The below paper is my homework written at the beginning of August 2021. Some of my arguments and prediction maybe incorrect in the future, but I think it is worth sharing in the situation of the real estate debt crisis in China, and the opening of the Lao high-speed train, and Vietnam's first Metro line in October and November 2021.
Firstly introduced officially by China President Xi Jinping in May 2013, massive infrastructure project connecting Asia and Europe - Belt and Road Initiative (BRI) was a big surprise about the massive ambition of China to the world. Became the largest project in human history, the project promoted the concept of a more assertive China [1]. However, from the beginning, the overall concept and purposes, the implementation plan, the feasibility of the super project were not only controversial but also skeptical. Compared to Japanese infrastructure outbound strategy, this essay will raise some important questions based on specific project cases in Lao and Vietnam, after giving brief information about both countries’ policies and researching the latest progress.
1. Introduction:
China’s Belt and Road Initiative originated from Silk Road, trading roads connecting the East and the West approximately 2000 years ago. The world leaders and citizens were amazed about the ambitions of Beijing while learning about the calculated and estimated numbers much larger than the original one: 72 countries from East Asia (2), Southeast Asia (11), South Asia (8), Central Asia (5), Middle East and North Africa (15), Europe and Central Asia (24), and other countries on Maritime Silk Road (7)[2]; arranged into 7 economic corridors; total investment amount could reach $1.2-1.3 trillion by 2027[3]; with thousands of component projects including ports, railways, highways, power stations, aviation and telecommunications.
On the other hand, Although Japanese infrastructure companies and governmental agencies had expanded foreign markets several decades ago, the very first national strategy – Infrastructure Systems Outbound Strategy was published in May 2013[4]. Hence Japanese nationality’s feature is often modest; some documents are translated into English, but most of the information about their Outbound Infrastructure Strategy is in Japanese, and they have not spread much propaganda about these to other countries. In contrast to Chinese politicians, the Japanese tend to conceal the factual purposes of their national interests. Japanese government under ODAs packages to developing countries have officially shown off their purpose of international development aids. According to the Ministry of Land, Infrastructure, Transport, and Tourism’s report, the contracting amount of basic infrastructure construction projects in foreign markets were approximately 568 billion JPY (5.2 billion USD), of which 60 % was ODA.
Graph 1: Contracting amount of foreign infrastructure construction projects [5]
Source: Japanese Ministry of Land, Infrastructure, Transport, and Tourism
Except for skepticism and criticism about China’s ambition for hegemonism, there are many doubtful points about the feasibility of BRI. This essay focuses on equivocalness about technical points of BRI project planning and project management compared to Japanese cases. Aside from other political purposes, both countries have the same motivations for this outbound strategy: solving the redundant capacity of domestic economies after booming. Interestingly, both countries strengthened their outbound infrastructure strategy almost the same time (2013) because of internal slowing economies. In two countries, many companies such as construction material manufacturers, design, and general contractors have been struggling to find a new market for their survival. The main point is that the implementation measures are entirely different, and the way China is conducting shows so many signs of forecasted failures.
2. Causes for predictable failures
① Arbitrariness in China super strategies
It is understandable why many experts were confused about the practical perspective of the super projects. BRI is not the first time China had projected and implemented super projects. For example, from 1958 to 1962, Chairman Mao Zedong launched the economic and social campaign - Great Leap Forward. The campaign was a humane disaster, causing the largest famine in human history (estimated between 15 and 55 million deaths). The lack of realistic views (implementation without strict feasibility research studies) and the lack of domestic freedom argument have made China policies arbitrariness. Even in recent years in China, there are so many failures in infrastructure investments. In these two decades, there are a dozen so-called ghost cities in China, such as Ordos City Kangbashi New Area and Nanhui New City. It seems that State own companies in the industry need to use their resources; therefore, they need to build as much as possible and did not research any actual demands. Others have argued that some areas, such as Pudong, one of the first ghost cities, now a prominent global financial district of Shanghai, need to be given enough time to develop into a vibrant area. However, is it appropriate to compare Shanghai, the most prominent economic city in China, the most crowded country with more than 1.3 billion people, with other much smaller countries? Without any detailed research about forecasting actual demands and trading volume in the future, these expensive projects are really wasteful because they may cause debt crises in many small developing countries. For instance, as a part of China’s BRI in Lao, which started constructing in 2015, the 414-kilometer high-speed rail line connecting the southern Chinese province of Yunnan with the Laotian capital of Vientiane will be completed. To be worth noting, in 2012, only 17 percent of Laos’ roads were paved. Perhaps this 7.1 million people country may need such a long high-speed rail line in the future. However, the question is whether the country needs to build a large project cost 1/3 of their annual GDP of 19.2 billion USD in 2019. Besides paying for interest fees of the estimated $1.5 billion in external debt to China[6], the country also must plan to pay for maintenance and operation fees.
In contrast, the Japanese government and companies have not decided speedily in foreign countries. They tend to did many feasibility studies, market sounding before beginning to conduct a project. Through Japan International Cooperation Agency (JICA), the Japanese government usually does a lot of area research for a long time before screening particular potential projects to conduct. In addition, based on market sounding Japanese government has selected the most appropriate for the country not as being served as the part of BRI like the case of China. For instance, in Lao from 2014 through 2016, Japan provided only one loan aid infrastructure project, the Vientiane Capital Water Supply Expansion Project with the cost of approximately 100 million USD[7]. Before deciding to conduct this water supply expansion project in 2015, JICA did the “Study on improvement of water environment in Vientiane city (01/2009～09/2011)”, drew a master plan in 2014, and did the preparation survey on Vientiane Capital water supply expansion project as a Feasibility study in June 2015[8].
Through two countries' projects in Lao, it is evident that compared to 100 million USD, the Japanese aid project took six years to do pre-project studying while the Chinese BRI, the 15 times more expensive in the amount of debt project, lacks the research time for real demanding. It is easy to realize the differences between the features of policy of both countries. When China-style concentrates on speed: "complete first, if failure, correct or forget and do another e," Japanese style is "wait and see how things will turn out." Each style has its own relative merits and demerits. However, in super projects where the impacts and the price of failures are enormous, the deeper and more comprehensive the feasibility studies are, the more practical and effective the projects will be. Some component projects of China's BRI have been completed, but experts cannot have a comprehensive evaluation of the pandemic. Nonetheless, it is also necessary to consider difficulties of operation after finishing construction, similar to the Ha Noi Metro project stated below. The lack of operational know-how is the primary reason for only 13 km of railways being delayed in nearly 100 million people Vietnam. Building physical facilities seem to be much easier than operating such complicated systems. Is Lao the country with only 7 million people and has no previous railways operation know-how before being ready to operate 414 km of high-speed railways? The answer is easy to predict. As a result, the failure of the high-speed rail line in Vientiane is forecasted.
② Contradiction from the citizens of member countries
In contrast to “made by Japan” national brands, the image of China’s national brands is extremely low. The reason may be that many international media have introduced and written about the low quality of Chinese products in general and Chinese construction projects in particular. For instance, in Vietnam, because politicians decided many governmental projects, citizens are not satisfied and usually opposite Chinese general contractors. It is easily seen that in the member states of BRI, national leaders tend to feel the delight to receive Chinese loans to form the infrastructure for development. The public often mistrusts the Chinese government and projects. Moreover, more questions were raised about whether it is debt-trap diplomacy from Beijing after. For instance, in August 2018, Chuck Grassle and other 15 US senators cited “the dangers of China’s debt-trap diplomacy,” warning: “The United States must counter China’s attempts to hold other countries financially hostage and force ransoms that further its geostrategic goals.”[9].
A fascinating case is the two first metro systems in Vietnam when in Ha Noi, China’s general contractors were employed for the Line 2A (Ha Dong – Cat Linh), and in Ho Chi Minh city, Japanese companies are contracted for Line 1 (Red Line, Ben Thanh - Mien Dong Bus Station). The 13 km railway between Cat Linh and Ha Dong in Hanoi started in October 2011 and was planned to operate in 2016. However, until 2021, the opening schedule is still delayed. Not until the delays of Line 2A, in Vietnam as the most anti-China country in Southeast Asia, Anti-Chinese sentiment has been present, resulting in many arguments about selecting the Chinese contractors and loan aids in the public. Neighboring China, in addition to thousands of years of historical disputes, the Vietnamese are worried about the recent rising influences of China in the world and the areas. Moreover, there are fears about corrupt officials "selling off" land to Chinese government investors due to China's "debt-trap diplomacy" in Africa. There is no countable hostility to Ho Chi Minh city's Line 1 projects being constructed in opposition to Ha Noi's railway systems. The beliefs in Japanese quality, transparency, and integrity of the Japanese government's trading predominate Japanese in foreign countries' markets. Not only in such extreme instances like Vietnam, in many other countries in the world (excepting China and Korea, for other historical problems), local citizens feel a strong affinity toward Japan. At the same time, in member countries of BRI, there are protests along the BRI. For example, in 2019, their many anti-Chinese protests in Russia and Kazakhstan were strong evidence that the BRI may face so many challenges by the popular resistance and local politics. "Government support is not enough," Oyuna Baldakova at Mercator Institute stated [10].
In addition, the anxieties that China has become a neo-colonialism because of its' "wolf warrior diplomacy" are natural. The "wolf warrior diplomacy" began with President Xi Jinping, the same prophet of BRI. Recent movements such as the "US-China trade war" or claims of "nine-dash line" are understandable nationalism because of their power from 1.3 billion people population and contemporary economics and technology development. However, these movements from Beijing fear other countries without regard to BRI's member countries. Despite not being related to BRI, the movement for the close of Confucius Institutes in recent years is evident of "anti-Chinese sentiment." Mandarin language and culture classes on Western countries' universities campuses are being abolished rapidly by host universities. International communities have tried to escape China’s rising influences regardless of actual economic interest. Needless to say, the "wolf warrior diplomacy" is harmful to China's soft power, causing negative impacts to the ambitious BRI. Recently, not only citizens, or other Western countries' politicians, or experts, but also project member countries' leaders who once were delighted about infrastructure development opportunities, now become anxious about the debt-trap diplomacy and Neo-Imperialism of Beijing. For example, Italia the only G7 country is predicted to be slow to withdraw from China’s BRI [11]. Beijing ought to be aware that the “wolf warrior diplomacy” of China has unexpectedly adverse effects on its’ foreign strategies.
Adverse to “wolf warrior diplomacy” of China, “pacifism diplomacy” of Japan is undoubtedly an excellent tool to obtain pro-Japanese sentiment from international communities. As a result, for example, the ranking of the two countries in the world’s top soft power nation 2021 is not so surprising. Japan ranks 2nd, compared to 8th of China[12]. It seems like the Japanese are very clever in appealing to be a “friendly international partner.” It is indubitable that soft power is an intangible but “valuable weapon” for the Japanese abroad. If Beijing wants to conduct the BRI smoothly and successfully, they need to concern about meticulous care toward the sentiments of foreign countries.
③ Financial matters
It is countable neglect if omitting financial perspective. The first significant issue is "the possibility to repay loans and interests" of the recipient countries. The Congressional Research Service stated China's "unsustainable debt obligations" as U.S. concerns on January 22, 2021. The article runs an example about the Sri Lankan government, which could not repay Chinese loans. As a result, the Chinese state-owned company China Merchants Port Holdings Company acquired the operation right of Hambantota for 99 years. High-interest rates, rarely forgiving debt repayment and extending the duration of loans were pointed out to measure China's long-term financial dependencies[13]. A few years later, that more member countries struggle to pay back and sink into debt traps is predictable. If the recipient countries' bankruptcy was the aimed results of Beijing, would "BRI loan policy" be sustainable for China? In other words, will Beijing afford to finance all component projects of the BRI alone?
The answer is "uncertain." As written above, many of Chinese's mega strategies failed because of lacking rigorous researches and feasibility studies. In general, the more influential the top leaders are, the more arbitrary the macro-policies are in China and other social countries. President Xi Jinping is frequently said to be the most prominent and powerful leader after Mao Zedong. Therefore, it is skeptical that Beijing calculated all costs in the worst cases and their capability to pay until the BRI completion. Moreover, the situation has changed since BRI was first introduced in 2013. From 2010 to 2015, the foreign-exchange reserves had increased significantly from 2.88 billion USD in 2010 to 3.88 billion USD in 2015, recorded annual average growth of 7.04%. However, since 2015, the foreign exchange reserves decreased and dropped to 3.2 billion USD at the end of July 2021.
Graph 2: China foreign exchange reserves from 1995 to 2020
Source: Tradingeconomics.com[14]
Arguably, the balances of foreign exchange reserves are not so relevant to China's domestic financial circumstances. However, China's domestic debt is deserved to focus.
Graph 3: China’ domestic debt from 2006 to 2020
Source: CNBC[15]
Compared to 2012, in 2020, China's domestic debts have increased drastically, causing the Debt-to-GDP ratios to rise from 180% to 290%. The rise in debt is undoubtedly impossible to understate while there are continuing adverse effects of U.S - China trade war and pandemics. A finance professor at Peking University, Michael Pettis, also made a rebuttal statement toward President Xi Jinping proposed the idea that GDP can be twice as big in 2035 at a Communist party conference in January 2021. Michael Pettis stated that a declining working population, dropping in productivity, and substantial and unpredictable political and social changes will be significant obstacles China will face. These matters in finance and economics issues certainly negatively affect the feasibility of the projects.
3. Current the situation of the project:
Graph 4: Chinese overseas investments 2013-2020 – distinguished between BRI and non-BRI countries Source: China’s Investments in the Belt and Road Initiative (BRI) in 2020[16]
The significant drop tendency of China in BRI and non-BRI countries on the above graph is evident about China’s declining financing ability. After reaching their peaks in 2016, the investments drop gradually. Excluding the effects of pandemics in 2020, there were slight decreases in investment in both BRI and non-BRI countries between 2017 and 2019. There are some assumptions about the declines in this period (2017-2019) compared to the annual average increase of 20 % in the previous period (2013-2016). First, China has been facing financial difficulties, causing reductions in its foreign investments. Second, the recipient countries of BRI become more cautious about Beijing loans for BRI’s projects. Whichever assumptions are more influential to this decline is also crucial for further analysis. The slight decline in the latest periods is an unignorable sign for the technically systematic failures of BRI in the future.
In the current world of freedom of speech, Beijing cannot prevent international critics and negative views of China. It is not the internal China where any opposite opinions are considered “erroneous opinions,” banned and punished. Xi’s government can use economic policies to punish other developed countries like the USA or Australia in recent years. However, it is hugely blockhead if China used the same measure to all countries. In other words, Beijing cannot use its’ unitary powers to conduct all the projects arbitrarily in foreign countries the same way as the projects are in domestic. China should learn more about Japanese diplomacy in international development strategies and project implementation methods to avoid foreseen failures.
[1] Andrew Chatzky and James McBride, China’s Massive Belt and Road Initiative, council foreign relations homepage, January 28, 2020
[2] OECD, OECD BUSINESS AND FINANCE OUTLOOK 2018 © OECD 2018
[3] Morgan Stanley, Inside China's Plan to Create a Modern Silk Road, Mar 14, 2018
https://www.morganstanley.com/ideas/china-belt-and-road
[4]Japanese government Kantei Homepage, May 17, 2013 https://www.kantei.go.jp/jp/singi/keikyou/dai4/kettei.pdf
[5] 石原 康弘、今後のインフラシステムの海外展開、日本国土交通省、土木学会
Yasuhiro Ishihara, Overseas Expansion of Infrastructure Systems, Ministry of Land, Infrastructure, Transport and Tourism of Japan, Japan Society of Civil Engineers
[6] James Guild, China’s BRI and its High-Speed Railways to Nowhere, The Diplomat, November 10, 2020, https://thediplomat.com/2020/11/chinas-bri-and-its-high-speed-railways-to-nowhere/
[7]Japanese Ministry of Foreign Affair https://www.mofa.go.jp/files/000142544.pdf
[8] JICA, Nihon Suido Consultants Co., Ltd. June 2015, The Preparation Survey on Vientiane Capital Water Supply Expansion Project
[9] Chuck Grassley, Senators Express Concerns Over China’s “Debt Trap” Diplomacy With Developing Countries, 08.10.2018
[10] Oyuna Baldakova, Protests along the BRI: China’s prestige project meets growing resistance, Mercator Institute for China Studies, Dec 10, 2019
https://merics.org/en/analysis/protests-along-bri-chinas-prestige-project-meets-growing-resistance
[11] Oxford Analytica (2021), "Italy will be slow to withdraw from China’s BRI", Expert Briefings, June 18, 2021, https://doi.org/10.1108/OXAN-ES262218
[12] Brand Finance, Brand Finance Global Soft Power Index 2021, 25 February 2021
https://brandfinance.com/press-releases/global-soft-power-index-2021-15-nations-from-mena-feature
[13]Congressional Research Service (CRS), China’s “One Belt, One Road” Initiative: Economic Issues, https://crsreports.congress.gov/product/pdf/IF/IF11735
[14]Trading economics https://tradingeconomics.com/china/foreign-exchange-reserves
[15] Yen Ne Lee, These charts show the dramatic increase in China’s debt, CNBC, MON, JUN 28 2021https://www.cnbc.com/2021/06/29/china-economy-charts-show-how-much-debt-has-grown.html
[16] Dr. Christoph Nedopil, China’s Investments in the Belt and Road Initiative (BRI) in 2020, Director IIGF Green BRI Center Beijing, January 2021
https://green-bri.org/wp-content/uploads/2021/01/China-BRI-Investment-Report-2020.pdf
