conducted in yuanpromises to promote Chinese soft power whileserving as a means for countries to evade USsanctions. Both Russia and Iran are selling oilto China and accepting payment in yuan, as aresponse to sanctions imposed on thesecountries by the US. China also views theemergence of yuan-denominated oil contractsas a means for Chinese companies to buy oiland gas in their own currency, thereby avoidingexposure to foreign currency fluctuations.Given that China is now the world’s largest oilimporter, these initiatives frame the emergenceof a multipolar world with a significant roleplayed by a yuan currency area.

More generally, China is looking to utilize theBRI as a means of promoting trade betweenitself and countries that sign up for BRIprojects – thus enhancing trade within a newlyemerged yuan currency area. The World Bankhas been monitoring these trade-relatedaspects of the BRI, and reports that tradelinkages between BRI countries haveproliferated, while production networkscentered on China have also intensified sincethe BRI was initiated.57 These are benigninfluences – and they carry implications forwider industrial development and for theinternationalization of China’s currency, theyuan. Perhaps it is overstating the case toassert that the BRI, in creating a dominanttrade area, is likely to set the future rules ofinternational trade and competition – as donerecently by the CEO of Siemens, Joe Kaeser –but one can see the point that the BRI is somuch more than just a series of infrastructure

projects.58

Is the BRI promoting green or blackdevelopment?

While the BRI is couched in general trade andinvestment terms, in practice much rests onwhether its investments promote green orblack (fossil fuelled) industrial development ona global scale. The World Resources Institutelooked at this issue in a recent report, findingthat the Chinese government “has taken initialsteps to incorporate environmentallysustainable, or green, strategies and objectivesinto BRI – but in very high-level and conceptualterms.”59 Against this, the WRI report citesresults from the Global Development PolicyCenter that claim that most Chinese deals inenergy and transportation over the period 2014to 2017 were tied to carbon-intensivesectors.60 These findings can be traced to theresearch efforts of the China’s Global EnergyFinance (CGEF) database housed at BostonUniversity (see website) which is based onanalysis of lending abroad in BRI countries bythe China Development Bank (CDB) and ChinaExport/Import Bank (China Exim Bank). Thenegative conclusions reported by theWRI/GDPC researchers are at variance with theanalysis provided by myself and Carol XinHuang, using the same database, as reported inthis journal. Our conclusion: “There is no doubtabout the reality of China’s green shift inelectric power generation in the domesticarena. What we are demonstrating in thisarticle, using data from the BU CGEF, is that acomparable green shift is occurring in China’senergy investments globally, if not to the samedegree as is found in China itself.”61

So the jury is out as to whether China’s loansthrough CDB and China Exim Bank around theworld, and specifically to BRI countries, arepromoting green over black investments.Resolution awaits further data being provided

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by China’s institutions and BRI recipientcountries. In the meantime, much can begleaned by examining the policy statements oflending institutions such as the AsianInfrastructure Investment Bank (AIIB), theBRICS New Development Bank (NDB) and theSilk Road Fund – all of which have strongcommitments to funding green infrastructurearound the world. And there are policyprescriptions like the Green InvestmentPrinciples, or guidelines on making Belt andRoad construction greener, issued by Beijingand London in December 2018.62 MeanwhileChina is now second only to the US in issuinggreen bonds, as vehicles for attractinginvestment in green projects around the world;China’s issuances in the first half of 2018topped $10 billion, while those from USinstitutions came to $18 bn. China’s green bondissuances, which cumulatively reached $60billion by 2018, provide finance for greeninvestments around the world, including in BRIprojects, involving Chinese companies.63 Whilethere are still some discrepancies between thestandards governing Chinese green bondissuances and those from European, Americanor Japanese sources, there is convergence inprojects considered to fall within green bondfinancing guidelines.64 These then are thefinancial drivers of a greening of the Belt andRoad Initiative.

Risks and downside factors in the BRI

Given its scale and its involvement of multiplesovereign state players, the BRI is clearlyhostage to international developments thatcould be quite beyond China’s control. Butthere are factors that multiply the risks thatChina is running and which could be addressedin a timely fashion – if the Chinese leadershipchose to do so. The obvious points of weaknessconcern the lack of transparency or generalrules in the granting of credit and the terms onwhich countries are allowed to borrow from

Chinese or Chinese-influenced banks andmultilateral institutions. To date the lendingcriteria seem to be governed more bywillingness to borrow than by informed analysisof ability to repay from the profits generated bythe project being financed – as would be thecase with World Bank loans, for example. Themultilateral banks like the AIIB are taking stepsto raise their transparency and the publicizingof terms on which loans are granted.

The same cannot be said for the practices ofthe CDB or China Exim Bank, which are underdirect Chinese state control. One canunderstand that China is seeking to promotethe BRI as a major foreign policy initiative, andin doing so is liable to grant loans to countriesor governments on sometimes flimsy evidenceof credit-worthiness. This generatesopportunities for secrecy and corruption thatare clearly evident in cases like Sri Lanka andMalaysia (where the borrowing activities of theprevious government have been reversed bythe incoming Mahathir-led government), orwhere there is mounting evidence that poorlyconceived programs are leading to financialproblems in host countries – as in cases likeKenya, Pakistan and Sri Lanka. Such negativeoutcomes may reflect the willingness of theChinese to accommodate the preferences ofhost country governments. If the hosts focus onprojects and programs that promote theircountries’ national interests, the Chinese willcooperate, to the mutual benefit of bothparties. But if the hosts’ main interests are tosecure personal benefits for a few leaders – asapparently in the cases of Sri Lanka andMalaysia – then the Chinese are also happy tooblige. So the results are a mixed set ofoutcomes – from projects that are of clearbenefit to the host country to vanity projectsthat are of benefit only to a particular leaderand his/her family.65 The indirect critiques ofbodies like the IMF concerning the BRI areclearly directed at seeking to bring the variouspro jects under some common set o ftransparency guidelines and lending rules that

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would minimize the prospects for negativeoutcomes – even if there is as yet little evidenceof moves in this direction.

Meanwhile China is discovering the securityimplications of many of its BRI-relatedinvestments, as unrest is provoked orexacerbated in areas of geopolitical tension.China’s BRI-related investments in Pakistanhave involved opening up mineral deposits inBaluchistan, provoking several terrorist attacksclaimed by the Baluchi Liberation Army. Thishas prompted China to form a Marine Corps,modelled on the US Marines, as a first line ofdefence to protect BRI projects.6 6 Thepossibilities for such security concerns to spillover into militarization of the BRI region areclear and ominous.

Concluding remarks

It is difficult not to be impressed by the sheerscale and bravado of China’s New Silk Roadsstrategy. At a time when the US is lookinginwards, and adopting profoundly protectioniststances, China is looking outwards andglobally, offering a strong defence of economicopenness and assisting developing countrieswith f inancia l support for their owninfrastructure building projects. For sevendecades since its victory in World War II theinternational initiative lay overwhelmingly withthe US, and to some extent the EU, in terms ofthe governance of the world economy.Suddenly China is there and precisely at amoment when the US is looking inward andemphasizing short-term goals. The Belt & RoadInitiative can be justified for China as part of animmense “soft power” push, but no lesssignificantly as a means of extending China’spower and reach internationally, to protect thesea lanes carrying its commercial produce,both imports (particularly oil) and exports of itsmanufactured goods. At the same time the newstrategy represents an enormous developmentboost for dozens of countries that have been

held back previously by the heavy demands ofthe IMF and World Bank.

From the perspective of China, the BRI strategyinvolves the use of debt as the fuel ofindustrialization and development, viainfrastructure development, with a powerfulrole to be played by state-owned developmentbanks like the CDB and Exim Bank and newmultilateral banks like the AIIB and NDB –albeit in ways where transparency and generalrules could be greatly strengthened. Chinaitself has utilized this strategy of debt-fuelleddevelopment (without ever defaulting) andurbanization, with a prominent role played bythe CDB – and is now extending this experiencebeyond its borders to the Eurasian continentand beyond to Africa and Latin America. Thegoals of the BRI need to be evaluated from sucha perspective, as extending China’s owndevelopment strategies to a swathe of countriesbeing brought within China’s influence bybecoming involved in the infrastructureprojects created by the BRI. As The Economistputs it, this is nothing less than “a vastlya m b i t i o u s p l a n t o c o n n e c t t h eworld.”67 Likewise it is hard to disagree withthe New York Times’ assessment that the BRIconstitutes a modern-day version of theMarshall Plan which refloated Europe in theaftermath of World War II.68

In such a vast and ambitious project there arebound to be mis-steps and falters along the way– not least the environmental costs of suchmega-projects. Some countries will doubtlessget themselves into too much debt and will beappealing to China to bail them out. China hasso far displayed a willingness to do so, but onstrict terms and without a sense of sendingcountries to “debtors’ prison”. On the otherhand, countries would be well advised to viewChina’s generosity as something not to betaken advantage of, for enforced debt-for-equity swaps can and will lead to cases oftransfer of sovereignty over key assets – asexperienced by Sri Lanka with the port of

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Hambantota. But to see China’s strategy assimply seeking to ensnare countries in “debttraps” is to misread its ambitions, tomisdiagnose its methods, and to ignore theoutcome in the vast majority of cases.

So far the US has attempted to curb China’sstrategic ambitions with a clumsy trade warinvolving escalating tariffs imposed on Chineseimports – while leaving itself vulnerable tocounter-tariffs imposed by China on USagricultural exports, and (no doubt soonenough) on high tech exports from SiliconValley. Meanwhile China’s global ambitions forits New Silk Roads strategy, involving debt-fuelled infrastructure investment around theglobe, drawing countries firmly into its sphereof influence, goes largely unanswered. Until theUS and allies in Japan and the EU can find away to respond to China’s BRI, to providea l ternat ive funding for a l ternat iveinfrastructure projects at the scale envisagedby China, the game will be lost.69 The New SilkRoads strategy is China’s ‘grand strategy’ forthe 21st century, and it is not to be under-estimated.

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John A. Mathews is Emeritus Professor of Management at MQ University Sydney, in the Facultyof Business and Economics. and formerly Eni Chair of Competitive Dynamics and Global Strategyat LUISS Guido Carli University in Rome. His research focuses on the competitive dynamicsof international business, the evolution of technologies and their strategic management, andthe rise of new high technology industries. His work has centered in recent years on theemergence of the ‘green economy’ and the transition to renewable energies, and theinstitutional changes needed to provide industrial capitalism with long-term sustainability. Heis the author of Strategizing, Disequilibrium, and Profit, Global Green Shift: When CeresMeets Gaia published by Anthem Press and Greening of Capitalism: How Asia is Driving theNext Great Transformation published by Stanford University Press.

Notes1 Many organizations now monitor the evolving Belt and Road Initiative. The World Bank forexample maintains a website here. The Mercator Institute for China Studies (MERICS)webpage provides a “BRI Tracker”. Business Insider puts the number of countries involved asof 2018 at 71, accounting for 33% of world GDP (and hence for approx. $26.7 trillion ineconomic activity). A full list of the countries involved can be found at the website of the HongKong Trade Development Council.2 See ‘China taps the brakes on its global push for influence’ by Keith Bradsher, New YorkTimes, June 29, 2018; and ‘China’s Belt and Road difficulties are proliferating across theworld’ by James Kynge, Financial Times, July 11, 2018, The latter article drew a sharpresponse from China’s Ministry of Foreign Affairs – see ‘Belt and Road financing criticism

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draws strong Chinese response’, GBTimes, July 18, 20183 See “Gateway to the globe: China has a vastly ambitious plan to connect the world. Briefingon China’s Belt and Road Initiative”, The Economist, July 28 2018, pp. 13-164 See hearings transcript and video5 See the written contributions from scholars testifying at the US Congressional hearings, inparticular Nadege Rolland, Joel Wuthnow, Joshua Eisenman and Jonathan Hillman. For theirscholarly contributions, see Rolland (2017a; 2017b), Wuthnow (2017), Eisenman and Stewart(2017), Hillman (2018a).6 See the report from the Center for Global Development by Hurley, Morris and Portelance(2018).7 See recent commentary on Sri Lanka, e.g. in South China Morning Post and in Bloomberg.8 In this article I treat the BRI as a series of financial and investment initiatives, separate fromand perhaps complementing strategic security and military initiatives like the creation of aChinese military base in Djibouti and the series of aggressive initiatives in the South ChinaSea. These all feature as aspects of China’s emerging bid for hegemonic status, which haveintensified in the recent period of Xi Jinping’s presidency – but the financial and investmentaspects as captured in the BRI deserve analysis in their own right.9 Some of the countries involved include the ‘stans of Central Asia, Russia, Afghanistan, SouthAsia – Sri Lanka, Pakistan and Bangladesh (but not India), Southeast Asia (includingSingapore, Malaysia, Thailand, Cambodia, Myanmar et al) and now countries in Africa as wellas Latin America.10 China has been careful to promote these new multilateral banks as complementary toexisting west-backed institutions like the World Bank and the Japan-based Asian InvestmentBank, rather than as direct competitors.11 See ‘The world, built by China’, by Derek Watkins, K.K. Rebecca Lai and Keith Bradsher,New York Times, Nov 18 2018.12 The Hong Kong Trade Development Council (HKTDC) maintains a web-based scrutiny ofdevelopments with the Belt & Road Initiative. For profiles of BRI projects, see HKTDC. Forinformed commentary, see expositions from such research bodies as the Lowy Institute, e.g.Cai (2017), and the Center for Strategic and International Studies (CSIS), e.g. Hillman(2018b).13 As noted above, this article focuses on the financial and investment initiatives being takenby China as captured in the BRI, without examining the initiatives being taken in the militaryand security spheres. The sheer scale of the BRI calls for analysis of its initiatives in their ownright.14 The name “Belt and Road Initiative” has itself followed an interesting evolution. Five yearsago, at the launch by President Xi Jinping, the terms used were “Silk Road Economic Belt”(encompassing six “corridors” such as the China-Pakistan Economic Corridor CPEC) and the“21st Century Maritime Silk Road” – both conjuring up major infrastructure projects linkingEurasian cities by road, rail, air and sea and involving new ports, airports, pipelines, high-speed rail, new freight services, electric power grid interconnections and so on. It then cameto be known as “One Belt One Road” (OBOR) and finally, in an official publication of theNational Development and Reform Commission (ND&RC) issued in March 2015, as the “Beltand Road Initiative” (BRI) – with the ND&RC specifying that English translations of the

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Chinese term “Yidai Yilu” (with its melodic tones) should not include “strategy” or “vision’ butinsists that it should be viewed as a “process” or an “Initiative” (See the Chinese website)15 It is probably worth noting that while the US “pivot to Asia” was never really followedthrough with investment and financial commitments, the Chinese initiatives certainly did.16 The US-China rivalry, as evidenced in many of the projects associated with the belt andRoad Initiative, is covered by recent articles in the New York Times, such as James Millward,‘Is China a colonial power?’, New York Times, May 4 2018; or David Barboza, Marc Santoraand Alexandra Stevenson, ‘China seeks influence in Europe, one business deal at a time’, NewYork Times, August 12 2918.17 The “Polar Silk Road” encompassing Arctic sea routes past the melting Arctic ice cap, wasannounced at the 2018 meeting of the World Economic Forum, at Davos. See ‘At Davos, thereal star may have been China, not Trump’ by Keith Bradsher, New York Times, Jan 28 2018.18 China issued an invitation to Latin American countries to join the BRI, in January 2018 – viaa speech from Foreign Minister Wang Yi in Santiago, Chile. See ‘China invites Latin Americato join One belt, One Road’, Reuters, Jan 23 2018.19 See report in South China Morning Post.20 A useful summary is provided by Wikipedia.21 It is worth noting that China is the largest trade partner of both Pakistan and Sri Lanka.22 Note that this map from C4ADS omits the Chinese territorial claims in the South China Sea,which are a source of so much geopolitical conflict in the current period.23 See the report by Devin Thorne and Ben Spivack, Harbored Ambitions: How China’s PortInvestments are Reshaping the Indo-Pacific, 17 April 2018, C4ADS.24 This aspect of the BRI can be linked to the Go West strategy … diversifying industryincluding electronics from the East coast (Guangdong, Shanghai) to western regions such asSichuan, or Chongqing.25 Of course the Gwadar port proposals have received a setback with Pakistan having to seeka bailout from the IMF in talks that have been underway since October 2018, and likely tocontinue into 2019. Pakistan has been looking to both China and Saudi Arabia as alternativesources of bailout, but it seems that the IMF is going to have to provide funding after all. See‘IMF warns Pakistan of risks of working with China’, by Xie Yu, South China Morning Post, 9Oct 2018.26 See the interview with John Mearsheimer by Peter Navarro.27 See Mearsheimer (2014). The current US-China trade war is a vindication of his position.For the celebrated debate between Mearsheimer and Brzezinski on offensive realism, seeSpence et al (2005).28 See Nye 2004 and then 2009; 201729 See Yağcı 2018 for discussion on this point. It is worth noting that while the US wasfighting multiple wars, China for the most part remained at peace, though it provided militarysupport in Korea, Vietnam, and went to war with Vietnam and others. Now, however, it isexercising greater geopolitical leverage of which the disputed claims (and China’s arrogance)in the South China Sea are most notable.30 See Glaser (2011) for an application of “security dilemma” reasoning to the case of China;for an extended discussion in the abstract, prior to the clear rise of China, see Glaser (1997).31 Some scholars and analysts refer to this aspect of China’s strategy as “economic diplomacy”

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in the sense that it represents an economic aspect of diplomatic activity and a framing ofdiplomatic initiatives around economic goals. For such a discussion relevant to the Belt andRoad Initiative, see Heath (2016).32 See the Nomura report ‘The Belt and Road Initiative: Globalization, Chinese style’, April2018.33 The Paris Club of creditor countries goes back to the debt crisis engulfing developingcountries in the 1980s; it turned on efforts by creditor countries like the US and EU membersto provide debt relief without undermining the IMF and its conditionality requirements. Ananalysis at the time is provided by Riefel in 1985 in the Princeton Essays in InternationalFinance.34 See ‘Debt bumps on China’s Belt and Road’, by Michael Smith, Australian Financial Review,27 April 2018.35 In the first five months of 2018, Chinese companies signed contracts worth $36.2 billionacross all economic sectors – according to the New York Times (‘China taps brakes on itsglobal push for influence’, by Keith Bradsher, New York Times, June 28 2018)36 See World Bank 1997 report, The East Asian Miracle. For outstanding reviews and debate,see Alice Amsden, ‘Why isn’t the whole world experimenting with the East Asian model todevelop?’ (Amsden 1998), or Dani Rodrik, ‘King Kong meets Godzilla: The World Bank and theEast Asian Miracle’.37 For analyses of China’s development model, from an historical perspective, see for exampleBrandt, Ma and Rawski (2014). Wan-wen Chu at Academia Sinica in Taiwan provides apenetrating analysis of China’s industrial strategy at provincial levels (Chu 2011).38 Much of the early investment in the 1980s and 1990s did not so much target the Chinesedomestic market as its cheap, disciplined labor to produce for export; this was also theChinese government idea underpinning the Free Trade Zones. Later, industries such aselectronics and auto would tap China’s vast internal market.39 See for example the recent study by Wei, Xie and Zhang (2017), which takes the story to theyear 2014, and demonstrates striking gains in both productivity and innovation in China asmeasured by patent filings from 1995 to 2014. A study from the World Intellectual PropertyOffice (WIPO) issued in 2018 argued that China is now driving international patentapplications to record heights – see the summary.40 Of course China’s strategies of infrastructure-driven growth and development have notgone unchallenged. In Oxford Review of Economic Policy, Ansar et al (2016) challenge thepremises of Chinese success.41 For critical discussions in this vein, see Tsui (2011) and more recently Pan, Zhang, Zhu andWojcik (2017).42 There has been criticism of China’s approach to urban redevelopment based on CDBpractices of debt management, with cases of underpayment to agricultural land holders whoare subject to compulsory acquisition orders. No doubt there have been cases of suchunderpayment, but the overall strategy does not depend on this aspect. There seem to befewer cases as market reforms are introduced at local level (Wen et al 2017).43 For an insightful book-length account of the workings of the CDB, see Sanderson andForsyth (2013). Ru (2018) provides a scholarly analysis of the workings of the CDB asdevelopment institution, arguing on the basis of data provided by the CDB that the bank

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“crowds-in” private investment, thus acting as a catalyst for further development.44 Of course the current US-launched trade war complicates these considerations of prospectsfor firms like ZTE and Huawei.45 On the positive role played by Multilateral Development Banks (like the ADB and AIIB) seeMunir and Gallagher 2018.46 See Schumpeter (1942) for the original exposition of creative destruction as a keymechanism of capitalist innovation.47 Financing by China so far is impressive, with the Silk Road Fund announcing a goal of $40billion in equity investments (with funds of $680 million being allocated by August 2017); theAIIB with BRI investments of $3.7 billion by 2017; and the CDB with huge loans of $110billion to BRI projects by January 2018. On top of these lending arrangements, the CDB andChina Exim Bank have announced separate BRI funds amounting to $36.2 billion and $18.8billion, respectively, at the 2017 Belt and Road Summit staged in Beijing. For details on thesefinancial commitments, see the report from ING, ‘China’s Belt and Road: Bigger than theMarshall Plan?’, 6 June 2018.48 See Doig (2018) as well as recent reportage on the Malaysian and Myanmar cases, e.g. ‘Themany bumps in paving China’s new silk road’, by M. Sharma, Gulf News, July 16 2018.49 Another dimension is that climate crisis and environmental pollution requires that China cutback on e.g. steel production and it has closed some major mines while seeking also to createnew green industries such as renewables and new energy vehicles.50 Note that China is now the world’s leading steel producer. Indeed a recent article by DavidScutt, at Business Insider, claims that ‘China is now producing more steel than the rest of theworld combined’, May 28 2018.51 See Holslag (2017), p. 49, for discussion on this point.52 See the article in Forbes, “Belt and Road: China’s strategy to capture supply chains fromGuangzhou to Greece”, by Dane Chamorro, Forbes, Dec 21, 2017.53 See the website maintained by HSBC.54 See ‘Why international use of RMB is about to be propelled’, by legal commentators DavidOlsson and Andrew Fai, at King & Wood Mallesons, 5 April 2018.55 See HSBC.56 See the article on China’s petroyuan, ‘China: The emergence of the Petroyuan and thechallenge to US dollar hegemony’ by Mark Selden and myself at The Asia Pacific Journal.57 See the World Bank report by Boffa (2018).58 Joe Kaeser, CEO of Siemens, is quoted in the NYT as saying: “The China One Belt, One Roadis going to be the new WTO – like it or not”. See ‘At Davos, the real star may have been China,not Trump’, by Keith Bradsher, New York Times, Jan 28 2018.59 See Lihuan Zhou et al, ‘Moving the Green Belt and Road Initiative: From words to actions’,Oct 2018, World Resources Institute and Global Development Policy center.60 The data reported are that greenfield investments in coal, oil and gas-fired power plantsglobally by Chinese sources, 2014 to 2017, amounted to over $30 billion (mostly provided bystate-owned enterprises), while investments in solar PV and wind, respectively, amounted tojust over $5 bn and just under $5 bn (overwhelmingly provided by privately owned firms) SeeFig 15 in Zhou et al 2018, p. 19.61 See the critique published by myself and Carol X. Huang, ‘China’s Belt and Road as a

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conduit for clean power projects around the world’, The Asia-Pacific Journal, Sep 15 2018.62 The Green Investment Principles were formulated and published by the Green FinanceCommittee (GFC) of the China Society for Finance and Banking (chaired by Dr Ma Jun, amember of the People’s Bank of China Monetary Policy Committee) and the Green FinanceInitiative (GFI) of the City of London, chaired by Sir Roger Gifford. See ‘China, UK publishguidelines to make Belt & Road construction greener’, Xinhua, 1 Dec 2018.63 On green bond issuances in 1H 2018, and cumulatively, see Climate Bond Initiative, ‘Greenbonds market summary, 1H 2018’, July 2018.64 For example, there is convergence in projects emanating from China that involve renewableenergies and energy storage. But there are discrepancies, as noted by Climate BondsInitiative, in projects that involve retrofitting on coal power plants, or projects involving“clean coal”. See the Climate Bonds Initiative China Annual Report 2017.65 I would like to thank a reviewer, Professor Thomas Rawski, for this insight.66 See the Lowy Institute paper by David Brewster, ‘China: The forces needed to protect theBelt and Road’, 28 November 2018.67 See The Economist Briefing on the BRI, July 25 2018, as mentioned above.68 As cited above, see ‘The world, built by China’, New York Times, Nov 18 2018.69 A small step in such a direction is evidenced by the trilateral announcement from the US,Japan and Australia of the possibility of finance for infrastructure development being providedfrom joint initiatives from the three countries, according to a statement from Australia’s thenForeign Minister Ms Julie Bishop, at the end of July. See report in The Australian, July 312018, “Australia, US, Japan to offer infrastructure lending in Asia-Pacific region”.