Belt and Road Initiative | Council on Foreign Relations

Southeast Asia

In Southeast Asia, Belt and Road Attracts Takers, But Skepticism is Rising

Since China’s Belt and Road Initiative was formally launched in 2013, Southeast Asia has been one of the major priorities of the infrastructure investment project. Beijing launched a new high-speed railway from Kunming to Laos (a line that is supposed to eventually stretch through Southeast Asia), a high-speed rail link connecting Kuala Lumpur and Singapore, and multiple other projects throughout the region. The giant infrastructure project still has many fans in Southeast Asian governments, and in Southeast Asian private companies. Laos’ government is pushing forward with the $5.8 billion railway, which it has touted as critical to transforming Laos into a transport hub for the region, to spark growth in parts of the landlocked state, and also to boost tourism in the country. According to the Nikkei Asian Review, at the recent Future of Asia conference held in Tokyo, Laotian Prime Minister Thongloun Sisoulith touted the rail as a project “of great importance” to the country’s development, downplaying concerns raised by some financial institutions of the railway’s potential debt burden; Laos could wind up assuming most of the cost of the $5.8 billion project, and piling up unsustainable amounts of debt. Meanwhile, Philippine President Rodrigo Duterte, among other Southeast Asian leaders, has continued assiduously wooing Belt and Road projects and other infrastructure investments from Beijing. Indonesian president Joko Widodo, too, apparently continues to see Chinese infrastructure investment and financing as critical to his plans to upgrade Indonesia’s aging physical infrastructure. But in recent months, leaders and publics in some Southeast Asian states have become worried about the potential downsides of Belt and Road investments. Leaders in Southeast Asia are surely aware of the situation last year in Sri Lanka, in which the country, increasingly dependent on Chinese financing, wound up giving China a 99-year lease on the important port of Hambantota, in order to get a reduction in Sri Lanka’s debts. As the Nikkei noted, even International Monetary Fund head Christine Lagarde warned, in April, that some Belt and Road projects—mostly delivered through loans and not grants—could wind up saddling recipient developing countries with debt traps, unable to repay Chinese state firms and lenders back in the long run. Such concerns in Southeast Asia about Belt and Road remained relatively muted until recently; many countries do indeed need infrastructure investment, did not want to alienate their biggest trading partner, and were waiting to see how Belt and Road’s specific initiatives developed. But now, several of the largest Southeast Asian states—countries with close trade ties with Beijing—are voicing concerns. Before the Malaysian opposition’s surprise victory in May elections, now-Prime Minister Mahathir Mohamad vowed to take a new look at many China-backed projects in Malaysia, including the Kuala Lumpur-Singapore rail line, to scrutinize how much they benefit Malaysia, how essential they are, and whether they involve wasteful spending. Although Mahathir and Anwar Ibrahim, who may be the next prime minister after Mahathir, have promised to maintain a strong relationship with China—Malaysia is China’s biggest trading partner in Southeast Asia—they are still expected to review multiple deals with Beijing. In Thailand too, a country that has become much closer to China economically and strategically over the past decade, some government leaders appear to be reassessing the value of Belt and Road projects. Thailand had promised to link up its eastern seaboard development project with Belt and Road initiatives, and also had welcomed the high speed line. But other countries’ Belt and Road debt problems, and the potential high cost and high debt associated with the rail line, could have soured the junta government on these Chinese initiatives. Construction has finally started on the rail line through Thailand, but this month the Thai government announced that it was, with other Southeast Asian states, considering launching a regional investment fund. The fund may be similar in some ways to Belt and Road (albeit on a much smaller scale)—a possible sign that Thailand wants to promote modest Belt and Road alternatives. The region’s smallest states, like Laos, have become so heavily dependent on China that they may feel they have no choice but to accept Belt and Road projects and other China-backed initiatives, even if they come with debt worries. But larger, more powerful economies may, at this point, be ending their honeymoon with Belt and Road.

Blog Post by Joshua Kurlantzick June 15, 2018 Asia Unbound
China

Managing Global Disorder: Prospects for U.S.-China Cooperation

In March 2018, the Council on Foreign Relations’ Center for Preventive Action convened a workshop to examine areas of cooperation between the United States and China. The workshop, held in partnership with Peking University’s School of International Studies, was made possible by the support of Carnegie Corporation of New York. The views described here are those of workshop participants only and are not Council on Foreign Relations or Carnegie Corporation positions. The Council on Foreign Relations takes no institutional positions on policy issues and has no affiliation with the U.S. government. Introduction Emerging challenges to international order require cooperation between the United States and China, two countries that share a common interest in preventing the world from becoming more dangerous and disorderly. U.S.-China relations are becoming more strained and antagonistic, however, and the prospects for cooperation appear to be receding. To explore whether there are still grounds for cooperation on issues of common concern between the two countries, in March 2018 the Center for Preventive Action (CPA) at the Council on Foreign Relations convened a group of fifteen experts from the United States and China for the workshop “Managing Global Disorder: Prospects for U.S.-China Cooperation.” CPA partnered with Peking University’s School of International Studies in Beijing for the workshop and also met with experts at the China Institutes of Contemporary International Relations in Beijing and the Shanghai Institutes for International Studies in Shanghai. During the workshop, President Donald J. Trump announced plans to impose about $60 billion in new tariffs on Chinese imports. While trade was a major topic of discussion, it was by no means the only area discussed. Workshop participants assessed conflicting views of the sources of global disorder and examined areas of global governance such as international trade, development, the environment, and the future of various multilateral institutions. They also discussed the most pressing security challenges in East and Southwest Asia. Participants highlighted the need for a greater understanding between the United States and China on the evolving international order. No major transnational problems will be solved without some cooperation between the two powers. It is therefore imperative that the two countries avoid a further deterioration of the relationship and instead identify areas of potential cooperation. Status of the World Order and Perspectives on Global Norms All participants recognized that the international liberal order is under considerable strain. Most agreed that, at the end of the Cold War, the United States expected that the post–World War II system it had helped create would expand and that China would join international institutions and liberalize both economically and politically. This expectation has since eroded; in fact, one participant argued the concept of an international liberal order was itself a source of friction: as the order is neither international, liberal, nor particularly orderly, and holding China to such a standard unnecessarily creates a zero-sum dynamic in U.S.-China relations. Participants agreed that Western assumptions about China need revisiting, but disagreed about how to do so. Some participants argued that China’s economic and political policies have not actually changed since the immediate post–Cold War period, but China has just changed its approach; the source of friction, therefore, is not China’s actions but the power imbalance created by China’s rise. Others argued that as China has gained more power, it has used that power in disconcerting ways. China has become more restrictive under President Xi Jinping, and hopes of an inevitable political liberalization have not been realized. As a result, many policymakers in the United States are no longer willing to tolerate illiberal tendencies in the name of gradual liberalization. Disagreement was also evident over China’s support for globalization. While China supports the existing trade regime and international institutions such as the World Trade Organization (WTO), the Asian Infrastructure Investment Bank, and the United Nations, it has certainly not championed the free flow of capital and information, two tenets of globalization. In fact, under Xi, China has taken steps in the opposite direction. Participants recognized that the United States and China do share several challenges, including climate change and its consequences, the ability of regulatory institutions to avoid another international financial crisis, and the effects of conflict in the Middle East on the security of the oil supply chain. However, because addressing these challenges requires not only shared interests but also shared understandings, participants cautioned against high expectations for U.S.-China cooperation on those issues over the next five to ten years. Potential Areas of Cooperation Despite a sober assessment of the high-level prospects for cooperation, areas for cooperation exist both regionally and on trade and economic issues. Belt and Road Initiative Participants highlighted opportunities for economic cooperation surrounding China’s Belt and Road Initiative (BRI). As one of the first truly global initiatives to come from China, the BRI has the potential to meet infrastructure needs in developing countries and to contribute to security and stability. However, several areas of concern—including a lack of clarity over the BRI’s scope, nature, and objective; the initiative’s potential weakening of economic, political, and environmental norms; and the likelihood of increased tensions across the geostrategic landscape—could limit international cooperation. Internationalizing BRI projects was offered as a way to diffuse tensions not just between the United States and China, but also among other potential international partners. Investing in “soft” infrastructure like education could also do more to trigger development than investments in “hard” infrastructure such as roads and railways alone, though the positive relationship between education and development was not shared by all in the group. While the current state of relations between the United States and China could stall progress on cooperation over the BRI, participants argued that circumstances allowing for more cooperation could develop over the course of the next six to twelve months. Trade Participants discussed how President Trump’s current approach to the trade relationship with China is modeled on the U.S.-Japan relationship of the early 1980s, when ad hoc negotiations resulted in Japan adopting voluntary export restraints, assuaging U.S. concerns over the threat from Japan’s economy. However, while some parallels exist, there are important differences between the Japanese precedent and the situation the United States currently finds itself in with China: namely, Japan had a close political relationship and military alliance with the United States. Participants agreed that both the United States and China needed to be prepared for a serious escalation in trade tensions. Indeed, fears of a trade war have increased since the conclusion of the workshop, with China announcing tariffs on targeted U.S. goods and the United States responding with an increase of $100 billion in tariffs. Moreover, some participants lamented that the current U.S. approach to trade with China is not informed by analysis of the actual drivers of economic decline in the United States. (However, everyone agreed, any attempt to remedy this in the present U.S. political context would likely be in vain). At the same time, participants pointed out that many of the challenges in U.S.-China trade relations are not unique; Canada, one the closest U.S. allies and trading partners, has had difficulty identifying U.S. objectives in renegotiating the North American Free Trade Agreement. Despite mounting tensions, there are opportunities for cooperation. Trump’s metric for success in U.S.-China trade relations will be measured by the bilateral trade deficit, which sets a clear, outcome-based benchmark for negotiations. In contrast, previous administrations have taken more behavior- driven approaches that set expectations for China’s respect for human rights and other domestic benchmarks. China’s voluntary restraint on steel production and targeted Chinese imports of U.S. products were offered as possible steps toward improved relations. The discussion also underscored that such measures would need to be implemented in a way that allows both leaders to save face. There is also room to find common ground on renegotiating the rules of international trade in a way that recognizes and accommodates both the U.S. and Chinese systems. Several participants pointed to calls for reforms to the WTO and the need to build a new consensus about the body’s value. East Asia Participants agreed that stability in East Asia is a goal the United States and China both share. They recognized North Korea as the most pressing challenge in the region, and noted that there is a mutual interest in a denuclearized Korean Peninsula. Some participants claimed that the United States and China should at least conduct joint contingency planning, as the threat of military clashes has grown in the past year. However, some participants argued that the best avenue to sustain pressure on North Korea would be through U.S.-Chinese cooperation. That could result in the start of a denuclearization process and a ban on long-range missile testing, especially of missiles that can reach the United States. However, significant challenges to such a process remain, including the verification and longevity of an international commitment in light of recent U.S. reversals on the Paris climate accords and the Iran nuclear deal. In the South and East China Seas, clarified rules of engagement and expanded military-to-military cooperation were proposed to minimize the chances of an incident escalating. This would extend beyond current cooperation between the U.S. and Chinese navies, to include China’s coast guard, fishing vessels, and paramilitary forces. Southwest Asia A bright spot among the areas discussed, similar interests in Southwest Asia make the region relatively ripe for cooperation between the United States and China. While recognizing that significant security challenges remain in Afghanistan, the two countries could enhance cooperation and join Afghanistan in trilateral talks that result in small, transactional steps in support of stability. The United States and China could also coordinate their positions on the peace process and deliver a consistent message, publicly and privately, that the two will support a unity government won through political processes, rather than a Taliban government won on the battlefield. The United States, China, and Russia share responsibility for assisting Pakistan in its counterterrorism efforts, participants recognized, calling for dialogue among those states. Potential spillover of terrorist activity on the Afghanistan-Pakistan border into China was also recognized as a concern that is stimulating China’s push into the region. Both the United States and China also have an interest in preventing escalation of the conflict between India and Pakistan. Confidence-building measures, such as joint military exercises, could improve China’s relations with India, which would be a step toward resolving the China-India border dispute. Improving U.S.-Pakistan ties was also proposed as a means to alleviate tensions. Recommendations Participants noted that, while the United States and China seem headed for a period of increased tensions, conflict is by no means predestined. In areas where the United States and China face common major threats—such as climate change, nuclear proliferation, and economic stability—there is greater scope for cooperation. To improve the relationship and increase the chances that the two powers can work together to manage global disorder, workshop participants outlined options for both countries. These included: Opening a discussion to reform global trade rules, as the two share a common interest in preventing the rules from disintegrating altogether. Increasing student exchanges, particularly of U.S. students studying in China, which could create new areas of cooperation in research and development, health care, green energy, and biotechnology. Building a common understanding of shared interests on the Korean Peninsula and identifying a desired interim resolution to the North Korea crisis. Increasing military-to-military communications, including with China’s coast guard and paramilitary elements, as existed during the 2008 Olympics in Beijing. Beginning a trilateral dialogue in support of a peaceful settlement of the conflict in Afghanistan.

Report April 18, 2018 Center for Preventive Action
China

China’s Strategy in Djibouti: Mixing Commercial and Military Interests

With the opening of the first overseas Chinese military base in Djibouti, this tiny Horn of Africa country has become a testing ground for the mixing of China's commercial and military interests abroad.

Blog Post by Guest Blogger for Asia Unbound April 13, 2018 Asia Unbound

China

The Belt and Road Initiative Didn't Quite Live up to its Hype in 2017

China's balance of payments data doesn't show any material increase in the pace of offshore lending.

Blog Post by Brad W. Setser February 12, 2018 Follow the Money
China

China’s Big Bet on Soft Power

China is believed to spend billions of dollars to boost its international image, but it has yet to see a marked return on its investment in soft power.

Backgrounder by Eleanor Albert February 9, 2018
China

Geostrategic and Military Drivers and Implications of the Belt and Road Initiative

In testimony before the U.S.-China Economic and Security Review Commission, Ely Ratner assessed the geostrategic drivers and implications of China’s Belt and Road Initiative (BRI). He recommended situating the U.S. response to BRI within a comprehensive and competitive China policy that reasserts U.S. leadership in economic, military, political, and information domains. To this end, the United States should address security concerns that result from BRI by preventing Chinese control of the South China Sea, rejoining the Trans-Pacific Partnership, shifting overseas security burdens to China, enhancing U.S. broadcasting and information operations, and building capacity in recipient countries to manage and evaluate potential BRI projects. Takeaways: BRI will likely result in increased overseas access and presence for the People’s Liberation Army. To limit the destabilizing effects of greater Chinese force projection capabilities, the United States should redouble efforts to sustain its military advantage in East Asia and prevent Chinese control of the South China Sea. The security and military implications of BRI will largely result from perceptions of a China-led economic order in Asia, whereby Beijing’s potential inducements and punishments will lead countries to limit their security cooperation with the United States and be less willing to push back on Chinese assertiveness. To counter these efforts, the United States will have to exhibit greater leadership on trade and economics in Asia, providing an economic alternative by rejoining the Trans-Pacific Partnership or initiating an equally ambitious multilateral arrangement. The influence China is garnering from Belt and Road—and the ancillary effects on security and military matters of importance to the United States—far outstrip the actual economic value of the projects. This calls for U.S. media and information platforms that can provide more public information about the facts and fictions of BRI, as well as the degree of U.S. and other countries’ investment and assistance throughout Asia. Negative externalities will develop from BRI if recipient countries are subject to corruption and coercion, or caught in debt traps that China exploits for political and strategic ends. The United States should therefore team up with like-minded countries (including Australia, Japan, and Singapore) to provide technical assistance that would help recipient countries evaluate proposed major infrastructure projects.

Testimony by Ely Ratner January 25, 2018
China

Beijing's Silk Road Goes Digital

Rachel Brown is a research associate in Asia Studies at the Council on Foreign Relations. The pageantry at last month’s Belt and Road Forum in Beijing highlighted the two major prongs of China’s Belt and Road Initiative: the Silk Road Economic Belt, which runs through Central Asia to Europe, and the 21st Century Maritime Silk Road, which runs through Southeast Asia, Africa, and Europe. But a third prong of the initiative – the “digital new silk road” or “information silk road” – received less attention. Yet this component could generate significant consequences. The idea of incorporating digital sectors like telecommunications, internet of things infrastructure, and e-commerce into One Belt, One Road (OBOR) is not new. The March 2015 white paper articulating the vision for OBOR called for growth in digital trade and the expansion of communications networks to develop “an information silk road”. A few months later, Lu Wei, then director of the Cyberspace Administration of China, told the China-EU digital cooperation roundtable that, “We can build a digital silk road, a silk road in cyberspace”. The concept even received a shout out in the joint communiqué from the recent Belt and Road Forum, with a pledge to support “innovation action plans for e-commerce, digital economy, smart cities and science and technology parks.” But outside the bland formulations of policy documents, what will the digital new silk road actually look like? Many aspects of the concept are a natural extension of the “going out” policies pursued by Chinese telecommunications companies and could fill unmet needs for digital connectivity; greater connectivity could in turn open new markets for Chinese firms in e-commerce and other areas. But overall, the digital new silk road looks less like a cohesive concept and more like a catchall phrase applied to everything from earth observation projects at the Chinese Academy of Sciences to cell phone sales by Xiaomi. So are companies and officials simply paying lip service to Xi Jinping’s One Belt, One Road vision when they speak of the digital new silk road or is there the potential for something more? The three sectors below offer insights into the ambitions for – and possible pitfalls of – OBOR’s third prong: 1. Telecommunications and Satellites In addition to new railways, ports, and power plants, another infrastructure priority under OBOR is improving “international communications connectivity” through “the construction of cross-border optical cables and other communications trunk line networks”. State-owned enterprises including China Telecom, China Unicom, and China Mobile have already embarked on OBOR-related projects and are building out the infrastructure to underlie the digital new silk road. Among the ambitious programs are the construction by China and Russia of overland cable links between Asia and Europe. Private companies like Huawei and ZTE have also gotten into the game with projects including a fiber optic cable network in Afghanistan. In addition to cable networks, OBOR also offers the Chinese government a chance to encourage the adoption of its Beidou satellite network, a competitor to GPS, through a “space-based silk road”. The government aims to roll out basic services along the Belt and Road route by 2018 and the State Council Information Office is promoting Beidou’s use in everything from power transmission to transportation. Already, limited use of Beidou has been piloted in Karachi, Pakistan. These new projects will not only enhance digital connectivity in underserved Central and Southeast Asian countries but also facilitate faster and easier to maintain data connections. However, telecommunications cables built by China and Russia could also lead to network splintering if countries seek to insulate their data from traveling through the United States or Europe due to surveillance fears. Additionally, while the expansion of the Beidou system could improve the accuracy of consumer satellite navigation, it could also squeeze foreign companies out of satellite navigation markets in China and certain OBOR nations. Beidou’s development could also have implications in the national security realm as the People’s Liberation Army improves its weapons and tracking capabilities. 2. Smart Cities Another digital infrastructure frontier for Chinese firms is the construction of “smart cities”. Smart cities are broadly defined as urban areas that integrate information and communications technology to improve city operations in everything from traffic flows to water conservation to crime prevention. In recent years, ZTE and Huawei have expanded their efforts to supply smart city projects in OBOR nations such as Malaysia, Kenya, and Germany. Even China’s model smart city, Yinchuan, lies along the path of the path of the original silk road in a region now poised to benefit from new trade routes. Yinchuan offers citizens an array of innovative services including access to city information via QR codes and the ability to pay bus fares upon boarding through facial recognition software. Last December, ZTE’s chief information and strategy officer, Chen Jie, stressed the company’s commitment to sharing its smart cities know-how across the OBOR route. One of the company’s subsidiaries, ZTEsoft, has even co-opted the Belt and Road name for its new initiative the “Data Belt, Information Road”. The program will work with Singapore’s StarHub telecommunications to promote cross-border collaboration on smart city development, operations, and technology. Such collaborations could help modernize cities, increase their efficiency, and promote greater standardization of technologies. However, the increasing reliance of cities on technology also raises cybersecurity risks given the susceptibility of internet of things devices to hacking. Moreover, for countries with often tense relationships with China, there could be broader worries about depending on digital infrastructure supplied by Chinese firms. For example, the City of Pearl, a planned “city within a city” in Manila, is being touted as the largest OBOR project in the Philippines. The project aims to integrate artificial intelligence to regulate city functions, but will be built by the Hong Kong and mainland China-affiliated UAA Kinming Group, which could raise security concerns. 3. E-Commerce Increased internet connectivity could also pave the way for more Chinese e-commerce sales along the Belt and Road route. Two of China’s e-commerce giants – Alibaba and JD.com – have already sought to link their global expansion to OBOR. According to Xinhua, JD.com plans to set up “more than 20 overseas warehouses to store and transfer goods from over 100 countries and regions including those along the Belt and Road Initiative.” Alibaba founder Jack Ma has cited countries along the OBOR route as among the most important regions for his company and plans further expansion in Russia, Central Asia, and Southeast Asia. This year, the company went even further and partnered with the Malaysian government to establish the first “digital free-trade zone”. The project will offer logistics and fulfillment capabilities as well as an online services platform. At the free trade zone’s launch, Ma argued that, “For human beings the first globalization was the silk road... today in the internet [age], I think we should transfer the silk road to an e-road”. This is a common refrain from Ma, who has argued for integrating standards and reducing trade barriers in e-commerce via an “electronic world trade platform”. Ma’s dream of promoting greater global online trade is consistent with OBOR’s mission of expanding commerce along new routes. But despite their apparent enthusiasm, Chinese e-commerce firms could become disillusioned in certain Belt and Road nations as they face competition from local firms, infrastructure challenges, and regulatory obstacles. OBOR projects may smooth some existing challenges such as limited shipping routes and high-speed broadband access, but other impediments will remain including customs policies and a lack of trust regarding e-commerce fulfillment. Given these hurdles, companies may not make money right away. But Ma appears willing to play a long game with his international e-commerce ambitions, much like Chinese leaders themselves with the entire OBOR project. Surveying the digital landscape under the auspices of One Belt, One Road, many projects still appear linked by political rhetoric rather than a coherent strategy. But if the digital new silk road overcomes the challenges highlighted above and emerges as more than a catchy phrase, it will be an important step in knitting other countries into Chinese networks and could limit the influence of the U.S. government and multinationals strategically and economically.

Blog Post by Guest Blogger for Asia Unbound June 6, 2017 Asia Unbound
China

Can China Finance One Belt One Road Without Jeopardizing Its Own Financial Stability?

The answer, I think, is yes. Even after Moody's downgrade. At least so long as China's ambitions for scaling up what seems to have been a roughly a $15 billion-a-year financing program are reasonable. I still remember a time not so long ago when China was adding $500 billion a year to its reserves and shadow reserves and was channeling $300 or more billion a year into the U.S., mostly by buying bonds (Not selling reserves and selling U.S. assets, as it did in 2016. The swing from 2013 to 2015-2016 was large). I still have a great deal of respect for the raw financing capacity of China’s state. China saves a ton, the raw material for a large current account surplus is still there—see Martin Wolf Estimates of the cost of One Belt and One Road vary—in part because the initiative’s scope is relatively elastic (is Yamal LNG part of OBOR? Chinese investment in Swiss seed companies? Chinese investment in Sudan and Angola?). But a common estimate is around $1 trillion (some have higher numbers, but the top end of the range seems implausible to me). Not all of that necessarily will be borne by China. Bradsher and Perlez of the New York Times report that China’s actual commitment at the summit in Beijing was around $120 billion—on top of $50 billion that already has been disbursed (over four years). Add in China’s commitment of paid-in ($10 billion) and callable capital ($40 billion) to the Asian Infrastructure and Investment Bank and its commitment to the New Development Bank ($10 billion) if you want. And there may be investments from state firms that aren't funded by the New Silk Road Fund or the development banks. That brings China's existing commitments up to around $200 billion. If that is right, the balance will either be financed by other sources (including banks in the countries hosting the projects), or simply not done — at least not in the next five years. I certainly would worry (very much) if China ever committed so much foreign exchange to financing the Belt and Road that it found itself short on reserves. China still has plenty of reserves in my view, but not so many that can completely ignore potential risks. But I also suspect $200 billion over five years—a sum in line with China's reported actual financial commitment, though not with common estimates of the overall size of the program — is something that China can manage fairly comfortably. Why? Simple: it is in line with the state banks recent pace of external lending, and consistent with China's balance of payments. Best I can tell, China’s state banks have been adding about $100 billion a year to their “illiquid” long-term external loan portfolio in the past few years. The $10-15 billion a year ($50 billion over 4 years) current pace of lending to One Belt One Road projects reported by the New York Times remains well below their current overall pace of external lending.* Projecting out the current growth of China's external lending over five years would generate roughly $500 billion in financing. And if the bonds China now is purchasing from abroad (over $50 billion a year in the last four quarters of data, with the state banks accounting for much of the buying) are added to the external lending of the state banks that sum rises to $750 billion over five years. The bulk of those bonds appear to have been purchased the the state banks. So the more modest accounting provided by the New York Times of China’s commitments to One Belt One Road does not imply anything that is wildly out of line with the current pace of growth in the balance sheet of its state banks —though it might imply Chinese banks have a bit less to lend to Chinese firms looking to buy New York real estate, or to Latin America. Now look at the sums being tossed around from the point of view of China’s balance of payments. This is a complementary view to the analysis of the state banks: the banks right now are either a vector for moving China’s current account surplus abroad, or a draw on China’s stock reserves—the legacy of past current account surpluses. China ran a current account surplus of $200 billion in 2016. The surplus has been coming down in the last two quarters, but I suspect it is likely to go back up as China reigns in its credit stimulus—especially given the recent fall in oil and iron prices. ** It though is a bit unrealistic to assume that all of China’s surplus all goes to funding state lending, let alone all to the One Belt One Road countries. In 2015 and 2016 the surplus wasn't large enough to finance private outflows and the increase in state lending (hence the draw on reserves). So if private outflows are large, China could have a bit more of a problem funding its commitments out of its current account. Private outflows from China have been going to Australia, Canada, the United States, and the like. Not to Central Asia. On the other hand, private outflows have slowed significantly this year. The combination of the yuan’s stability against the dollar, and China’s controls seem to be working. Finally, what would happen if China had to dip into its reserves to meet its commitments (this would be the case if net private outflows are equal to its current account surplus)? I personally think could China could safely draw on a small portion of its $3 trillion in reserves. China has a bit more than $3 trillion actually, the central bank’s $125 billion in “other foreign assets” are for all intents and purposes reserves.*** With around $750 billion in short-term debt, China could $500 billion of its reserves to finance lending to One Belt One Road (over 5 years) and still cover its short-term external debt three times over. So, I do not see any real constraint that would preclude China from raising its current $10-15 billion a year in lending to the Belt and Road (and equity investment from state funds in related projects) to $40 to $50 billion a year —assuming China’s doesn’t lose control of its financial account. On the other hand $100 to 200 billion annually ($500 billion to a trillion over five years) would be a stretch, as it would imply the bulk of China's current surplus would need to flow toward the One Belt One Road countries. Or, if private outflows resume, China might need to dip heavily into its reserves There is another possibility as well — one highlighted by Christopher Balding. China could start raise most of the funds it needs for its external lending by borrowing —through its state institutions — in global markets. Chinese led multilateral institutions, like the Asian Infrastructure and Investment Bank, are certainly likely to do so. China could thus try, in a sense, to draw on Japanese—or European—savings to fund its strategic ambitions. To be clear, though, that doesn't appear to be how the state banks have funded the recent growth in their external lending. The balance of payments suggests that the net external position of China's state banks has actually moved into a substantial surplus in recent years, as the banks continued to lend abroad while repaying their "carry trade" related external liabilities.**** Yet China also needs to be at least somewhat cautious. The external borrowing of any state institution is effectively a claim on China's reserves. China has a bit of leeway —a country with China's characteristics (little short-term external debt and a current account surplus) would be fine with less than $3 trillion in liquid reserves — but not much leeway that it is freed from any budget constraints. There is a second reason why the low-end of estimates of One Belt One Road financing seems far more reasonable than the high-end estimates. There are limits on the ability of Central and South East Asia to absorb massive inflows over the next five years. Even sums that are closer to $200 billion than to $1 trillion (over five years) would imply large current account deficits in some fairly small economies. The combined GDP of the main economies of central Asia is about $300 billion. The combined GDP of Laos, Cambodia and Myanmar is about $100 billion. If India stays out, the combined GDP of the main economies of South Asia is $600 billion (Pakistan is the biggest). Obviously expanding the set of countries to cover some larger economies would help. But it isn't clear Russia, which now runs a current account surplus, particularly wants to be financially dependent on China. And the main economies of southeast Asia and the Gulf do not lack access to market financing and do not necessarily need to rely on China to fund their infrastructure. Would $200 billion from China over five years be enough to create Asia’s equivalent of Chicago (a brilliant analogy that comes from Paul Krugman), with China enjoying stronger transportation links to Central Asia, South Asia (Pakistan at least), and South East Asia than any of these geographic regions enjoy with each other? To be honest, I do not know. And I think Krugman's analogy could be extended to cover oil and gas pipelines as well as roads and railways — though invariably that also raises the Russian angle. More on that at a later time. * I should note that China could expand its lending capacity by capitalizing offshore financial intermediaries that fund themselves in global markets. That is the model of the AIIB—though it isn't the model of the China Development Bank, which historically has funded itself domestically. ** The U.S. need not worry that there won’t be spare savings globally to fund the U.S. current account deficit if China’s surplus is channeled towards its neighbors. The combined surplus of Japan, the Asian NIEs, and Europe is over $1 trillion. And the world economy really would be more healthy if the U.S. (along with Mexico and Canada) wasn’t the one absorbing the bulk of the world’s spare savings—the resulting trade deficits put a huge strain on workers in the U.S. manufacturing sector. *** In addition to $3 trillion in reserves and $125 billion in reserve-like assets (the PBOC's other foreign assets), China has $550 billion in external loans and $350 billion in portfolio debt and equity (mostly state owned in my view, with the debt held mostly by the state banks and the equity by the CIC and a few others). The total foreign assets of the Chinese state are closer to $4 trillion than to $3 trillion, and the most illiquid parts of the state’s portfolio in my view are held outside of SAFE’s formal reserves. See this post. **** Cole Frank and I used the line items "currency and deposits" and "loans" in "other" in the balance of payments to construct this graph. That leaves out trade credit, and other, other assets (other, other is the banks assets with the PBOC, e.g. the balance of payments line item that maps to the PBOC's other foreign assets). The stock is estimated from cumulative flows.

Blog Post by Brad W. Setser May 22, 2017 Follow the Money
India

India Objects to China's Belt and Road Initiative—and It Has a Point

The grandiose Belt and Road Forum—a symbol of China’s foreign policy stepping-out as a global connectivity visionary—kicked off on May 14 with a notable absentee: India. On May 13, India’s Ministry of External Affairs released its formal response to a question about Indian representation at the Belt and Road Forum, attended by “nearly three dozen” heads of state and dozens of senior officials from around the world. It’s worth reading in full. The statement abandons the typical language Indian officialdom crafts to be as inoffensive as possible to the greatest number of countries. Citing India’s commitment to physical connectivity “in an equitable and balanced manner,” the statement itemizes a series of principles for infrastructure projects that sound like a World Bank investment monitoring report: “must be based on universally recognized international norms, good governance, rule of law, openness, transparency and equality” “must follow principles of financial responsibility to avoid projects that would create unsustainable debt burden for communities” “balanced ecological and environmental protection and preservation standards” “transparent assessment of project costs” “skill and technology transfer to help long term running and maintenance of the assets created by local communities” “must be pursued in a manner that respects sovereignty and territorial integrity” India obviously believes that Belt and Road projects do not meet the above criteria. India’s statement also closes with a kicker focused on the China-Pakistan Economic Corridor (CPEC): “No country can accept a project that ignores its core concerns on sovereignty and territorial integrity.” India’s objections to CPEC have been repeated and vocal. The crux of the issue concerns the transit pathway that will link western China to the plains of Pakistan and then through to a new deep-water port at Gwadar. The only way to get from western China to the heart of Pakistan is through the Karakoram Highway, a high-altitude transport corridor that in many ways could be called the twentieth-century blueprint for the Belt and Road Initiative. The highway was built by China and Pakistan, beginning back in 1959. It opened in 1979. The highway runs through territory now called Gilgit-Baltistan (earlier termed the “Northern Areas”) that was originally part of the princely state of Jammu and Kashmir. India and Pakistan both claim the entirety of the former princely state of Jammu and Kashmir, though it is Pakistan’s claims to the Srinagar Valley that tend to occupy international public attention as the “Kashmir Conflict,” not Indian claims to other parts of the territory which Pakistan presently administers. (The history of this territory is complex; for historical details, see Cabeiri deBergh Robinson’s recent book.) This territory and its history explain the objection to CPEC, but India’s public statement also noted concern for “financial responsibility to avoid projects that would create unsustainable debt burden for communities.” Here, too, the China-sponsored infrastructure developments in neighboring Sri Lanka offer an instructive lesson. Numerous infrastructure projects, negotiated in secret by the former Sri Lankan government of Mahinda Rajapaksa, saddled the Sri Lankan treasury with debts to China estimated at some $8 billion. Sri Lanka cannot repay what it owes, so it has negotiated a debt-for-equity swap of the Hambantota Port project. This has led to protests in the country. With other projects financed by China proliferating, under unclear terms and with the prospect of similar bills due down the line, India’s external affairs ministry has a good point. China’s Belt and Road Initiative is not a gift to the world. It is a vision that has a price tag—known to Beijing. That lesson is worth remembering. But whatever the merit in India’s view, the global response to the forum shows that it has few takers for the moment. This post originally appeared on Forbes.com. Follow me on Twitter: @AyresAlyssa. Or like me on Facebook (fb.me/ayresalyssa) or Instagram (instagr.am/ayresalyssa).

Blog Post by Alyssa Ayres May 17, 2017 Asia Unbound
China

China’s Soft Power Offensive, One Belt One Road, and the Limitations of Beijing’s Soft Power, Part 2

In this second post in the series, I will examine why I doubt China’s efforts to bolster its soft power will succeed today. Why are China’s soft power efforts unlikely to succeed today? And they are unlikely to succeed: As the Economist notes, polling data collected by the Pew Research Center found that, in most of the nations studied, public images of China have become more negative in recent years. A recent study by the Singapore-based Institute of Southeast Asian Studies-Yusof Ishak Institute of Southeast Asian perceptions of the United States and China, found that the Trump administration was potentially undermining perception of U.S. power in Southeast Asia, and that China was perceived as becoming more influential regionally. According to the South China Morning Post: Over 70 per cent of the respondents [to the survey] – people in government, academia, business and media and civil society in ten ASEAN nations – said the United States’ reputation under Trump had either deteriorated or deteriorated immensely. Yet at the same time, respondents to the survey had extremely negative perceptions of China, while they admitted that Beijing was becoming the essential strategic actor in Southeast Asia. A majority of respondents in the ISEAS-Yusof Ishak Institute study, as the South China Morning Post noted, said they had little or no confidence in China to essentially act in the region’s greater good, to protect common regional interests. Even in Laos, one of the countries highlighted in the New York Times’ Sunday report on One Belt, One Road – a place where China is spending feverishly on a railway project and the economy has becoming increasingly dependent on Chinese aid and investment over the past decade – it is hard to definitively say that China’s public image has improved in recent years. Laos’ new government, which took power last year, reportedly is packed with top leaders close to Vietnam. Meanwhile, those who wanted to tilt Laotian foreign policy toward China retired or did not take senior positions in the new, 2016 government. Although it is difficult to measure, it is hard to see that Laotian public opinion toward China, which soft power would target, has been swayed either. There have been a series of unexplained attacks on Chinese nationals in Laos over the past two years – in part possibly because of public anger over Chinese firms’ environmental records in investments in northern Laos. Although Laos is one of the most repressive places in the world, social media often includes strident anti-Beijing writings. One major reason why China’s soft power strategy is not currently working is that Beijing simply has spent the last decade exerting significant hard power, particularly in Southeast Asia and Northeast Asia, its near neighborhood. And, its growing willingness to wield coercive strategic and economic power has made its soft power a more difficult sell, even when Beijing is lavishing funds on One Belt, One Road and cultural, media, and educational projects overseas. Thus, while people in the region recognize China’s growing hard power, Beijing’s soft power is a really tough sell. In recent years, China has militarized parts of the South China Sea and East China Sea, rapidly upgraded its military forces, assertively claimed much of the South China Sea, and allegedly used its diplomacy to foster splits within Association of Southeast Asian Nations (ASEAN) over issues like the South China Sea, leading to a sense of paralysis within ASEAN at every meeting, and infuriating some Southeast Asian opinion leaders. Beijing has helped spark an arms race in Southeast Asia, and has shown a willingness to use Chinese state companies and other state tools to put pressure on regional competitors. What’s more, under Xi Jinping, the Chinese government further has enacted a range of policies that promote Chinese firms in many industries and severely limit foreign investors, a strategy that has led a wide range of foreign chambers of commerce in Beijing to complain about increasingly economically nationalistic Chinese policies. (To its credit, Beijing also has been relatively proactive in providing regional trade leadership and leadership on some climate change issues.) Many states in the region, from Japan to Singapore to Vietnam to Myanmar, have become increasingly wary of China’s seeming desire to dominate the region. In such an environment, aid, cultural programs, media, and other soft power tools will find few minds to convert. Meanwhile, even in places like Central Asia, South Asia, and Eastern Europe where China’s One Belt, One Road will provide critical infrastructure links, power plants, and other important assistance – and where China exerts less obvious hard power than in the South China or East China Seas -- many leaders fear that the project will simply make it easier for China to flood local markets with Chinese goods, while not being willing to handle trade deals fairly. In Africa, Central Asia, and Latin America, among other developing regions, China’s aid and investment and funding for infrastructure are more warmly welcomed, but they are not without downsides. (Polling data suggest that Africans view China more favorably than people on many other continents.) Some African opinion leaders, while praising Chinese investment, have in recent years complained that Beijing employs too few local workers, pays little attention to environmental norms, and dumps products below costs on African markets. More broadly, since China’s own domestic media environment remains tightly constrained – and is in fact getting less free under Xi Jinping – it is hard for Beijing to convince anyone outside of China to be interested in its cultural programming, as the Economist notes. In my next post, I will discuss why even the global democratic regression of the past decade will not necessarily bolster China’s soft power or increase converts to China’s authoritarian style of politics.

Blog Post by Joshua Kurlantzick May 16, 2017 Asia Unbound
China

China’s Soft Power Offensive, One Belt One Road, and the Limitations of Beijing’s Soft Power

This is the first part in a series on China's attempts to bolster its soft power and its prospects for success. In recent years, China has stepped up its soft power offensive in South Asia, Southeast Asia, and Central Asia, among other regions of the globe. About two months ago, The Economist chronicled Beijing’s soft power boom, in a lengthy story that examined the ways in which China attempts to bolster its softer types of influence. As The Economist noted, China is now spending around $10 billion per year on a plan to boost its global soft power, according to an estimate by David Shambaugh of George Washington University. This effort includes plans to expand China’s foreign-language media abroad, create more Confucius Institutes and foster educational exchanges, boost aid outflows, sponsor cultural festivals abroad, and generally try to portray Beijing today as a defender of the international order, trade, and globalization. China’s massive Belt and Road Initiative, also known as “One Belt, One Road,” chronicled on Sunday in a lengthy article in the New York Times, fits into this soft power offensive in some respects. Beijing plans to spend and raise as much as $1 trillion in an effort to create a vast new road and rail infrastructure, energy projects, and other needed infrastructure across many parts of Eurasia and even in Africa and parts of Western Europe. One Belt, One Road is by far the largest such economic spending plan in the world today – and one that is larger, in its spending, than the famed Marshall Plan was. The infrastructure creation, aid, and jobs that will come with the initiative could boost growth in places from Laos to Pakistan to many parts of Eastern Europe, and could theoretically improve China’s public image in these countries and regions. After all, the United States is supposedly retreating into an “America First” crouch while Beijing is lavishing these funds on building infrastructure and promoting trade, all the way from its near neighborhood to the Balkans. As it happens, I wrote a book about China’s soft power—in Southeast Asia, Africa, Latin America, and other developing regions of the globe—about a decade ago. At that time, China was just beginning to increase its aid programs, launch its educational link-ups with foreign universities, spread its state media into foreign markets, promote Chinese culture abroad, fund large-scale training programs for foreign officials who came to China, and take other methods of boosting China’s influence without utilizing coercive military or economic tools. At the time, China seemed in a strong position to wield its soft power. It had mostly avoided major disputes with its neighbors in Southeast Asia, at least for more than a decade, and it was a relatively new power in Africa, the Middle East, and some other parts of the world. In contrast, the United States at that time was suffering from the aftereffects of the Iraq War; the United States’ public image had soured in much of the globe, and the overall popularity of democratic government was slipping as well. Some Chinese officials were beginning to enunciate a Chinese model of development, as an alternative to the Washington Consensus. Now, a decade after writing that book, the United States’s global image remains weak—although it rebounded for a time during the 2010s—democracy is in dire shape in many parts of the globe, and Beijing undoubtedly is far stronger, strategically and economically, than it was in 2007, when my book was published. But I am doubtful that China can effectively wield soft power today—far more doubtful than I was back in 2007—even though Beijing’s budget for aid, education programs, training programs, cultural programming, and other soft power tools is exponentially greater than it was a decade ago.

Blog Post by Joshua Kurlantzick May 16, 2017 Asia Unbound
China

China’s One Road From Paris

Gabriel Walker is a research associate for Asia Studies at the Council on Foreign Relations. This is the final part of a series on China’s role in international development. Read the first and second parts on the Asian Infrastructure Investment Bank and green bonds. On the eve of this year’s Group of Twenty meeting in Hangzhou, U.S. President Barack Obama and Chinese President Xi Jinping formally ratified the Paris Agreement, the UN’s landmark treaty on fighting climate change. So far 180 countries have signed the document and now, including the world’s two largest carbon emitters, twenty-seven have ratified it. If the Agreement garners enough ratifications to enter into legal force by next April, it would formally bind the signatories to staunch global warming by reducing greenhouse gas emissions, encouraging green financing, and promoting climate resilience. Each signatory’s commitment under the Agreement is self-determined, and China has already made headlines by promising to peak carbon emissions by 2030. But China’s Paris commitments go beyond greenhouse gas caps; they also include pledges to bolster sustainable development abroad. In its Intended Nationally Determined Contribution, submitted ahead of the 2015 Paris climate change conference, China promises to promote green, low-carbon development and innovation; to provide financing, technology, and capacity-building to other developing countries; to foster more equitable access to sustainable development for developing countries; and more. China’s far-reaching Belt and Road endeavor will be a litmus test for these commitments: whether and how it aligns with Paris values is an important opportunity for China to display environmental leadership and establish its geopolitical character. The Belt and Road initiative (also known as “One Belt, One Road”) is a massive trade and infrastructure development project on a scale the world has never seen. Specifically, it aims to connect Eurasian nations and their adjacent seas, establish trans-regional partnerships, and “realize diversified, independent, balanced and sustainable developments” throughout the continent. Its two components are an overland Silk Road Economic Belt, stretching from Beijing to Europe, and a Maritime Silk Road, snaking all the way from the Bohai Sea to the Mediterranean. Transportation infrastructure, such as railways and ports, will feature prominently in the plan, but development projects in many other sectors such as energy, agriculture, and industry will also take shape. For the Chinese government, the Belt and Road strategy is both economically and geopolitically significant. From Beijing’s perspective, it ideally will stimulate the Chinese economy by creating new export markets, offloading excess industrial capacity, and focusing Chinese companies’ international business ventures. Geopolitically, Belt and Road strategists hope that it will counter perceived growing American, Japanese, and European influence over the Eurasian continent, and boost China’s global standing by fostering bilateral trade relationships. The Belt and Road plan is not only potentially transformational for catalyzing development across Eurasia, but is also China’s most clearly articulated international foray to date. The Chinese media have already trumpeted the environmentalism of some early Belt and Road projects, calling them a realization of the “Green Silk Road” ideal. Chinese engineers working on a railway in Tajikistan, for example, took special measures to reforest the site to prevent soil erosion, even when local regulations did not require it. A Chinese-built cogeneration power plant in the Tajik capital of Dushanbe uses some of the world’s most advanced dust-filtration and sulfur-scrubbing technologies. Some private companies have even joined together to found a Green Ecological Silk Road Investment Fund, which will direct capital toward solar panel construction, clean energy development, and ecological remediation. At the same time, international Chinese projects have a poor environmental track record: dams in Southeast Asia have intensified drought; oil field development in Chad caused more than $400 million in environmental violations; and banana plantations in Laos have polluted groundwater, not to mention domestic examples of development-related pollution. For Belt and Road projects, the potential for harming fragile ecosystems through railway and road construction, and coastal air quality through increased shipping traffic, for example, is dangerously high. Redirecting excess Chinese industrial capacity—by relocating factories or by laying down thousands of miles of railroad tracks—will also fuel demand for carbon-intensive products such as steel and concrete within China. Belt and Road pipelines and shipping lanes that satiate China’s increasing need for imported natural gas and crude will certainly bolster the international fossil fuel industry. Because the Belt and Road initiative could easily perpetuate inefficient and dangerous modes of development, Beijing fundamentally needs to reinvent how Chinese companies operate abroad. Consistent indicators in a few areas would prove China’s commitment to environmentally conscious Belt and Road projects, including: Prioritizing low-carbon or carbon-neutral development projects; Implementing comprehensive measures to protect land, coastal, and marine ecosystems from gradual decline, and effective crisis management procedures to remedy unforeseen accidents; Continuing to transfer low-carbon technologies and technological know-how to other developing countries; Working with development banks with proven track records of good environmental governance, such as the Asian Development Bank and potentially the Asian Infrastructure Investment Bank; Displaying leadership by not engaging in environmentally detrimental projects, such as certain hydroelectric dams, even when the potential for profit is high; And setting a good example by holding domestic Belt and Road development projects within China to the highest environmental standards. China’s Paris commitments to sow the seeds of sustainable development are lofty and laudable, especially because they involve more than greenhouse gas pledges. Whether or not the Agreement comes into force next year, China has much to gain by putting its ambitious rhetoric into practice and much to lose if its grand plans go awry. If China is indeed able to promote sustainable Belt and Road ventures throughout Eurasia, it would garner a renewed respect on the international stage for its tenacity in upholding global environmental norms.

Blog Post by Guest Blogger for Asia Unbound September 8, 2016 Asia Unbound
Russia

What “One Belt, One Road” Could Mean for China’s Regional Security Approach

Rachel Brown is a research associate in Asia Studies at the Council on Foreign Relations. In November, when the Islamic State group executed Chinese hostage Fan Jinghui, a Chinese advertising consultant and self-identified “wanderer,” Chinese netizens quickly vented their frustration over the government’s limited response. One Weibo user wrote, “It’s time for China as a big power to stand up and act.” Although Chinese censors temporarily blocked keywords such as “hostage” and “IS,” the burst of online sentiment raised questions about how the Chinese government would react to the mounting threat posed by terrorism both abroad and within its borders. In particular, would the specter of the Islamic State lead China to change its regional security strategy as it expands its trade and investment presence under its “One Belt, One Road” initiative? China’s “One Belt, One Road” (OBOR) policy is an ambitious effort to link the country through infrastructure, telecommunications, and finance to Central Asia, the Middle East, Africa, and Europe. Over the next ten years, Beijing aspires to achieve 2.5 trillion dollars in annual trade with the nations involved in OBOR. Chinese policy analysts are well aware of the security concerns posed by the project. Tsinghua University professor Zhao Kejin has noted, “As China becomes more involved in economic globalization and closely integrated with the world – especially with the ‘Road and Belt’ initiative and its underlying projects – ISIS is not an issue the country can get around.” China has long claimed that it faces an externally supported terrorist threat inside its borders, particularly in the predominantly Muslim autonomous region of Xinjiang. With approximately 70 percent of the trade between China and Central Asia passing through Xinjiang, its stability is vital to the success of the Silk Road Economic Belt. Yet the region has been the site of significant ethnic violence. After the Paris attacks, leaders cited a September attack on a mine in northwest Xinjiang that killed fifty people as evidence of China’s domestic terrorist threat and Chinese foreign minister Wang Yi stated, “China is also a victim of terrorism.” However, a debate persists between foreign observers and Chinese officials over the sources of regional unrest and what constitutes terrorism. These domestic concerns over violence and instability have led Beijing to collaborate closely with its Central Asian neighbors on antiterrorism efforts since the 1990s. Historically, this collaboration has occurred through the Shanghai Cooperation Organization (SCO), whose members already exchange information and practices through the Regional Anti-Terrorist Structure. Since 2002, China has also participated in fifteen military exercises and drills with the SCO and according to one report, “all but one of these exercises have focused explicitly on counterterrorism.” While these are not highly complex drills, they nonetheless help Chinese troops prepare to operate in foreign contexts and improve battlefield capacities, essential skills were China to adopt a more active military presence abroad. At an SCO meeting in mid-December, Chinese premier Li Keqiang advocated that the group collaborate even more closely in addressing the threat posed by the Islamic State. Separate from their SCO activities, China and Kazakhstan also made defense pledges in October that could help the two nations cooperate to fight terrorism, including through Chinese training of Kazakh special forces. Yet OBOR will significantly raise the stakes for Chinese counterterrorism efforts. Much of the land-based portion of OBOR will pass through Central Asia. New infrastructure and energy projects travelling through Xinjiang and Central Asia will increase both the number of Han Chinese workers in the region and the attendant security risks. Protection of Chinese laborers abroad has become a growing concern for the Chinese government. For example, three executives from the China Railway Construction Corporation were killed by al-Qaeda in the Islamic Maghreb during the hostage crisis at the Radisson Blu Hotel in Bamako, Mali. Recent propaganda released by the Islamic State such as a Mandarin chant calling on Muslims to “take up weapons to fight” has intensified fears of terrorism targeted at Chinese nationals. The implementation of OBOR will also likely reveal critical gaps including a lack of “military reach and experience on the ground dealing with complex security” writes Andrew Browne in the Wall Street Journal. At present, China depends on local militaries and in some instances Russian troops to ensure the safety of its projects. The evolving military presence of both Russia and the United States in Central Asia will also affect China’s security needs in the region. As the United States reduces its presence in Afghanistan in the coming years, China will be forced to consider new options to help secure its investments in ventures such as the Aynak copper mine. Beijing has taken some steps to meet these gaps and protect China’s interests abroad. Article 7 of the newly approved counterterrorism law permits members of the People’s Liberation Army (PLA) and other Chinese security forces to conduct counterterrorism missions abroad if granted approval by the relevant host nation. PLA reform proposals would also establish the largest of five new military zones (hosting over one-third of China’s ground-based forces) in the nation’s far west, which could enhance their ability to address instability close to Central Asia. PLA members have proposed additional ideas such as supporting private military firms to play a role in providing security if Chinese troops are not permitted to do so, and pushing the SCO to assume more responsibility in addressing the dual priorities of security and economic development. The confluence of perceived domestic threats in Xinjiang and the need to protect large investments in neighboring countries could lead China to pursue a more aggressive counterterrorism effort, linking cooperation with other countries to an expansion in the capabilities of the PLA. While China’s rise as a regional and global power brings new opportunities, it also introduces new challenges including more targets for terrorists and concern over the intentions surrounding Chinese economic projects. Such risks, however, are often the price a “big power” pays to trade and invest around the world.

Blog Post by Guest Blogger for Asia Unbound January 12, 2016 Asia Unbound