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A second look at China's OBOR scheme

  • Published at 06:44 pm June 18th, 2017
  • Last updated at 08:04 pm June 18th, 2017
A second look at China's OBOR scheme
Some see the ambitious China-sponsored One Belt One Road (OBOR) scheme, seeking to connect UK, West Europe and Chinese locations by road/rail linkage through West Asia and Africa, as the world’s biggest infrastructure development project. By achieving new connectivity, this has the potential to rev up the stagnant economies of over 100 countries currently hit by a world recession. It will bring about a massive increase in the movement of people and goods in the medium turn. The critics of the project, who are by no means anti-Chinese by inclination, view the project quite differently. Their verdict: what is presented by China as an economic game changer is a grand scheme to increase both the depth and range of Chinese economic influence in the world, which can readily morph into a political domination at short notice. Both in Bangladesh and India, the OBOR scheme has its supporters and critics. The proposed Bangladesh–China–India–Myanmar Forum for Regional Cooperation (BCIM) – the 2,800 km economic corridor – is a component of the OBOR scheme. However, its work continues sporadically. Meanwhile in South Asia, two countries, Pakistan and Sri Lanka, have had their first taste of working with China on major economic projects. China has built the Hambantota Port complex in Sri Lanka. It has also built the long China-Pakistan Economic Corridor (CPEC) highway linking its Xinjiang province with the Gwadar port in Pakistan. The question then arises, what has been their experience and what are the short-term results so far. But before that, let's look into the timing and objectives of the OBOR project. Regardless of their political leanings, most economists are convinced that Beijing has launched the OBOR initiative with much fanfare at a time when its own domestic economy is in recession. They believe, China's demand for new construction in real estate sector has slackened. As the Indian analyst Mohan Guruswamy points out in his recent write-up, China’s current domestic annual demand for steel is for only 700,000 tonnes however it has the capacity to produce 1.1 billion tonnes of steel. For China, it would make good sense to produce more steel only if the surplus output is used for specific projects – building highways, bridges and tunnels or expanding roads under the OBOR. However, as Guruswamy explains, even the ongoing OBOR scheme will not solve the problem of idle over-capacity in China’s steel sector. World Steel Industry estimates are that the European Union (EU), which usually has the biggest regional demand for steel, would need only 150,000 tonnes for this year, whereas China has an excess capacity for 300,000 tonnes! It is the same with cement and other materials that are essential for construction and infrastructure building operations throughout the world. Domestic demand in China has been hit by an economic slowdown. The property and stock market bubbles have burst. This has created idle capacity reducing the demand for cement. However, Chinese forex reserves are still the largest in the world – by some estimates, amounting to around $1.3 trillion. Because of the world economic slowdown, much of this amount held in western banks, cannot be invested. Much of the money lies in the form of US government bonds, with a low interest component. Worse yet, the value of the US dollar, vis-à-vis other international currencies, has been depreciating for several years.
This means the longer Chinese forex reserves stay in the vaults, the more the country loses in real terms. What better way to spend these idle dollars in a massive infrastructure development project, like OBOR, adopting a lesson taught by Keynes? As economists point out, the yields from infrastructure projects may not be very high, but the duration of repayment from such projects takes a long time and the rate of return is better than going interest rates. So, the OBOR solves both problems for China: it uses up its idle dollars, ensuring that in terms of loans and tolls it will recover the money invested and at the same time, keep its own factories running at full steam even as other major economies find it hard to keep their workers employed. In the process, struggling economies of smaller countries in Asia and Africa are helped in building their infrastructure – resorting to the ‘soft ‘ long-term loans on offer from Beijing. The repayment of loans of such projects may be small, but they will continue for ages! Even so, the OBOR may not see the kind of success its Chinese presenters hope for. Many big and small countries, including the US and the EU, attended the recently concluded international meet in China to discuss the OBOR. However, President Xi Jinping announced that China would spend around ¥380 billion ($55 billion) for the OBOR in the short-term. Significantly, this falls well short from the claims of $750 billion or so worth of investments that were made earlier by some circles, suggesting that perhaps the world's most populous country would take its next steps more carefully. [caption id="attachment_69852" align="aligncenter" width="780"]China's President Xi Jinping attends a news conference at Los Pinos Presidential Palace in Mexico City June 4, 2013. REUTERS/Edgard Garrido China's President Xi Jinping at a news conference at Los Pinos Presidential Palace in Mexico City June 4, 2013 Photo: REUTERS[/caption] As some western observers have pointed out, in the end what may prevent the OBOR from becoming an attractive proposition for countries keen to move their imports/exports by road/rail is the cost factor. The researcher, Tom Holland, points out that land freight costs are always pegged higher than sea freight costs, because of the time factor. And surely the bulk of export/import items are not high priority items with a brief shelf life. So most countries may prefer to continue using the sea routes for the movement of their goods – cutting down on costs. As for the experience in Pakistan and Sri Lanka, both public and political reactions to the impact of Chinese projects have not been entirely positive. By using labour and other components, Beijing is believed to have recouped most of what it spent on building the Hambantota port complex. But hard negotiations continue between the two countries as to what further concessions (not necessarily in cash terms) Sri Lanka has to make to China. The Sri Lanka government has also faced much flak over the concessions it has already announced for China. However, it has been worse in Pakistan. Analysts have pointed out that the CPEC practically divides the country into two parts, with thousands of Chinese personnel expected to work in various manufacturing and power producing units. Over 15,000 Pakistan para-military troops provide protection for them, from Baluchi and other insurgents, who have created problems during construction of the highways. To make matters worse, two Chinese citizens have been kidnapped and killed by suspected miscreants a few days ago – causing some anger in Beijing. A Pakistani economist addressing a gathering in Kolkata last week did not mince his words. He said: “It may seem to a visitor to Pakistan these days that the country has become a colony of China!” This, as he says, calls for more trade and business between India and Pakistan. Observers are more worried about the purchase of scores of big and medium companies by Chines businessmen in Pakistan, along with the acquisition of thousands of acres of agricultural land along the CPEC highway by China (by lease or other arrangements). What do the Chinese want to do with such large tracts of largely water-deficit land in Pakistan? Only time can tell. Already there are reports that the Chinese intend to build new army bases on Pakistani soil, which have been denied by Beijing. But judging by the experience of Myanmar (where China is no longer a popular country among the people), it is certain that Beijing will not feel it necessary to explain to Islamabad what it wants to do with Pakistani soil once it acquires control there. Bangladesh and India, therefore, must learn from the experience of their regional neighbours in their dealings with the Chinese, if only to avoid major political/diplomatic problems in the long run.