Railpolitik: the strengths and pitfalls of Chinese-financed African Railways

Ethiopia is tapping into both Chinese and Turkish financing for its railway ambitions. The difference illuminates the pros and cons of China’s model of overseas infrastructure development.

By Chen Yunnan

Chinese railways are crisscrossing the world. Driven in part by domestic competition in a saturated infrastructure construction market, Chinese state-owned enterprises (SOEs) are increasingly seeking projects overseas, constructing new transboundary high-speed rail projects across Southeast Asia, and in Africa, new standard gauge railway (SGR) projects in Nigeria, Kenya, and Ethiopia. These projects have become a way to offshore China’s excess capacity in its industrial sectors, boosting Chinese manufacturing through a ‘supply chain export’ model where railways, locomotives and equipment are offered as a package to recipient governments in Africa and elsewhere, and conditional on the generous loan finance from China Eximbank that supports them.

These projects have constituted some of Africa’s largest lending from China. Up to 2016, 31% of China’s total lending in Africa has been in the transport sector: of this, over a third went to the railway sector. Many projects feed into existing domestic and regional corridor plans, but they have also become absorbed into China’s Belt and Road Initiative (BRI), particularly in the east African region. Railways also hold symbolic power in the China-Africa relationship. The first Chinese-built railway, the Tanzania-Zambia (Tazara) cross-border ‘friendship railway’, was built in the 1970s, at the height of the Cold War and China-Soviet tensions, when China was on a desperate search for international allies. It remains a potent symbol of contemporary solidarity and cooperation between China and its African partners.

But as this case study of Ethiopia’s engagement with China’s railway financing shows, the “China model” of supporting railway expansion in Africa comes with both strengths and constraints. Though “debt sustainability” concerns loom large in conversations about railway projects, the difficulties experienced in Ethiopia’s railway projects are more directly linked to its creditor-debtor and employer-contractor relationships formed under those deals. A parallel case of a Turkish-financed railway project, constructed sequentially after a major Chinese-line, highlights the pros and cons of the politically-oriented China model vis a vis a more transactional, commercially-motivated project.

Research for this case study in 2018 and 2019 involved several months of fieldwork investigations, including site visits to operational and under-construction railways, as well as around 40 interviews with representatives from the Ethiopian Railway Corporation (ERC), Chinese and Turkish contractors, and other managing agencies working on the project. Interviews were semi-structured, and conducted in English and Mandarin Chinese.

Ethiopia rail
Images: Chen Yunnan

Ethiopia’s Railway Ambitions

Ethiopia has had perhaps one of the most ambitious railway development schemes in Africa, leveraging Chinese as well as other foreign finance for its railway network. In 2007, the Ethiopian Railway Corporation (ERC) was created to oversee the construction of a new planned network spanning 5,000km. This network was seen as part of a wider industrialization and export-oriented growth strategy to connect major planned industrial zones across the country—many of which have Chinese involvement—to the sea port in Djibouti, which was also financed and constructed by Chinese institutions. Crucially, this is the justification on which the railway is supposed to make economic sense.

Economic potential—in generating trade and connectivity, and in encouraging technology transfer through foreign investment—is one of the main allures of railway technology. In China’s own domestic experience, the development of its locomotives industry benefited directly from German and Japanese technology. Further back, the construction of many of China’s main arterial railways, and the creation of professional railway institutions owed much to colonial-era foreign concessional railways by British and American companies. However, this form of technology transfer is not automatic. The Tazara railway’s decline after the departure of Chinese engineers showed a failure of management and the insufficiency of knowledge transfer.

As well as a new urban light rail project in Addis Ababa, Ethiopia has so far constructed two new standard gauge railway lines. The first, from Addis Ababa, crosses the border towards Djibouti (marked in red below) ; the second, a branch from the city of Awash northward to Weldiya, eventually to connect the trunk line to the north city of Mekele in Amhara (marked in green below). All these projects, including the light rail, are notable for being the first electrified railway projects in sub-Saharan Africa.

Ethiopia railmap

A Tale of Two Financiers

The Ethiopia case is particularly illuminating because at the same time, the country is tapping into two very different pools of funding and construction expertise to realize its railway ambitions.

Ethiopia’s first route, from Addis Ababa to the port of Djibouti, is Chinese constructed, by a joint consortium of China Railway Engineering Corporation (CREC) and China Civil Engineering and Construction Corporation (CCECC), and financed by China Eximbank through a loan of US$2.5bn. The second line from Awash to Weldiya, is a Turkish/European project, built by Yapi Merkezi, and financed by a consortium of lenders including Turkish Eximbank, who lent US$300mn, and Credit Suisse at a tune of US$1.1bn. While both are similarly financed through commercial loans and an EPC (Engineering, Procurement and Construction) contract, the different financiers and contractors at play has entailed a significant divergence in how the ERC and other agencies have been able to leverage their contractor and financier relationships, with implications for project implementation and for the agency and choice of recipient host governments.

One major material difference between the two railways’ construction are the different standards and technologies used between the two sets of contractors. The Chinese Addis-Djibouti line, completed in 2018, uses Chinese Class 2 technical standards, and CTCS (Chinese standard) signaling systems that controls locomotive speeds above 120km/h. The Turkish-built Awash-Weldiya line, meanwhile, employs European technical standards, including social and environmental safeguards, and employs ERMTS (European standard) signaling systems. As of 2019, the project was over 95% complete. It will likely require several more years for electrification and testing before it will become operational however, as well as a further challenge of integrating the operation of the two railway lines.

The two railway projects also show a very different creditor-debtor relationship, influenced by the nature of how the financing for the projects arrived. This in turn impacts the relationship between the ERC and the project contractors, as well as the implementation of the projects. For instance, the Turkish contractors Yapi Merkezi won the Awash-Weldiya project through a traditional competitive bid, where crucially, their promise to broker finance from European creditors for the EPC contract was key in winning them the bid. Meanwhile, the Chinese railway project was premised on a strategic bilateral relationship: financing was pledged first via high-level discussions between Chinese and Ethiopian governments. Contractors were subsequently determined on the Chinese side, through a selection process of the major national railway contractors—while this process is competitive, it is limited to only Chinese firms and decided in Beijing, not in Addis Ababa. Though the Turkish project also enjoyed export credit financing, the project due to its blended finance nature was far more commercial and transactional in its relationship between host and contractor.

The implications of this for the ERC’s scope of agency is significant. Contrary to common perceptions, the major advantage of choosing Chinese finance has been the flexibility in the financial relationship. Ethiopia has long-faced challenges in its foreign exchange that has seen it struggle to service external debts. With its Chinese partners, the ERC has been delaying payments on loans and on the management fees to the contractors for the first year since the project started operating. In September 2018, Ethiopia renegotiated the tenor of loan to 30 years from the original 15-year agreement, signalling a major concession on the part of China. With its European lenders, however, Ethiopia has never missed a payment.

In this area, Ethiopia has seen increased scope for maneuver. It has prioritized its European private creditors where it has less leeway, due to higher reputational and financial costs in non-repayment. Conversely, the strategic and political relationship that Ethiopia holds with China as a regional partner means it has been able to exploit the flexibility of Chinese finance that the bilateral Ethiopia-China relationship offers. Put simply, the political elevation of the railway as a ‘Belt and Road’ project means it is politically unfeasible to allow it to fail, giving the Ethiopian government significant leverage and flexibility over loan repayments.

The Double Edge of Chinese Loans

Despite the corollary of this, the ERC faced a bigger struggle when facing its Chinese contractors in applying pressure and getting compliance compared to the Turkish, where they had a more transactional commercial relationship. In this sense, the tied nature of financing has been a constraint to the exercise of agency. Firstly, in the inability to choose the contractor, which was a condition of financing in both Chinese funded light rail and standard gauge railways. Secondly, in the appointment of Chinese construction company representatives as the employer’s representative,, a position which generally takes the project owner’s side (in this case the ERC) in holding contractors to account on the project implementation and construction. This was the case in the Addis-Djibouti railway, where ERC were compelled to select CIEEC as the employer’s representative. This had repercussions for the level of trust and accountability between the ERC and contractors, as the ERC perceived the employer’s representative and contractors to be in a form of ‘collusion’, and not adequately representing the ERC’s interests.

The political model of finance, despite its advantages in terms of loan repayment, has led to an ineffective employer-contractor relationship. One example of this can be seen in when the project owner (ERC) tried to push the contractor CREC to fulfil a commitment to procure and provide spare parts for maintenance work on the light rail. Pushing the contractor directly was ineffective. Contractors were slow to respond to demands and, with the ERC behind on payments to the contractors for railway operations and management fees, their leverage over the firms was limited. Instead, according to the ERC’s manager on the light rail, they had to pull on political levers, calling on the Chinese embassy and economic counsellor’s office, who then applied direct pressure to the firms to order and pay for parts, and to pay for a new maintenance workshop.

This poor relationship between host and contractor also has implications for the long-term sustainability of the project, particularly for skills and technology transfer. Interviewees at the ERC expressed a sense of missed opportunity in the construction phase of the Addis-Djibouti railway, in terms of the potential for learning and knowledge transfer on railway construction for local staff. There is also a distrust of the firms’ interests in technology transfer on the part of Ethiopian respondents, who see genuine capacity building as a conflict of interest with the incentives of the Chinese companies to hold onto their intellectual property and knowledge, ensuring their continued involvement in the railways’ management. ERC has since learned from this experience and built in an engineering skill transfer component in its Yapi Merkezi deal.

The very fact the two contractors—specialists in construction, not operation—remained in the first place to take over the operations and management signals a failure of capacity building during the early phase. Significantly, CREC and CCECC were both pressured to extend their operation and management role beyond the initial six years agreed in contracts..

Under pressure from China’s Ministry of Commerce (MOFCOM) and the ERC, the firms have later set up a capacity building center outside of Addis Ababa, conducting in-house training sessions themselves for staff in maintenance, engineering, and even driver training. Further funding via Chinese aid have supported student exchange for ERC workers at several Chinese universities with railway specializations, and in 2018, MOFCOM pledged funds for a new railway academy, which will specialize in railway vocational training.

In this, the flexibility of this coordinated Chinese model abroad compensated for the poor employer-contractor relationship. The Chinese contractors have continued to fulfil the operation and management parts of the contract, despite late loan payments on the part of the cash-strapped ERC. The comprehensive breadth of skill transfer initiatives involved from both state actors and contractors, in financing new colleges, student exchanges and training courses, are advantages that competitors like Turkish Yapi Merkezi, cannot fulfil, and do not have an interest in.

Furthermore, these state-led and firm-led training and technology transfer initiatives offers not only the transfer of technology, equipment and contractors, but also whole systems of management: the dissemination of China’s own railway technical and managerial standards, operating procedures and protocols, all of which will have a similar impact on the development of Ethiopia’s young railway bureaucracy—in the same way that China’s own railway borrowed from European and foreign partners. This can generate potential path-dependence effects that can ‘lock-in’ advantage for Chinese firms and technology in the future. This can already be seen in the case of the Turkish-built railway, where despite the use of European construction techniques, the design of the railway itself had to conform to Chinese locomotives, and the signaling system to be integrated with the Chinese system that carries the rest of the network.

Railpolitik

The burst of Chinese lending overseas following the global financial crisis has been a boon for the development of Africa’s nascent railway sector, and a means to offshore China’s domestic capacity and promote its own railway technology. After this initial exuberance, however, the tide has been slowing down. Debt sustainability has become a keenly politicized issue in Ethiopia and elsewhere, particularly given the railway’s operational challenges. Low uptake, power supply issues, and regional ethnic grievances have complicated the operation of Africa’s first electric railway. This has become a risk to its economic profitability in the long-run—and thus the sustainability of the debt that financed it.

Notably, none of the China-financed railway projects have had independent financial feasibility studies conducted. They were driven instead by the interests of winning contracts for Chinese firms and technology manufacturers overseas, and to satisfy the infrastructure ambitions of Ethiopian political elites. However, the lingering question of the projects’ financial feasibility has induced greater risk aversion on the part of both Chinese and Ethiopian partners, seen in the skeptical comments from state insurer Sinosure, and also puts into question the future expansion of the railway network. A branch extension from the Turkish-built line from Weldiya to Mekele in the North, contracted to the China Communications Construction Corporation (CCCC), for example, has also stalled due to lack of financing. Further loans from China Eximbank will not be forthcoming until the Addis-Djibouti line can be proven to work.

As China’s Belt and Road Initiative continues to broaden in scope, the case of Ethiopia’s railways illustrates the strengths and pitfalls of China’s coordinated model of infrastructure finance. Compared to the European and Turkish project, the advantage of Chinese lending for Ethiopia’s railway infrastructure has been significant leniency and flexibility in the creditor-debtor relationship. This has enabled the ERC to expand its agency in the relationship and ability to manage and prioritise its multiple lending partners. However, there is a trade-off to this flexibility: it has not necessarily lead to a better project. In the case of the Addis-Djibouti railway, it has undermined the ability of host government agencies to oversee and control foreign contractors, which is crucial for new institutions like the ERC, as it seeks to build its own experience and capacity through working with foreign partners.

Chen Yunnan is a Senior Research Officer at the Overseas Development Institute (ODI) and PhD Candidate at Johns Hopkins School of Advanced International Studies. She was previously a Global China Initiative fellow at the Global Development Policy Centre, Boston University. At the SAIS China Africa Research Initiative (CARI), her research focused on the rise of China in global development, particularly infrastructure finance in Africa. She has worked at the Institute of Development Studies, Sussex, and China Dialogue, London. She holds an MA in political science from the University of British Columbia, and a BA in politics, philosophy and economics from the University of Oxford.

 

Looking at the Belt and Road through the lens of Marxist geography

The Belt and Road is driven by a capitalist logic recognizable to any large economy

By Tom Baxter

In November last year researchers from the Transnational Institute (TNI) wrote a framing paper on the Belt and Road Initiative (BRI) on behalf of the Asia Europe People’s Forum. The paper provided a quite different and refreshing perspective on the BRI, seeing it through the lens of political economy and, in particular, Marxist geographer David Harvey’s theory of the “spatial fix” for economies facing crises of overaccumulation. Steering clear of the noise of proponents’ and opponents’ political sloganeering around the Initiative, the researchers dug into the underlying economic drivers of the Belt and Road. Such an approach is potentially enabling for advocacy groups in that it helps to identify different actors and their motivations within the Initiative and provides new discussion points and perspectives for researchers and anyone else interested in the Belt and Road.

Panda Paw Dragon Claw interviewed the three authors of the framing paper, Stephanie Olinga-Shannon, Mads Barbesgaard and Pietje Vervest, on their critical perspectives on the Belt and Road Initiative.

PPDC: Looking at Belt and Road as a whole, many have seen the motivation for the initiative through the lens of geopolitics – China attempting to increase its influence around the world. In your briefing, however, you reject this view in favor of the macro-economic push factors, which you describe as a “capitalist crisis with Chinese characteristics”. Can you tell us more about this reading of the BRI?

TNI: Viewing the BRI through the lens of political economy, rather than geopolitics, a different picture emerges. Rather than a ‘grand strategy’, we see the BRI as a broad and loosely governed framework of activities seeking to address a crisis in Chinese capitalism. Under the capitalist mode of production, crises routinely emerge and – as argued by geographer David Harvey – an indicator of such crises is the “overaccumulation of capital”. This overaccumulation can be defined as: “some combination of surplus capital looking for productive investment, surplus commodities looking for buyers, and surplus labor power looking for productive employment”. This then requires some sort of fix. As Harvey argues, such fixes are discernible throughout the history of capitalist development. For example, Britain’s export of surplus capital and labor in the nineteenth century to the United States, Australia, Argentina and South Africa. Or more recently, the export of surplus capital from Japan in the 1960s, South Korea in the 1970s and Taiwan in the 1980s. Significant parts of the export from the latter three in fact went to China and helped build up productive capacity there. In the framing paper, we argue that the BRI needs to be seen in the context of such fixes that have also been taking place in China to solve moments of “overaccumulation”.

As we try to show, similar activities to those currently happening under the BRI, in fact began in the 1990s in a similar moment of overaccumulation, as Chinese companies began operating abroad, including state-owned enterprises (SOEs). Thus, in this view, the BRI, like ‘Going Out’ and ‘the Great Western Development Project’ before it, provides a broad framework to incorporate and encourage these activities that seek to provide a solution to overaccumulation.

Almost any activity, implemented by any actor in any place can be included under the BRI framework and branded as a ‘BRI project’. This campaign mobilisation approach to policy making is common in Chinese economic policy. It allows Chinese SOEs and provincial governments to promote their own projects in pursuit of profit and economic growth, while the central Chinese government maintains a semblance of leadership and control over the initiative. Where necessary, the central Chinese government plays a strong politically supportive role, through local embassies, or national ministries or agencies such as the National Energy Administration or the Ministry of Commerce. But at the same time, with such a broad framework, and a multitude of actors involved, the Chinese government has struggled to effectively govern BRI activities.

PPDC: In particular, you talk about BRI as a “spatial fix” to China’s economic woes. Can you explain more about this concept?

TNI: David Harvey explains that when capital, for different reasons, can no longer find profitable outlets, crises characterized by surpluses of money, commodities and industrial capacity emerge, leading to “mass unemployment of labor and an overaccumulation of capital”. Capital is understood here as a process rather than a thing, whereby money is invested into productive labor in order to earn more money. If this process stops, surpluses of capital sitting ‘idle’ – that is, not in process (including money, commodities and machines) – emerge side-by-side with surpluses of labor power (meaning workers, who are unemployed). Under capitalism, such barriers to the process of capital can lead to situations of social unrest. Under globalized capitalism, any and all governments must manage these crises, if they are to remain in power.

David Harvey cover

Such crises are often managed by what Harvey terms a ‘spatial fix’, that is, as Harvey writes in his book Seventeen Contradictions and the End of Capitalism, the “absorption of these surpluses through geographical expansion and spatial reorganisation”. The crux of spatial fixes is to provide new opportunities for productively combining capital and labour in pursuit of profit. Spatial fixes can take many forms, such as opening up new markets by breaking down trade and investment barriers or building large-scale infrastructure projects to absorb surpluses while facilitating expansion into new territories. While these spatial fixes have occurred throughout the history of capitalist development, they are necessarily unable to permanently resolve the crisis, they merely delay or relocate it. In the framing paper then, we try to conceptualise the BRI as encapsulating the latest in a series of spatial fixes happening since the 1990s.

PPDC: What do you see as the principal motivations for Chinese companies, in particular SOEs, to invest along the Belt and Road?

TNI: We see profit as the main motive for Chinese companies, including SOEs, to invest abroad. Since reforms to corporatize Chinese SOEs in the 1990s, they have been required to become self-funding and their success is evaluated by the State-owned Assets Supervision and Administration Commission (SASAC) primarily based on economic targets, including profit. Investments and projects abroad are one of the means through which these SOEs are pursuing profits. This pursuit can take many forms, e.g. from the construction of infrastructure, to hunting for cheaper manufacturing opportunities, to constantly reducing shipping costs in different ways.

We aren’t thinking in terms of ‘along the Belt and Road’, as this assumes one big physical project, but see these as a broad range of investments branded under the BRI framework. Investments have also been branded by their promoters as ‘BRI activities’ in countries that have not signed Memorandums of Understanding (MOUs) relating to the BRI.

Branding investments and projects under the BRI provides Chinese companies, especially SOEs, with financing opportunities, political support for projects both from the Chinese government and potentially from the government where the project is located, and the prestige of their project being part of a global initiative.

PPDC: Given that BRI is designed to release the pressure valve on China’s overcapacity industries, many of which are polluting heavy industries, to what extent do you think the Belt and Road can really be “greened”, an intention that was reiterated at last year’s Belt and Road Forum in April?

TNI: ‘Greening’ the BRI will be challenging given the scope of the BRI and its focus on mega infrastructure and mega production. As renewable energy capacity has increased in China, some Chinese companies have developed strong technology and experience in this field. However, the use of this capacity and technology has not necessarily been used in BRI-branded projects outside of China. Furthermore, activists and researchers are increasingly showing there is also a ‘dark side’ to renewables, for example Corporate Europe Observatory’s research on so-called ‘renewable gas’.

The type of energy projects implemented in participating countries also depends on what these governments want. Where there is a demand for coal power and large-scale hydropower, profit-seeking Chinese companies will be keen to fulfil these demands. At the same time, we have seen strong lobbying from Chinese energy companies to promote their projects. In Myanmar, for example, hydropower companies, with the support of the Chinese Embassy in Yangon and the National Energy Administration, have lobbied the national government for the expansion of large-scale hydropower in the country’s north.

We also need to think about what is meant by “green”. In China, large-scale hydropower is viewed as ‘green’ and has been key to the reduction of China’s energy emissions. Large-scale hydropower has, however, had devastating impacts on communities affected. It is important that ‘greening’ the BRI does not mean destroying the lives and livelihoods of those involved.

PPDC: In contrast to placing China’s domestic economic issues as the main drivers of the BRI, you describe the geopolitics of Belt and Road as “a consequence” of the Initiative. Can you tell us a bit more about this perspective?

TNI: We argue the primary drivers of BRI are political-economic. The types of profit and growth driven activities currently being branded under the BRI were implemented long before the BRI was announced. However, the BRI does encourage the building of political and public support for the initiative (BRI priority areas number one and five), and trade and investment on such a mammoth scale is apt to change the economies and relations of many places involved, at both the national and local level. The BRI has already impacted relations between China and participating countries, and between participating and non-participating countries. Japan and the United States, for example, have launched similar initiatives in response to the BRI, in an attempt to prevent their own influence from diminishing.

PPDC: If the geopolitical implications of BRI are a consequence rather than a motivating factor, why do you think the initiative has triggered so much scepticism from Western governments, in particular the US?

TNI: Regardless of the drivers of the BRI, many western governments are viewing the BRI through how it impacts their interests (including the interests of capital emanating from their respective countries). As the BRI is increasing competition and BRI-branded projects are changing the physical landscape and movement of goods, people, resources and energy, this is undoubtedly impacting those interests. However, just because the BRI is perceived to be driven by geopolitics, doesn’t mean that it is.

PPDC: You also explain that China and the BRI are, contrary to more commonly heard interpretations, not trying to overthrow the international order, but rather are proactively engaging with international organisations to create legitimacy for and smooth the path for the initiative. Can you tell us more about how China is doing this and the likely intentions and outcomes?

TNI: In recent years we have seen a significant increase in the Chinese government’s involvement in the UN and other international organisations, including funding, personnel and cooperation. At least 29 international organisations have signed MOUs relating to the BRI, and the Chinese government, for example, is promoting the BRI as a key means to achieving the UN Sustainable Development Goals. This builds legitimacy for the BRI and seeks to change the perception of the BRI from a threat, to the BRI as a global and cooperative initiative to promote development. The Chinese government, for example, has also been a key advocate for a UN Treaty on Transnational Corporations and Human Rights. Another key moment was President Xi’s 2016 speech to Davos, where he made it clear that the Chinese government was willing to be a champion of free trade, as President Trump espoused more protectionist trade policies. These commitments show that the Chinese government is seeking to play a key and increasingly prominent role in existing international organisations, rather than overthrow them.

A notable exception is the establishment of ‘BRI courts’ for commercial and investor-state dispute arbitration. Here, rather than work within the existing (and flawed) international arbitration system, the Chinese government is establishing their own courts under the People’s Supreme Court. This is likely to create a venue for arbitration that is more in favor of Chinese companies but follows the same model as similar venues in Singapore, Dubai and Hong Kong. The Chinese government is, therefore, not overthrowing the existing system, just tweaking it in favor of Chinese actors. We are, therefore, likely to see an international system that increasingly involves and favors Chinese actors, but not an overhaul of this system.

PPDC: Looking at BRI as a “spatial fix” underpinned by economic considerations, what are the most hopeful pathways for better environmental and social governance of the Initiative? 

TNI: Viewing the BRI as a broad and loosely governed framework of many activities, rather than a pre-planned grand strategy, is politically enabling for activists on the ground, in that individual BRI activities (though large) are thereby not so different from other projects that they may have successfully challenged. Rather than being reduced to mere pawns in a larger geopolitical powerplay between governments, people can be mobilized and organized to engage in and/or challenge these activities as they see fit. While still very difficult, it is easier to halt or alter individual activities than an entire grand strategy hence opening up pathways for better environmental and social governance of BRI-branded projects.

Some activists and NGOs have had success halting BRI projects taking a ‘follow the money’ approach. Financiers of BRI branded projects, in some cases, have been willing to review  their financing if the project is shown to be unprofitable or harmful. For example, in March 2019, the Bank of China agreed to review their financing of the Batang Toru hydropower dam in Indonesia following concerns raised by campaigners. The bank has not yet announced the results of their review and the financing for the project remains in doubt. However, activists opposing the dam continue to be threatened and in October 2019 activist Golfrid Siregar died in suspicious circumstances.

Another successful approach has been through litigation in national courts. For example, in Kenya, the deCOALonize campaign won a court case to stop the construction of a BRI-branded coal-fired power plant in Lamu. Their case was based on environmental grounds and the companies’ lack of consultation with affected communities.

Lastly, the Chinese government is sensitive to criticism and does not want to be perceived as an imperial actor. As discussed above, the self-branding nature of BRI activities means that the brand is difficult to control. This presents risks for the Chinese government, who cannot control, and may not even be aware of harmful BRI-branded projects abroad. This sensitivity can also provide an opening for activists and NGOs.

PPDC: Anything else you want to add?

TNI: Chinese investments are often racialized in a way that investments from other countries are not. That is, investments are referred to as ‘Chinese’ or by ‘China’, while investments from other countries are mostly viewed as from a specific company. For example, an international investment by Shell is rarely seen as ‘Dutch’ investment but investment by Shell the company. It is also often assumed that the activities of Chinese SOEs are under the tight control of the central Chinese government, when in reality these enterprises are loosely governed by central or provincial government agencies with limited capacity. As profit-seeking companies, they are, in fact, not innately different from other international companies. It is important that we refer to individual Chinese actors, such as companies and provincial governments, by their names so as not to racialize investments and contribute to anti-Chinese sentiment.

Stephanie Olinga-Shannon researches the Belt and Road Initiative at TNI, with a particular focus on Myanmar. 

Mads Barbesgaard works on agrarian and environmental justice and land and ocean politics at TNI and teaches at the Department of Human Geography at Lund University @Madsbarbesgaard. 

Pietje Vervest is an economic anthropologist coordinating TNI’s economic justice program.

 

 

Belt and Road actors brace for coronavirus shock

The epidemic is already disrupting some BRI operations but SOEs are getting prepared for more long lasting impacts

By Ma Tianjie and Tom Baxter

Up to the point of writing, the entire country of China has been at war with a disastrous outbreak of a novel coronavirus (2019-nCov) for three weeks, with no end in sight. The epidemic has infected more than 35000 people and killed more than 900. The virus has already claimed more lives than SARS, and the numbers are still growing rapidly.

The immense disruption to all aspects of life in China is clear for anyone to see. Wuhan, the epicenter of the outbreak and a city of 11 million, is in total lockdown, as its hospitals are overwhelmed by patients seeking medical attention. The rest of the country is half-paralyzed by travel restrictions and neighborhood seal-offs that keep most of its citizens confined at home. Schools are holding classes online and businesses are struggling to keep themselves afloat.

China’s overseas operations, from power plants to railway constructions, are also not immune to what’s going on at home. According to a tally kept by the Chinese National Immigration Agency (NIA), 128 countries have installed border control measures against Chinese citizens or people who have visited China. These measures range from Indonesia and Singapore’s strict ban on entry or transit of non-nationals or non-residents who have been in China within the last 14 days to the milder measures of the UK, where direct flights from Wuhan are to be checked. The disruption to the international movement of both people and goods is already sending shuddering shockwaves to China’s expansive presence across the globe.

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A quarantine space at a Power China overseas camp. Image: Power China

Scrambling SOEs

The outbreak derailed what would otherwise look like a brilliant start to 2020 for the Belt and Road Initiative. From January 17-18, President Xi Jinping made a state visit to Myanmar. His handshake with State Counsellor Daw Ang Sang Suu Kyi delivered a basket of key outcomes for the BRI that some media claimed would “remake the country”. Among them, the signing of the Letter of Intent for Yangon New City and the handover of Feasibility Study Reports of Mandalay-Tigyaing-Muse Expressway & Kyaukpyu-Naypyitaw Highway Projects are important progress for China Communications Construction (CCCC), one of the largest state owned enterprises (SOE) operating on the Belt and Road, specializing in building ports and roads.

Two days after the celebratory meeting between the leaders, on Jan 20, the coronavirus situation in Wuhan escalated into a national emergency, when top Chinese experts alarmed the country of human-to-human transmission and infected medical workers. And a national response was required. By Jan 29, CCCC was in a war posture to combat the outbreak, with units across the company’s massive organizational chart all mobilized to “win the war against the epidemic”. The company’s public records were not without worries. At a Feb 5 meeting, top executives instructed that the company should “minimize the impact of the outbreak” and come up with concrete counter measures to protect overseas projects with national strategic importance.

CCCC is not the only SOE scrambling to respond to the sudden deterioration of the situation. Power China, a major contractor for constructing power plants globally, provides a snapshot of the virus’s impact. The company immediately implemented traffic controls at its overseas bases, freezing holiday plans of all staff members on site while running health checks on anyone who had travelled to China two weeks before. Quarantine spaces were created and safety supplies such as facial masks were distributed at the bases. Moreover, the company also mobilized its overseas teams to source safety gears in their respective countries and ship them back home. In some cases, such as Bangladesh, the company worked closely with the Chinese embassy and the local authorities to collect and report the whereabouts of staff members and follow quarantine procedures. In other cases, such as Cambodia, the company went further to help communities living near its base camp to implement basic prevention measures such as sterilizing public spaces.

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Power China staff helping Cambodia neighborhood to disinfect door handles Image: Power China

Contract worries

The SOEs’ concerns go beyond just inconvenience at their overseas bases. The severe chokehold on the movement of personnel, goods and supplies is already threatening to delay project progress and trigger non-compliance clauses in project contracts.

In more than one case, SOEs referred to such risk in their instructions to staff. Power China reminded its legal departments to study local laws and contract terms to “get prepared for ensuing compensation claims.” CEEC, another big energy infrastructure contractor, asked its Philippines project company to start initial communications about potential compensation claims.

On 7 February, a Beijing law firm published an article outlining a few scenarios where the coronavirus outbreak may transform into legal risks to Chinese overseas projects. One obvious risk is the inability to send a large number of Chinese laborers overseas in the short term. The lawyer advised that Chinese companies should consider switching Chinese sub-contractors to local suppliers of services such as construction in order to avoid delaying project progress.

Some projects are already experiencing such difficulty. Bangladeshi media has reported that thousands of Chinese workers and engineers are now stuck at home after going back for Chinese New Year holiday, unable to return to work on a few priority projects such as the Padma Bridge and Payra Thermal Power Plant. The Bangladeshi government has already announced that this will lead to delays on a number of priority infrastructure projects, including postponement of the commissioning of the Payra coal power plant, which was supposed to begin commercial operations in early February. Similar situations have also been reported at Indonesian coal plants and nickel smelters with Chinese SOE involvement.

Another risk, according to the law firm, is “quarantine at anchorage” rules imposed by destination countries that may affect maritime routes. Such rules would not allow crew members to disembark before obtaining a quarantine officer’s permission. Malaysia is one of the countries that has implemented such measures. The risks of delayed or failed delivery of goods and equipment, and the ensuing costs at ports are something Chinese companies have to grapple with now.

A tricky aspect is that even “force majeure” clauses, already invoked in three contracts by CNOOC, according to a recent Reuters report, might not shield Chinese companies from legal liabilities unless such events as an epidemic outbreak have already been specified in contracts.

“Friend in need”

Commercial considerations aside, the outbreak appears to have become a litmus test of countries’ friendship with China, potentially redrawing the diplomatic friend/foe map across the globe.

In a telling episode, the BBC reported that China’s Ambassador Liu Xiaoming complained to Stanley Johnson, father of the UK’s Prime Minister, about his son not sending a personal message of condolence to President Xi.

With the government facing massive public discontent over its handling of the Wuhan situation at home, it is actively seeking international recognition and endorsement of its response to the epidemic to buttress its legitimacy. The effort has developed into an all-out diplomatic campaign that is two-pronged: 1) proactively seek messages of support from various levels of a foreign government; 2) scalding or threatening those who Beijing considers as “over reacting”.

The World Health Organization is an apparent target of such effort, with its Director General, Dr. Tedros Adhanom Ghebreyesus, placing lavish praises on China’s efforts to contain the epidemic. China’s ambassadors across the globe are also, like Liu Xiaoming, working hard to secure more such messages of support. Ambassador to the Philippines, Huang Xilian, sent back a message from Davao City Mayor of being confident that China will prevail over the disease under the leadership of the Chinese government. Li Jiming, Ambassador to Bangladesh, passed back praises from Bangladeshi ministers, commending China’s “responsible and transparent stance over the issue.” Probably the most impressive of all, is the message delivered in person, by Cambodia’s Prime Minister Hun Sen, who paid a visit to President Xi in Beijing and to the epicenter, Wuhan, on Feb 6.

Some countries, in contrast, are at the receiving end of China’s ire. Ministry of Foreign Affairs spokesperson Hua Chunying’s lambasting the US for implementing travel bans got a lot of media coverage last week. Lesser noticed was the stern words of China’s Ambassador to Indonesia, Xiao Qian, to the Indonesian government on certain trade restrictions the country has introduced. Speaking of Indonesia’s potential import ban on Chinese food and beverage, the Ambassador warned publicly:

“This kind of overreaction will harm the two countries’ normal trade relations and possibly give rise to serious consequences that neither side would wish to see for the two countries’ relations and future cooperation.”

Indonesia has since backpedaled from the position, claiming that the proposed ban only applies to live animals. But given China’s past practice of using economic leverage to punish “unfriendly” behavior from another country, the scuffle’s impact on the future of China-Indonesia relations, particularly Belt and Road projects in Indonesia, is worth watching.

In its hour of greatest need, just how well did China’s Belt and Road allies show up? And how will they be judged on their performance?

So far there is still no clear sign that the epidemic is going to be under control very soon. Dr. Zhong Nanshan, China’s top expert advising the State Council on the coronavirus, told reporters on Feb 11 that a turning point “might be expected in late Feb” but “no one can be certain.” Facing mounting pressure to reignite the frozen economy, the central government is cautiously loosening some confinement measures in non-epicenter regions. But this creates new uncertainty over whether it could slow or negate some of the earlier gains of containing the disease. A black swan event of epic proportions, the coronavirus outbreak is affecting almost every corner of Chinese politics and economics in the first six weeks of 2020. In what shape will BRI come out of this situation depends on how prolonged China’s war against the epidemic will be and how countries realign themselves in this war.

How does 2020 bode for China’s overseas investment? A Chinese lawyer’s take

Zhang Jingjing previews legal challenges awaiting a few controversial projects and welcomes a groundbreaking move by China’s Supreme Court

The last year of the 2010s was certainly eventful from the perspective of China’s Going Global strategy. Beijing held the 2nd Belt and Road Forum in early 2019 as both a celebration and a moment of reckoning, as China’s signature global development program was questioned by some host countries on its financial sustainability and from the international environmental community on its green merits. A correction of course (the publication of a Debt Sustainability Framework and the creation of a green coalition) was presented at the forum as a response to international concerns. But the rest of the year still saw major controversies erupt in different parts of the world. These surrounded, for example, a power plant in Kenya, a resource–infrastructure swap deal in Ghana, and a river dredging project deep in the Amazon forest.

Zhang Jingjing started practicing law in the late 1990s, helping Chinese pollution victims win cases against polluters. She is one of the few Chinese lawyers in the overseas investment scene who stands side by side with affected communities. Based out of the University of Maryland Law School, over the past few years her nascent legal initiative, the Transnational Environmental Accountability Project, has been involved in a number of legal battles centering on China-related overseas projects. In one of those cases, her amicus curiae brief, delivered for the first time by a Chinese environmental lawyer at an Ecuadorian court in Cuenca, played an unprecedented role in bringing about a historic court order to suspend mining activities at a gold mine operated by Chinese mining company Junefield.

Panda Paw Dragon Claw spoke with Zhang Jingjing recently to get her take on the year ahead. Her insights about the evolving legal landscape surrounding a few high-profile Chinese outbound investment cases and the Chinese Supreme Court’s new interest in Belt and Road cases are as refreshing as ever.

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Zhang Jingjing inspecting a borehole in a village affected by bauxite mining in Boke, Guinea. (Image provided by Zhang Jingjing)

Panda Paw Dragon Claw (PPDC): In the past two years you have been deeply involved in a case in Guinea, West Africa, where a consortium of Singaporean and Chinese companies led one of the world’s largest bauxite mining operations, affecting the livelihood and environment of local communities. Could you share with us the latest developments with this case?

Zhang Jingjing(ZJJ): Chinese businesses have been very active in Guinea’s bauxite mining sector. SMB, the consortium that consists of Singapore’s Winning Shipping and two Chinese companies [Shandong Weiqiao Group and Yantai Port Group], entered Guinea in 2015 after their bauxite supply chain got cut by an export ban from Indonesia in 2014 due to heavy pollution caused by the business.

Since the operation began, SMB’s activities have been shrouded in controversies over impact on the environment and livelihood of local communities. The mining roads, full of heavy-duty vehicles transporting reddish bauxite ores, create large amounts of dust pollution. Open pit mining disrupts the local hydrology, dwindling precious drinking water resources for villages and polluting water from wells and boreholes that villagers depend on. Mining areas were never, or poorly, rehabilitated with recovered topsoil and vegetation. Those existing problems have barely been resolved yet. SMB, pressured by a major anti-mining riot in 2017, is still updating an Environmental and Social Impact Assessment (ESIA) of their existing mining sites. And despite this ongoing situation, big Chinese investments are pouring into the sector, with Chinalco and Henan International Mining all lining up to enter the scene on bauxite.

PPDC: What is on the horizon for SMB and other Chinese bauxite involvements in Guinea in 2020?

ZJJ: SMB is set to expand its operations this year with new mining sites, a planned aluminium refinery, and new railway construction. Land acquisition and other preparations are already underway. ESIAs for the new mining sites and railway construction are already being carried out but so far information about the expansions is scant.

This represents a major upgrade of its operation from a purely extractive nature – mining bauxite and then shipping ores all the way back to China – to a more value-added business of aluminum making. What’s important is the possible model for that business. Shandong Weiqiao Group, a member of the SMB consortium, is China’s largest aluminum maker and is known for its unique model of captive coal power plus aluminum electrolysis (an extremely power-intensive process). Captive power, self-generated electricity unconnected with the power grid and not subject to grid dispatching, helps keep costs low (a crucial component for the model) but is highly controversial in China for staying outside the environmental regulatory regime on the power sector. Weiqiao Group’s captive power plants in China are known for pollution problems. If this model is now exported to Guinea, we can certainly expect much more significant environmental impacts.

PPDC: Are there efforts to make SMB accountable for its practices in Guinea?

ZJJ: Local communities and civil society groups have been making complaints to the consortium about pollution. Unfortunately, such complaints have now been internalized as a kind of routine for the companies. SMB prepares small compensations to be doled out when complaints are made. It has also initiated Corporate Social Responsibility (CSR) projects that provide small scale livelihood support for affected local communities. But these cannot substitute legal obligations to minimize and mitigate negative impacts.

Guinean civil society is even more concerned after SMB recently won a bid to develop the controversial Samandou iron mine located in a key biodiversity hotspot area, given the consortium’s previous environmental records in the bauxite sector.

Guinea adopted a relatively modern Mining Code in 2011, incorporating some of the good practices from regulatory regimes of other African countries. It provides relatively strong protection to affected communities but is poorly implemented in reality. The country also has a basic Environment Act in place. However, Guinean NGOs and communities have never initiated any legal challenges to corporate ESIAs, nor have they had experience bringing environmental lawsuits to the court. With the massive inflow of Chinese investment into bauxite and iron mining, both Guinea’s governance capabilities and the capacity of its civil society to safeguard community interests are put to great test.

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A puddle frog on a large leaf at night in the Atewa Range Forest Reserve, Ghana. (Image: Alamy)

PPDC: In the past year, another bauxite mining project has garnered much more international attention. In exchange for Chinese supported infrastructure, Ghana plans to open up the precious Atewa forest for bauxite mining, using the ores as repayment for the US$2 billion deal. What is the prospect for this project in 2020?

ZJJ: It is almost certain that the project will encounter fierce opposition for its environmental and social impact. Ghanaian society is still very much traumatized by the havoc wreaked by Chinese small-scale gold miners (galamsey). Today you can still see the scarred landscape left by such illegal activities. Even though the individual Chinese miners were not part of any national strategy, they nevertheless shaped the Ghanaian impression of Chinese investment and would definitely overshadow the massive resource–infrastructure swap deal.

Unlike Guinea, Ghana’s governance capabilities are more advanced, and the country has an active civil society, including a great number of environmental lawyers. They are already mobilizing to challenge the deal through legal means.

PPDC: The company behind the Ghana deal, Sinohydro, is also currently at the center of another major infrastructure project in Peru. The Amazon Waterway project aims to dredge the Amazon river to facilitate transportation and commerce but has met with strong opposition from indigenous groups for its potential impact on fisheries and local culture. How is this case being handled in Peru?

ZJJ: The project’s Environmental Impact Assessment (EIA) is being challenged from multiple angles now by indigenous groups, which will likely affect the timetable of this major infrastructure program that Peru and Brazil have planned for over two decades. Even though reports are saying that approval of the EIA is imminent (as early as April this year), I have learned that local civil society will keep challenging it. Lawsuits might be on their way.

A few Latin American countries, including Peru, have enshrined indigenous rights in their constitutions, particularly the right to be informed and consulted before projects like this can go ahead [Free, Prior and Informed Consent, FPIC]. It is therefore unsurprising that local groups are now challenging the EIA for lack of prior consultation with indigenous people and have sent the case all the way to the Supreme Court in Lima.

None of the legal actions are directly targeting the Chinese company. Rather, their objective is to revert administrative approvals and decisions made by host country authorities. If those challenges are successful, they will invariably delay the progress of the project and bring losses to the developers. This is a prospect that any Chinese investors in the region should be aware of.

PPDC: You have been following a few other cases in 2019, including legal challenges to coal power projects around the world. What signals have you picked up from them?

ZJJ: A tidal wave of “climate litigation” is coming. Kenya’s Lamu power plant case, in which Chinese companies are deeply involved, is but one outstanding example of how a combination of lively civil society and an independent judiciary can become a formidable obstacle for environmentally questionable projects.

Globally, with climate change becoming an increasingly urgent concern, climate litigation is set to become more commonly used by communities and activists to challenge not only coal power but also government policies allowing such projects. In the past year, Indian farmers and fishermen have brought the International Finance Group (IFC) to court in the United States for funding a coal power plant in Gujarat. Bosnia-Herzegovina’s China-funded Tuzla 7 coal power plant is also bogged down by legal challenges.

Just a few weeks ago, the Dutch Supreme Court delivered a historic ruling ordering the government to cut greenhouse gas emissions 25% below 1990 levels by the end of 2020, after NGO Urgenda sued the Dutch government. Those developments around the world foreshadow the bumpy legal roads ahead if China continues funding and building coal power plants overseas.

PPDC: So far, those legal battles have all been fought in host countries. But people often wonder, can China’s own legal system be activated to make Chinese investment accountable overseas?

ZJJ: In transboundary cases, it is a commonly accepted principle to give host countries jurisdiction over lawsuits on environmental and social impacts. This is because their judiciary can more easily ascertain facts concerning damages and infringements on their native ground.

This doesn’t mean China’s regulatory regime has no role to play in injecting responsibility into its overseas investments. In fact, a host of policy items have been promulgated to steer outbound investment towards a more sustainable path. The 2017 Guidance on Promoting Green Belt and Road, published jointly by four ministries, calls on Chinese companies to abide by host country laws, global treaties and international high standards. But such policy items are often mere aspirational statements without binding force. The very few binding rules, such as the National Development and Reform Commission’s (NDRC) Measures on Outbound Investment, are low-level departmental rules with limited force. So China does need to install higher level outbound investment laws and regulations to introduce accountability to its companies going global.

What is really encouraging is that at the end of 2019, China’s Supreme People’s Court issued a groundbreaking opinion on how the judiciary system should support the Belt and Road Initiative, stating that China should “proactively contribute its judicial resources to global environmental governance”. More specifically, it calls on the Chinese judiciary to strengthen environmental public interest litigation and tort litigation to “stop environmental violation” and “enforce liability for damages”.

If these words are meant genuinely, the opinion in effect opens the doors of Chinese courts to environmental public interest litigation and tort cases on damages happening outside China’s borders, particularly along the Belt and Road. China’s judicial resources, and its experience with trying domestic environmental disputes, are now accessible by communities affected by Chinese investments in countries with underdeveloped environmental governance. This is certainly the best new year present I have received as a Chinese environmental lawyer and an offering that I am keen to activate in the coming year.

This interview has been co-published with China Dialogue

From Pioneers to Brokers: How a diverse Chinese diaspora facilitates the Belt and Road in Lao

A lively snapshot of those who lubricate deals and exchanges that make the Belt and Road possible

By Juliet Lu and Wanjing (Kelly) Chen

There is something about China – perhaps its size, perhaps its foreignness to Western audiences, or perhaps the simple fact that it is a new global economic power – that lends to vast oversimplifications and doomsday portrayals of the country’s global integration. China’s increasing presence overseas is without doubt one of the topics on which this oversimplification gets the most play. Summary statistics and breathless reports give the sense that Chinese firms parachute into countries, checks in hand, and unilaterally determine what to build, grow, and extract. But in order to understand how China’s global integration is unfolding on the ground, we need to ask a few questions. How does this emerging wave of investment actually take root? Through what channels does Chinese money flow, and through whose hands?

Investing in new country contexts is a laborious process that requires a diverse set of actors who can assemble disparate resources and apply niche expertise to carefully facilitate investment deals. Long before the Belt and Road Initiative (BRI) was announced in 2013, waves of Chinese migrants struck out into the world to make a living beyond China’s borders. These pioneers are now positioning themselves as brokers to the various investment projects encapsulated in the BRI, serving as pivotal in-country links but also taking advantage of newer, more naïve arrivals. They pave the way for the current day globalization of Chinese capitalism with their years of experience, knowledge of cross-cultural business and cultural norms, and social and cultural capital in host countries.

We believe it is important to understand China’s global integration not only from the point of view of elites, but also from the ‘civilian perspective’ (民间视角). Our field research aims to uncover some of these perspectives from a handful of Chinese migrant pioneers-turned-brokers of Chinese capital in Lao. They are not the face of Chinese investment which normally comes to mind – polished government officials and suit-wearing state owned company CEOs. Instead, we point to the hidden army of people who draw, direct, and enable the flows of capital into new contexts and unsettle the tendency (which dominates coverage of the BRI) of grouping Chinese actors into one monolithic category.

The View from China’s Backyard

Although a majority share of Chinese global investment has been in Southeast Asia, reporting and research on China in the region has been noticeably less alarmist and negative than that on China in Africa and other regions of the world. This is partly because Chinese traders and investors are neither new nor the only foreign investors active in the region. As early as the 16th century, sojourners and settlers from coastal China had already formed enclaved communities across the region through sea-based emigration. Over land, upland ethnic groups in southwest China were particularly mobile and heavily engaged in trade with their neighbors in mainland Southeast Asia. More recently, during the Reform and Opening Era, the Chinese state relied heavily upon the Chinese diaspora in Southeast Asia (referred to as the “Bamboo Network”) for investment capital to kick start the country’s economic reform and eventual dramatic rise.

The Lao PDR is an especially interesting country from which to examine the role of the Chinese diaspora in the making of the BRI. A diverse set of communities have come from China and settled in Lao during different periods, from long established groups of Yunnanese traders who migrated generations ago and now refer to themselves as the ‘Ho,’ to Lao refugees who fled to China during the civil war in the 70s and 80s and returned in the 90s to resettle or just establish trade links, to more recent arrivals seeking a wide range of economic opportunities. The Chinese community in Lao is thus highly diverse; they have come from a mixture of places within China, arrived at varying times for different reasons, and hold contrasting class positions and occupations. But as the country’s global economic import grows, this diverse group of pioneers position themselves strategically and rearticulate their links back to China as they come into new roles as bridges between Lao and China.

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View from a hill in Luang Namtha, photo supplied by the authors

The Chen Family and Chinese Business Associations in Lao

Chen Li *, had been doing business in Lao for over two decades by the time we met during my preliminary fieldwork interviews. I* stumbled upon his company headquarters, a converted two-room Lao home in the tiny provincial capital of Luang Namtha. He was sitting inside in a tank top pulled up to rest on his belly, pants rolled to his knees exposing a pair of pink plastic slippers. Despite the tropical heat, I sipped steaming tea with him under the light buzz of a ceiling fan in his office and we talked about how he had come to Lao. Lao Chen (老陈), as he is referred to by those familiar with him, is the son of migrants from Hunan Province who came to the borderlands of Yunnan to tap rubber in the 1960s. His parents answered Chairman Mao’s call to secure the border by working on the rubber plantations of Yunnan’s State Farms – former border military units turned state agribusiness operations after 1949. Like workers in most state-owned enterprises, Lao Chen enjoyed a certain level of security as a State Farms worker but wages were abysmal and would never allow him to build a better life for his children.

So, in the mid 1990s, he scraped together enough savings to strike out and begin a modest trade enterprise importing fertilizer and rice seedlings from China to sell to Lao farmers. Soon he began lending maize seeds on credit and in the early 2000s, turning back to his roots in rubber, Lao Chen managed to secure a small plot of Lao state land to establish a rubber plantation, which he supplemented by contracting nearby villagers to grow their own plots which he helped them manage. By the time we met in 2017, his hair had begun to gray and he had hired Lao staff and a few relatives to run the day-to-day operations of his trade enterprise. His son had also moved from China to take over the rubber plantation. “I just come to check on things occasionally,” he explained as he showed me his border pass which allows Lao and Chinese citizens like him who reside within a few kilometers of the border to cross between the two countries for short-range trips lasting up to 10 days without having to apply for a visa. “It’s convenient enough to come, just an hour or so with the new road” he shrugged, “but my wife is tired of coming here all the time … and keeps asking me when these investments will pan out and we can retire.”

Just as we were ending our interview, Lao Chen’s cell phone rang and he paced around the front porch chatting loudly in his native Hunan dialect as I cracked sunflower seeds and drank my tea. After hanging up, Lao Chen insisted I join him for lunch and promised I’d meet other Chinese investors to interview – “don’t be polite” (别客气) he chided as he opened the passenger door of his truck for me. “Lunch is at our local Hunan Business Association, I’m the founding member” he beamed, and we sped off down the cracked road a few short blocks to one end of the town’s main drag.

I had imagined something akin to an American Chamber of Commerce, perhaps an office building adorned with state slogans of Sino-Lao friendship. Instead, we pulled into the dusty yard of another converted Lao home next to a few haphazardly constructed meeting rooms and a dilapidated sign that announced in peeling letters the business association in Lao and Chinese. Off the house, a dining area had been built with a few wooden beams and a corrugated aluminum roof. The table was set with a combination of Hunan and Yunnan staples, and a few Lao style salads with bottles of Beerlao served with ice. Lao Chen introduced me hastily before diving into a hurry of handshakes and gossip.

As I have learned is common in Chinese migrant communities across Lao and elsewhere, Lao Chen’s business association was less of a formal organization than a loose group of friends from the same origin province in China. In other towns in Lao I would encounter the Liaoning Province Business Association, the Guangdong Province Business Association, and many other groups built around common ties back home. Lao Chen explained that they provided some formal services for modest fees, such as procuring visas and business licenses, and he often used the association to legitimize his role facilitating connections between Chinese investors and Lao state officials or trade partners. But for the most part, the association simply served as a loose organization of fellow Hunan migrants with a diverse set of business operations in that area of Lao.

As we ate, the group exchanged lively banter, gave advice and shared complaints about doing business in Lao. One woman there who I had already met earlier that month on the bus from the Chinese border had come with her husband twelve years before and started selling farm equipment until they had enough capital to shift to selling Chinese electronics. She complained about how luohou (落后, backwards) Lao is as she laid SIM cards out on the table for the two men next to her to pick through for a lucky phone number. They had just arrived from Xishuangbanna to sell a truck full of construction supplies, and were asking her about the road conditions on the way to the next district and what to do if stopped by Lao police and asked to pay transport fees. Lao Chen’s younger cousin had also just arrived from Hunan at Lao Chen’s prompting, and while he too referred to Lao as luohou, he fostered a boyish excitement about it. He made a grand performance of recounting the wildlife he’d bought at the town market – bamboo rats and a few lizards, photos of which he showed us proudly on his phone – and eagerly asked others about life in this remote border region. He had found some success in the real estate market back home and was predicting grand profits if he could figure out the path where the Kunming-Vientiane Railway (the flagship Belt and Road project in Lao) would run and procure land in those areas.

The man sitting across from me was particularly boisterous – he had been hired by one of the Chinese construction companies contracted to help with the train construction to facilitate their negotiations with the Lao government to import equipment and supplies. He laughed at some of the company boss’s misconceptions about doing business in Lao – “I told him, everything in Lao is slow! Not like in China, here you cannot do anything fast” – and boasted proudly of the company’s reliance on his Lao state connections. Next to me sat the oldest man there, my guess put him in his early 70s. He sported a worn jacket and matching slacks and introduced himself as the deputy head of the association after Lao Chen. He smiled broadly and explained that, although he had lived in Lao for almost twenty years, he’d never learned to speak Lao. “I have studied how to drink Beer Lao instead! So I know how to do business here just fine!” He clinked our glasses together, finished his beer in one gulp, then placed it back on the table empty with a laugh.

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80th anniversary gala of a Chinese school, photo supplied by the authors

Dissidents in Disguise: politics and profit along the BRI

Not all Chinese business community gatherings in Lao are so lively and pleasant as the casual lunch orchestrated by Lao Chen. In November 2017, I found myself attending a dinner gala for the 80th anniversary of a Chinese school in Vientiane where some guests found it hard to enjoy themselves. For A Zhen, the atmosphere of the gala went sour as the celebratory performances became increasingly infused with Chinese communist ideology. As singers at the gala began performing Me and My Country, one of the most famous propaganda songs in China, A Zhen decided to go outside to clear his mind.

An established businessman in his 50s, A Zhen stood on the porch of the grand event hall, trying to calm his critical thoughts with the help of a cigarette. “There is too much patriotism in there,” he whispered to me as I snuck out of the gala to join him for a cigarette. Having known each other for a while, he had grown quite candid with me about his general discontent with the politics of the Chinese state. Yet he kept a tight lip around his other Chinese contacts. If revealed, his opinions would be devastating for his current career as broker, which allowed him to extract commissions and kickbacks for fixing deals for newly arrived Chinese investors. Given that some of his top clients are Chinese state-owned enterprises looking to establish projects in hydropower, logging, and mining under the Belt and Road Initiative, the cost of being vocally critical could be huge.

A Zhen represents a particular segment of overseas Chinese who are faced with day-to-day struggle to reconcile their personal politics and economic interests. He is one of many descendants of Chinese migrants who came to Lao throughout the 19th century and the first half of the 20th century, long before China became the People’s Republic of China. Many of this community speak Teochew and Hokkien and originate from two coastal regions of China known historically as the cradle for Chinese traders who set out across Southeast Asia. Individuals like A Zhen were mostly raised in families and communities with strong transnational business traditions. In an era when Chinese capital is flooding into Lao at an unprecedented speed and volume, those who have managed to preserve their Chinese language capacity and cultural affinity have used their entrepreneurial spirit to quickly carve out a new career path as brokers. They possess the cultural and social capital necessary to navigate Lao’s opaque regulatory system and seal big deals, like contracts for hydropower project worth millions of dollars.

A Zhen just recently managed to land such an investment project for a Chinese state-owned enterprise and took 5% of the total contract value as commission. His ability to comprehend the Lao cultural subtext in important business meetings with state officials greatly facilitated the process throughout. More importantly, he had inside access in government through his half-brother. This allowed him to gauge dynamics within key state bureaus that regulate foreign investment in energy sector. Such nuanced cultural familiarity and deep social connections are rarely found amongst the more recent wave of Chinese migrants in Lao who came in the last two decades. Therefore, while most brokers are preoccupied with providing tedious services like securing visas and renting local offices for investors (services which earn them relatively meager incomes) A Zhen facilitates big deals and, consequently, secures big paychecks.

Still, for descendants of Chinese pioneers who settled in Lao a century ago, a successful career as broker often requires repressing one’s personal political opinions. Due to their unique position in Lao history, and migratory life journeys, this segment of overseas Chinese are generally highly critical of the PRC regime. Many of them suffered a turbulent youth due to the Lao communist takeover in 1975. During decolonization after WWII, Lao sank into a civil war between the American-backed Lao and communist Pathet Lao. Teochew and Hokkien Chinese stood firmly with the Lao Royal Family. The vast majority, including A Zhen’s family, fled Lao in fear of communist persecution when the Lao Royal Family lost the war. They packed up important documents and portable valuable items before running across the border into Thailand. Thus, the word ‘communism’ alone brings back terrible memories of when their community was dispersed, families were separated, property was confiscated, and the place they called home was permanently changed.

Implicitly or explicitly, such experiences underpin their negative feelings toward Chinese communism. Moreover, the nomadic lives many of them have lived since fleeing Lao have further exposed them to liberal ideas that are incompatible with PRC ideologies. A Zhen for one, received an education in the United States and spent a considerable period of time living in France, Japan, and Taiwan before returning to Lao in 2012. A pro-democracy poet who writes against authoritarianism in private, he has struggled more than others in his everyday encounters with investors fresh out of China, who are deeply patriotic and enthusiastically draw upon PR China’s state propaganda – especially in promoting their projects within the context of the Belt and Road.

When our brief smoking session ended, A Zhen returned to the gala with a reserved smile on his face. He rejoined a crowd of people and politely if stiffly clapped at appropriate moments. After all, in the struggle between moneyed interests and liberal political beliefs, the former seems to always win out. There are thus many dissidents in disguises like A Zhen, who diligently work to facilitate the global expansion of Chinese capitalism today.

Viewing the BRI from the Ground Up

Chen Li and A Zhen are just two members of a diverse group of pioneering emigrants and sojourners who came from China to Lao a generation before the new wave migrants now arriving. After years of modestly making a place for themselves in the slow Lao economy, they now scrap together a wealth of local connections and years of experience to facilitate the ambitious plans of incoming Chinese investors mobilized by the Belt and Road Initiative. These pioneers-turned-brokers are pivotal links. It is based on their own past experiences that new investors’ expectations are set, through their family ties and established networks that Chinese capital connects with the Lao state, and on their advice and facilitation that a huge variety of deals across sectors take shape on the ground.

Their brokerage activities, however, are not underpinned by a unifying loyalty towards Beijing, nor do they respond to the state’s directives above their own. Instead, they are driven by a multiplicity of interests, dominated by their own quest for wealth and shaped by localized ties and personal histories. They reflect the complex nature of cross-border relationships and the evolution of the Belt and Road over time. The emergence of pioneers-turned-brokers like Chen Li and A Zhen amidst the rolling out of Belt and Road Initiative serves as a reminder that China’s global integration is a process which presents complicated contradictions and the need to negotiate personal, practical and historical realities.

* On the request of the authors, the authorship of respective segments of the article has not been stated.

* Pseudonyms are used in this article to protect the identity of the interlocutors.

* Please refer to the links here and here for questions concerning the usage of “Lao” in the article.

Juliet Lu is a doctoral student at UC Berkeley’s Department of Environmental Science, Policy and Management with a focus on political ecology. Wanjing (Kelly) Chen is a doctoral student at University of Wisconsin – Madison’s Department of Geography. Her current research focuses on the globalizing processes of contemporary Chinese political economy.

 

Between the lines: new reports offer a peek into Chinese policy banks

Research teams at Chinese and international institutions collectively shed light on the practices and thinking of CDB and Exim Bank.

In the past few weeks, reports released by teams at UNDP, China Development Bank, the Boao Forum for Asia and NRDC-Tsinghua University open windows into the operation of China’s policy banks when it comes to overseas financing.

None of the reports, even those compiled by China Development Bank itself, are particularly revealing in their description of practices and policies of the state controlled banks, underscoring the general opaqueness of those financial institutions. Most of the information presented in the reports is based on already published materials (policy papers, case studies, news reports etc), and only the Tsinghua University team’s report involved interviews with policy bank executives, providing fresh, first hand information on the banks’ sustainability policies.

Nonetheless, in this desert of accessible information on Chinese state actors, the reports’ compilation of information on the banks’ operations provides some interesting additional insights into how the two policy banks attempt to align their investments with Belt and Road goals and the global sustainability agenda, if you read carefully between the lines. In particular, we get a sneak peek into their differing approaches to environmental and social standards, and how loans for risky but much needed development projects are made secure, at least from the banks’ perspective.

Policy Banks on the Belt and Road

There is already an existing literature on the roles played by China’s main policy banks, China Exim Bank and China Development Bank(CDB), in China’s overseas industrial build-up. It is still worth highlighting, however, the distinctive roles of the two banks, as described in the UNDP-CDB “Harmonizing Investment and Financing Standards towards Sustainable Development along the Belt and Road” report (hereafter as “UNDP-CDB report”). CDB, being the world’s largest national policy bank, offers mainly mid-to-long term non-concessional, commercial loans on the Belt and Road, while China Exim Bank provides mostly concessional loans and export seller’s/buyer’s credit based on market interest rates. According to the UNDP-CDB report, by the end of 2018, CDB had provided financing for over 600 Belt and Road projects with accumulated value of USD 190 billion (USD 105.9 billion still outstanding). The Exim Bank’s Belt and Road portfolio is larger in size, with outstanding loans over 1 trillion RMB (about USD 143 billion) spread across 1800 projects.

A key observation made by the UNDP-CDB report is that loans still occupy a dominant share of Belt and Road financing, as opposed to equity investment. This may be due to the fact that most Chinese financial participants of the Belt and Road Initiative are banks, whose mandate is to provide lending (especially for commercial banks). Nevertheless, the UNDP-CDB report notes that Chinese financing may have also tilted toward loans for their relatively low risk and ability to pool resources for supporting large projects, while equity investment involves longer term exposure to risks over the entire lifecycle of projects and higher transaction costs. But, as a previous blog post on this site has shown, this preference might be changing for some Chinese Belt and Road players as they become more attracted to the higher and sustained return of projects funded through equity investments.

Policy Banks on the Belt and Road
Source of information: UNDP-CDB report

BRI’s heavy infrastructure focus means that the banks’ Belt and Road portfolios tilt heavily towards energy, transportation and construction, with the energy sector the largest recipient of bank financing. The go-to data source for BRI researchers – even for established and connected Chinese research teams, such as at Tsinghua University – Boston University’s Global Economic Governance Initiative shows that coal makes up the majority of the two bank’s BRI financing between 2000 and 2017, followed by oil and gas financing.

Sustainability, Sustainability, Sustainability

One question that observers of the BRI often have is how come Chinese policy banks, despite a domestic emphasis on sustainable development, continues their funding of overseas projects with questionable sustainability, both environmentally and financially. Many analyses approach this question by looking at the banks’ “safeguard policies”, i.e. to what extent can mechanisms at the banks rule out financing “bad” projects. But an interesting insight from the NRDC-Tsinghua report “Research on Green Investment and Financing Standards for Policy Banks in the Belt and Road Initiative” (hereafter as “NRDC-Tsinghua report”) is that domestically, Chinese policy banks, particularly CDB, approach sustainability not so much from a safeguard point of view, but rather from an industrial policy point of view. China’s “green banking” policies are essentially an extension of the central government’s industrial policy. Its central components are sector-specific or client-specific credit guidelines. Through those sector-specific policies, CDB systematically channeled more than RMB 1.6 trillion (about USD 229 billion) into supporting China’s domestic green transformation agenda, which involves the set-up of low-carbon cities and smart cities, pollution control and environmental rehabilitation, renewable energy development and circular economy. In the process, CDB sets up a regular communication channel with the Ministry of Industry and Information Technology (MIIT), a key maker of Chinese industrial policies, to screen and create a pool of bankable industrial energy saving projects.

Without the same level of industrial policy coordination and strategic guidance, Chinese policy banks have a much less clear green mandate when financing overseas, and have to resort to basic safeguards based on host country policies. According to the NRDC-Tsinghua report, this approach has clear limitations. The idea of deferring sustainability standards to host country regulations seems to have been deeply rooted in the thinking of bank executives. The NRDC-Tsinghua team’s interview indicates that those executives are fully aware of the “strictness of environmental and social safeguards developed by the World Bank and Inter-American Development Bank”. But they also believe that strict standards “limit where banks can go in terms of their businesses”, as they require too much on the side of the recipients. These executives nevertheless conceded that when local standards “prove inadequate”, they are willing to bring in Chinese standards (if more robust) as a stopgap. The rationale for applying Chinese standards is to elevate their global acceptance for future technological exports.

The deference approach also applies to grievance mechanisms, where Chinese policy banks demonstrate a clear preference for complaints to be directed to recipient country authorities rather than themselves. Addressing the issue of deference, the UNDP-CDB report recommends governments and financial institutions to assess host country standards and identify countries lacking the ability to implement standards or those lacking standards altogether. Based on such assessment, capability enhancing efforts can be made in the form of technical support or modest grant financing. “Defer to the host country on standards that are already aligned with best-practice standards,” the report prescribes, “but work with the host country to boost implementation, compliance and monitoring capabilities.” This approach can “substitute practices received with limited enthusiasm”, a subtle criticism by report authors of the Bretton Wood institutions’ “conditionality” methods.

Both the NRDC-Tsinghua report and the UNDP-CDB report outline how environmental and social review is embedded in the policy banks’ internal procedurals, with slight differences, as shown in the table below. Before delving into the table, one should note that neither bank currently has dedicated offices or teams to handle environmental and social standards. The safeguard is therefore scattered ( or “embedded)” in bits and pieces across the banks’ due diligence and approval processes without any overarching overseers of how green their lending is. Interviews by the NRDC-Tsinghua team also shows that Chinese bank interviewees have little comprehension of the “Environmental and Social Covenant” approach commonly practiced by international development financial institutions, which would put clients’ environmental and social commitments into loan agreement to become legally binding.

Policy Bank ESS
Source of information: UNDP-CDB report and NRDC-Tsinghua report

The above table might give the impression that safeguards are available and working at the Chinese policy banks, as the banks themselves often argue. But as report writers pointed out, the reliance on recipient country standards mean that in regions with weak governance, such as Southeast Asia, poorly-designed projects might get greenlights. And the lack of a central policy, a dedicated staff and clear project-level standards for environmental and social issues means they are at the risk of being treated as secondary concerns at each of those steps wherein their consideration is supposedly “embedded”.

Green Loan

If the bank’s safeguards seem a bit underwhelming, the Boao Forum for Asia’s “Belt and Road Green Development Case Study” report (hereafter as “Boao report”) brings to the fore interesting details of a solar mill project that CDB financed in Zambia. At Panda Paw Dragon Claw we love graphs and flowcharts that illuminate the workings of Belt and Road actors. The Boao report did a nice job of drawing the below diagram of the parties involved in the CBD solar mill loan:

Zambia Model
Source of diagram: Boao Forum report

Based on the report authors’ description, Zambia’s hydro-powered mills for cornmeal, a staple food for the country, faced curtailed power supply due to a lack of rainfall in 2014, leading to rising food prices. President Edgar Lungu launched the Presidential Solar Milling Initiative to construct 2000 solar mills around the country to ease the pressure on cornmeal supply. The initiative, with a total estimated cost of USD 200 million, was financed through a CDB loan worth USD 170 million. The rest would be paid by Zambia itself.

Despite its green merits – the mills are solar powered and have a public livelihood objectives at its core – the loan also has clear CDB features. Based on the description of the report and news reports from Zambia, the loan appears to be non-concessional (interest rate is unknown), although CDB waived all other fees associated with the loan. It is sovereign guaranteed from Zambia’s Ministry of Finance. A Chinese EPC contractor gets the contract to build the solar mills. And Sinosure, China’s policy insurer, provides mid to long-term insurance for the loan.

Touted as green finance, the loan nonetheless shows both the advantages and limitations of CDB debt financing. Zambia is considered “high risk” in World Bank/IMF’s debt sustainability assessment, and would be advised to avoid or limit non-concessional borrowing. This may restrict the country’s ability to raise funds from international lenders, making CDB’s offering highly attractive. (In cases like this, multilateral development banks would only offer concessional loans with very low or zero interest. And market rate lending will be made to private companies without sovereign guarantee.) While the solar mills may be fulfilling a genuine development need and have a viable future revenue stream (local cooperatives would pay to use the mills), a non-concessional loan inevitably adds to the overall financial stress of a country whose 2018 debt stock stood at USD 10 billion. On the China side, CDB has thoroughly risk-proofed its loan (sovereign guaranteed and Sinosure insured) and the Chinese EPC contractor will reap the benefit of a major construction deal. But Zambia has to figure out how to make the project work in the next 15 years so that the loan can be serviced.

In Zambia, there are already signs of trouble: the President has openly expressed dismay that some of the solar mills have become “white elephants” and is urging provincial officials to take action. Vandalism and theft (of solar panels) also plague the project. “Government borrowed money which has to be paid back with interest,” says Zambia Daily Mail, “Zambia cannot afford to waste resources in that manner (referring to the non-working solar mills).”

If providing financing and construction help get projects like the solar mill initiative off the ground, there is still a distance from a true “win-win” if one side bears a disproportionate risk of project failure while the other side enjoys the safety of near-term benefits.  If the latest reports collectively highlight one thing, it is the disproportional burden Chinese financing is putting on the weak shoulders of its Belt and Road partners, be it environmental governance or debt sustainability. If BRI is to be genuinely “mutually beneficial”, fine tuning that risk-benefit equation would be a first step.

Dreams and Infrastructure – Common Destiny, the first Belt and Road movie

A BRI-themed documentary movie manifests China’s infrastructure-centric concept of development

Common Destiny, a movie-documentary about the modern Silk Road, tells the story of lives transformed by dreams realised through persistence and the enabling power of infrastructure development. In many ways the movie presents the narrative of China’s materialist theory of development, led by and underpinned by infrastructure, a contrast to Western countries’ current focus on development aid.

Released in China shortly before the October National Day Holidays, the documentary was relatively high budget – in excess of 50 million RMB, according to producer Liang Yan – received some international attention at the Venice Film Festival, but was low audience, garnering only a million RMB in box office sales during its five days of screening in September, according to RFI.

The movie is a picaresque medley of five stories from across Eurasia and Africa. The stories are all real, recreated by amateur actors, in some cases the real life protagonists themselves.

The prominent presence of infrastructure through the movie reflects and participates in the creation of the “promises of infrastructure” that anthropologist Brian Larkin writes about in his key essay on the social meaning of infrastructure. In that essay, Larkin posits that infrastructure projects “are made up of desire as much as concrete or steel”. He also argues that, because they are the sites of such fluid and diverse forces as personal and societal desires and ambitions, infrastructure is “always metaphor.” If that is the case, Common Destiny is, as a film director’s response to the Belt and Road, playing an active role in constructing that metaphor.

Common Destiny
The movie poster for Common Destiny

Five journeys, one destiny

Common Destiny begins in Kenya, with what has, after being retold on a number of WeChat channels, perhaps become the most iconic of the five stories. Grace is a child in rural Kenya whose school lacks an art teacher. Their weekly scheduled art class has been replaced by an English language class, to the frustration of the students. One day whilst stacking shelves in her mother’s village shop, Grace comes across a promotional flyer for a children’s art school in Nairobi tucked away in one of the delivery boxes. It triggers an idea – to go to Nairobi, find this school and ask the teacher to come to her village to teach at the school. But how to get to Nairobi? Well, there is a new high speed train line built by a Chinese company. Grace saves up money for the train ticket and arrives at the school in Nairobi to ask the teacher to come to their village school. The teacher is sceptical, saying he cannot give up his job in the city just to teach at a rural school. No worries, says Grace, there is a high speed train, you can come just one day a week. Infrastructure has compressed space and made the impossible possible, made dreams, with a dose of dogged persistence from Grace, a reality.

The other stories focus on the road trip of Yangyang, a young Chinese artist and writer, and her father’s friend Wu Yinghua, a truck driver and secret photographer, from Guangzhou to Almaty, Kazakhstan; a journey of (re)discovery for Santos, a Spanish traditional paper maker, to a paper making village in Jiangxi province; the persistence of Ghayda, a young Jordanian woman, in finding a job against the headwinds of patriarchal tradition dictating a housewife future (after nearly 20 failed attempts she finds a job in what seems to be a Chinese company); and the dream of a young Uyghur boy Yusuf Jiang in Kashgar to win a basketball scholarship, again against the headwinds of traditional expectations.

A full deck of positive stories then. At the screening, producer Liang Yan made a point of stressing that the film is not backed by government, echoing comments made to The Economist. Beijing Silk Road Media Group, the production company behind the movie, do explicitly state one of their missions as to “enthusiastically respond to the country’s Belt and Road strategy,” however (written in 2015, when the term “strategy” was in use to describe what is now termed “initiative”). Whether or not the film has direct financial or other backing from government then, it seems likely that it set out with an intention to portray a favourable image of Belt and Road. Of course, if it did not, it would hardly get past Beijing’s movie censors anyway.

Regardless of where the money comes from and the propagandistic undertones of the movie, we can still take it seriously as a cultural response to and participation in the Belt and Road. With Belt and Road a dominant topic in Chinese mainstream (especially state) media, it was only be a matter of time before Chinese artists, literary writers or, in this case, film directors turned their attention to the initiative to offer their interpretations of it. Their interpretations are part of the creation of meaning and of the metaphor of the Belt and Road.

Personal Dreams + Infrastructure = A positive future

This is the equation that formulates the main theme of the movie. Grace’s story is the most prominent and obvious example. Infrastructure is also central to the story of Yangyang and Wu Yinghua whose journey of finding themselves – Yangyang finding her creative drive and Wu finding the confidence to become a semi-professional photographer – is written out in allegorical style as they journey across the now-tarmaced silk roads of China from Guangzhou to Xinjiang and on to Kazakhstan. Elements of that story are almost pointedly self reflective of the centrality of infrastructure to the movie. While Yangyang photographs local minority villagers going about their farming business, Wu turns his camera lens to mega-bridge projects spanning the gorges of south west China, lingering on their powerful, transformational forms.

Infrastructure features prominently throughout the movie, the camera sometimes panning slowly across infrastructure panormas. At times it even seems to perform the functions of narrative and plot device, both a scenic backdrop and a character in itself. It would be easy to mock this as a filmic representation of the financially and techno-charged dreams of state-owned enterprises and local governments, but there is, of course, an element of truth to the equation. The rapid development of infrastructure has enabled incredible things to happen in China over the last three decades and perhaps it is only natural that a creative response to the Belt and Road from Chinese film directors would view the initiative through this lens.

In this way, Common Destiny reflects China’s materialist concept of development, which puts infrastructure front and center in the process of development. Build and economic activity will follow, it proposes, a gamble that has met with both successes and failures within China.

The insistence to put infrastructure front and center in its overseas development agenda differs significantly to the shifting focus of Western development aid in the past few decades, which, according to scholars such as Debra Brautigam, has gradually moved away from earlier emphasis on infrastructure and industry. Over the years, Western donors have elevated concepts of basic human needs, “structural adjustment”, governance and democracy in the place of handing out “hardwares” to recipient countries. While infrastructure is not totally excluded from this picture, current Western theories of international development tends to place emphasis on the individual as the unit that, once empowered, will bring about economic progress. In the Marxian language China’s state planners should be familiar with, the Western theory of development proposes to tinker with the superstructure, while China proposes to remake the base.

Crazy about Infrastructure

Perhaps it is also worth pointing out here that, though an obsession with mega infrastructure projects — bigger, taller, longer, faster — might seem somewhat crude to 21st Western sensibilities, the West too had its period of rapid infrastructure development and a similar fetishisation of the structures — New York’s tallest skyscrapers, 19th century England’s gorge-spanning Clifton Suspension Bridge. Since then, however, the role of infrastructure has largely been backgrounded in the West, while in Chinese discourse of both domestic and international development it is clearly very much foregrounded.

Indeed, as the developed world grapples with post-industrial issues, China is very much embracing and celebrating its industrial might that has finally reached a level comparable with established manufacturing powerhouses like Germany and Japan. The sentiment is best manifested by the online term “infrastructure maniac” or “infrastructure devil” (基建狂魔), coined by netizens to refer to their motherland. Under a 2016 question on Zhihu.com (China’s Quora) “Why do people refer to China as an infrastructure-maniac?”, there are more than 1000 answers, many of which are first-person accounts by engineers of impressive infrastructure projects they worked on — bridges built in remote mountainous areas, highways connecting seemingly impossible destinations, and electricity grids providing millions with access to power in a matter of years. In one of the answers, the user simply posted a few pictures and typed “this says it all.” They were pictures of kids playing with mock excavators in an amusement park.

Infrastructure-maniac

The industrialist national psyche has found its way into people’s imagination about China’s involvement overseas. Common Destiny is a manifestation of that development philosophy.

The omitted variables

In the introduction to the edited volume The Promise of Infrastructure, Hannah Appel, Nikhil Anand and Akhil Gupta write “new infrastructures are promises made in the present about our future.”

In Common Destiny, the “dreams + infrastructure = development” equation works seamlessly. The question this raises, and one which brings us closer to reality, is what happens when the equation goes wrong? In reality, there are many more variables to that equation — levels of corruption, effectiveness of engagement with local communities, the attainment of a “social license”, the conduct of environmental impact assessments, and more — what in the parlance of investors would be categorised as “risk”.

A failure to take into account the many variables which can make that bright future a reality leads to a breaking of those promises and a betrayal of aspirations, a major reason why infrastructure projects — from the Lamu coal power plant in Kenya to the hydro dams of Indonesia to the Yunnan-Laos high speed rail — are so frequently controversial and politically charged. Common Destiny omits these elements and their consequences from its equation.

But through its storytelling, Common Destiny also (maybe unintentionally) acknowledges a fundamental truth to human development. No matter what you end up building — a bridge, a highway, a power grid — infrastructure is always a means to an end, not an end in itself. Grace’s dream is for her school to have an art teacher. Ghayda, the young Jordanian woman, is trying to break away from suppressing traditions. These are human pursuits that speak to desires and aspirations higher than material satisfaction. Steel and concrete may assist such pursuits, but can never replace or suppress them.

Ironically, non-materialistic values, such as the integrity of one’s cultural heritage or the love for nature, are often brushed aside as irrational or outright anti-development by infrastructure constructors and their interest groups when they get in the way of a project. In that sense, Common Destiny may have provided a window for viewers to reflect on what development is really about — the needs and desires, material and non-material, of communities around the world.

Writing the image of Belt and Road

“Infrastructures are always fantastic as well as technical objects. They are made up of desire as much as concrete or steel,” writes Brian Larkin in his essay on the anthropology of infrastructure. It is this combination of infrastructure as physical, technical object and a location of wishes and desires that Common Destiny tries to spell out, though limiting itself only to positive examples.

As sites of dreams and desires, government-to-people promises and potential abuses, the meaning of both individual infrastructure projects and a mega infrastructure project like Belt and Road as a whole is a process of creation and discourse. That discourse will include a plurality of voices from across the Belt and Road, weighing up such issues as whether or not promises of a better future have been kept or broken.

Common Destiny contributes its voice to the construction of the narrative of infrastructure. But, as in traditional Chinese paintings where blank means as much as strokes, it is in the omissions to the movie’s central equation that we can see the real challenges and controversies facing China’s infrastructure projects overseas.

Interview: Can Chinese NGOs help companies obtain “social licenses” along the Belt and Road?

As a Chinese NGO stepped outside the country for the first time, it found itself caught in between Chinese companies and skeptical local communities.

One largely untold story in the narrative of China’s Going Out, which focuses on the government, SOEs and banks, is how its own burgeoning civil society, witnessing the huge impact China is making overseas, tries to catch up with the footsteps of state actors and make their own mark in shaping the country’s footprint abroad. With the daunting constraints NGOs are facing domestically, working in a foreign country offers only further challenges. They not only have to overcome the barriers of language and culture, but are also confronted by a more fundamental reality of their delicate relationship with the Chinese state.

What is unbeknownst to many international observers of China’s Belt & Road Initiative is that a few Chinese civil society groups have already ventured out, albeit slowly and quietly, and have set up a presence in a handful of key Belt and Road countries. In this space, there are government-backed NGOs such as China Foundation for Poverty Alleviation, which has already set up development programs in 5 countries including Myanmar, Nepal and Ethiopia; professional environmental NGOs such as the Global Environmental Institute, and grassroots community development groups such as Social Resources Institute (SRI), the organization of focus in this interview.

Yue Jinfei, a young development worker had spent a few year in the Chinese countryside before joining SRI in 2014, was, in 2015, tasked with a project untried before in the organization’s history: with a few team members, he was to map the complicated web of interests around the controversial Letpadaung copper mine project in Myanmar. SRI had never had any experience working in another country.

Letpadaung was Asia’s largest hydrometallurgical copper mining project and one of the most controversial Chinese projects in Myanmar. Violent protests had disrupted the project, acquired in 2010, by Chinese state-owned company Wanbao, over issues of land acquisition and relocation of villages. The situation prompted President Thein Sein to appoint Aung Sang Suu Kyi, then the chairwoman of National League for Democracy, as the chair of an investigation commission tasked with giving a comprehensive assessment of the problems surrounding the project. The commission has since come up with a set of recommendations and rectifications that Wanbao is required to implement.

Yue Jinfei and his team made field trips to Myanmar between 2016 and 2017, talking to a wide range of stakeholders affected by the project to come up with a comprehensive report widely referenced by researchers, journalists and civil society workers taking an interest in China’s involvement in Myanmar. In a recent interview with Panda Paw Dragon Claw, he shared his reflections on the promises and limitations of Chinese civil society’s “Going Out”.

Jinfei
Yue Jinfei has worked in China’s countryside for years before joining an SRI team to map the interests around the controversial Letpadaung copper mine in Myanmar.

Panda Paw Dragon Claw (PPDC): Why did SRI decide to get involved in a Chinese overseas project like Letpadaung?

Yue Jinfei (YJF): In the early 2010s, SRI started working on poverty alleviation through sustainable agriculture in China. Within that space we did extensive research and consultancy on agricultural supply chains, including tea, coffee, tomato and cosmetic ingredients.

In 2014-15, that work brought us to Chinese agricultural investments in other countries. That’s when we first cast our sight overseas and we realized very few Chinese NGO peers had overseas experience, so there was not much we could build our work upon. It was uncharted waters. The realization made us think maybe it could be more valuable to take a broad viewpoint rather than focusing on sectoral issues. So we focused our research around how Chinese companies deal with local communities in other countries. As a first step, we were just trying to understand what’s going on, as Chinese civil society as a whole seemed to have very little clue of the situations beyond China’s borders.

We selected Myanmar as a starting point because of its complexity as a country. In 2014-15 the political transition was already under way but not quite completed. Other Chinese projects such as the Myitsone dam had already caused lots of controversy. But unlike the Myitsone dam, which was already halted, Letpadaung was still ongoing at that time. Its ups and downs provided a very good window into the dynamics of a Chinese overseas project. How it went from problem to at least partial solution is a source of knowledge and understanding that has guided us ever since.

PPDC: You adopted the Sustainable Livelihood Framework (SLF) in your report. Was it an attempt to show comprehensiveness and balance in your analysis?

YJF: The adoption of a research framework for us was also a learning process. At SRI, we were studying useful theories and tools in the field of rural development. We encountered the SLF developed by the UK’s Department for International Development (DFID) and Francis Fukuyama’s work on social capital. We felt they were very relevant for the Letpadaung case, which is a rural community affected by a major industrial project. Using the framework allowed us to capture multiple dimensions of those impacts, from human capital, natural capital to social capital, that collectively determined the quality of a rural livelihood which was really our main concern. It’s like dissecting a sparrow. And SLF provides a handy tool for doing that.

PPDC: Did the complexity of the local situation surprise you?

YJF: We picked Letpadaung exactly because of its complexity. So that was almost expected. But still I was struck by the complicated web of factors that contributed to conflicts in that case. There were dynamics between villagers who refused to move and those who agreed to relocate to Wanbao-built new villages (and therefore enjoyed new homes and new job prospects). And conflicts happened within each group. For example, in order to maintain collective leveraging power, villagers who remained would exert pressure on those who showed willingness to relocate. And in some cases, conflicts even manifested on household levels. I have seen siblings split over compensation and relocation. Someone who had nominal ownership of a piece of land might have received the compensation from Wanbao, but his or her sibling might be the person who actually occupied and worked the land and refused to vacate it.

How actors approach such complexities may reflect different (cultural) values. Chinese companies often consider household disputes a purely private matter (家务事) and refuse to intervene into the private sphere. But if you look at reports by Western civil society groups, they would point to such household disputes as the result of Chinese investment (or at least exacerbated by it): the disruption of traditional family structures by the injection of external resources.

As a Chinese NGO, how should we look at such problems? I don’t have an answer yet. But it did remind me that many phenomena that we had taken for granted in China for the past decades, such as the disintegration of family structures by external economic forces, could become problematic issues overseas.

Letpadaung mapping
SRI’s mapping of stakeholders involved in and affected by the Letpadaung project

PPDC: What did you plan to do with such an analysis of the complex community-level impact of Wanbao’s project?

YJF: As an organization we are probably too research-minded [laughs] that we were simply studying the situation for the sake of understanding it. We did not have mature ideas of how we should utilize the result of the research and apply its findings.

But we did have a general direction. In rural development work within China, the methodology of participatory community development, first introduced by Western development groups, has taken roots among NGOs. Many organizations use such methods in China to facilitate the expression of community needs and inform their response. Is it possible to introduce this to corporate community relations management? We knew that some companies had introduced stakeholder analysis into their CSR work. But their way of stakeholder communication is far from the participatory method development workers are familiar with.

Here we encountered a fundamental dilemma that is still haunting me today: the way you treat minority interest in a situation like this. I would call it the “20% problem”. If 20% of the villagers refuse to move no matter what the Chinese company does, what should we do? Wanbao in the end chose to ignore them, as their opposition to the project no longer posed a substantive threat to the operation of the plant and the majority of the community had already started over in new villages. This may be a rational decision in a business sense. But as a Chinese NGO, our years of work in this field tells us that even a small minority voice represents intrinsic human rights. So how should we play the bridging role that we set out to play in a situation like this?

PPDC: Did you have a conversation about this with Wanbao?

YJF: Our access to the company wasn’t as good as some business groups. We were not able to enter the core premises of Wanbao’s plant in Letpadaugn . But we did visit its Yangon office (which was Public Relations oriented) and interviewed them about the project. To some extent our relationship with the company was also defined by our stance on the minority issue. I was reminded not just once by my friends with close ties to the business sector that openly expressing sympathy with “the 20%” would negatively affect future communication with companies. On the other hand, we were also sometimes warned, albeit friendly, by civil society partners in Myanmar that it could alienate local communities if we appeared too cozy with Chinese companies – we’d be seen as their invited guest. We were really caught in the middle.

Wanbao was quite sensitive of how we represented its practices, so they did provide three rounds of feedback in our drafting process and provided information about what they were doing, especially in areas where they felt they were misunderstood. But on the substantive level, we didn’t think our study would make much of a difference on the project level as Wanbao was quite confident that their problems were already settled.

PPDC: Do you agree?

YJF: Maybe their Letpadaung operation is now unscathed by remaining opposition. But recently, as Wanbao has started prospecting for a new mine in the nearby region, they have met with fierce resistance from local communities. Many simply wouldn’t let Wanbao personnel in. That speaks to a continued lack of social license to operate in the wider neighborhood, despite all the work Wanbao has done.

PPDC: How did the local community and civil society groups receive you?

YJF: We were introduced to some civil society groups in Myanmar through partners and then our reach just snowballed to a wider network. Some of the NGOs were research oriented while others, such as Myanmar Alliance for Transparency and Accountability (MATA), were active on the ground. Through them we were then led to community based organizations (CBO) working on very local levels in Letpadaung and also community members.

But as a Chinese NGO our interaction with the local community was shadowed by the larger context of China as an authoritarian state. There was always the perception that, no matter whether you are a company or an NGO, you somehow represented the Chinese government. That’s why our local partners often treated us with a level of caution, as they were unsure what our real intention was. This kind of mistrust has only been exacerbated by China’s physical closeness and its assertiveness in recent years. I would even say that this misgiving towards China was much more intense than towards Japan, which actually invaded and occupied Myanmar during WWII. In Myanmar eyes, that invasion is now firmly in the past, while China’s impact is present.

When at the end of 2018 the Chinese embassy in Yangon made controversial comments about public perceptions of the Myitsone Dam in Kachin State, we immediately felt the heat while doing field work in Myanmar. We were asked a lot of questions by local contacts and some of our scheduled meetings or interviews couldn’t happen as local contacts got suspicious of us collecting information about their attitudes and perceptions at that sensitive moment.

Our acts were closely scrutinized, sometimes even when we were not physically in Myanmar. Information about a recent workshop that we held in Beijing on corporate-civil society relations in Myanmar was widely circulated in Myanmar’s NGO circles after someone probably Google translated our workshop introduction from Chinese. Criticism of us “selling information” to Chinese companies arose just because we shared our interview findings at the workshop where corporate representatives were present.

PPDC: Given this situation, do you think Chinese civil society groups can play a role in obtaining social license for China’s overseas involvements?

YJF: As individual organizations, I think it’s difficult. But collectively as a group, there is a possibility for Chinese NGOs to build the foundations of local public support for or acceptance of constructive Chinese involvement in the region.

Japanese civil society serves as a good example for us. With Japan’s deep involvement in Southeast Asia, Japanese NGOs have long ventured out into the region. On the one hand, there are Japanese NGOs doing traditional aid work such as building roads, setting up schools and digging up wells; on the other hand, there are watchdog groups like Mekong Watch, which focuses on Japan’s environmental and social impact in the region. What’s unique about the Japanese civil society presence in the region is its “depth”. It’s not rare for Japanese NGO workers to plug in a rural area of Myanmar for months or even years, learn the local language and really advocate for the local communities. How many of us have that conviction even when working in the poor countryside of China? With that kind of deep involvement, local communities associate “Japan” with generosity and benevolence.

This level of public trust cannot be built by a single NGO. It takes long term cultivation by an ecosystem of different groups. It doesn’t matter if CFPA only focuses on donations of goods in Myanmar and not on corporate accountability. As long as their work creates recognition among local communities of what “Chinese” do, other Chinese NGOs can build on this acceptance of our presence to further their areas of work. My hope is that through this collective effort, a diverse China will be more visible. People will discover that China is not a monolithic entity and that its civil society is here to help for the greater good.

 

How China’s power companies invest overseas

China’s power infrastructure investment comes in multiple forms, all of which entail different risks

By Wang Yan and Li Danqing

Over the past twenty years, China’s ‘going-out’ strategy has built Chinese companies an international role as the major suppliers of infrastructure around the world. Within the growing stock of infrastructure that China is building up, power infrastructure, especially coal power plants outside China’s borders, is attracting increasing attention both for their contribution to energy accessibility in developing countries, particularly South Asia and South East Asia, and for their climate impacts for decades to come (“carbon lock in”).

Articles, reports and academic papers have been written about this phenomenon as the world seeks a way to engage China in a dialogue about its coal build-up overseas. But before any serious conversation can happen, understanding the true nature of Chinese power companies’ operations overseas is key. Chinese companies’ role in supporting the development of coal power plants overseas comes in multiple forms, ranging from design and construction to part-ownership. Since 2013 Chinese companies have had an increasing preference for equity investments, a form of investment that entails both increased potential profit and increased risks. This blog tries to illuminate the landscape that the multiple forms Chinese coal power investments are made in.

Types of investment

A commonly overlooked aspect of Chinese – or for that matter any country’s – overseas infrastructure investments is that there are a range of investment model options available for companies and banks. Each option entails different types of contracts, partnerships, responsibilities, potential profit margins, and, inevitably, risk. To get a true understanding of how Chinese coal plant construction companies operate overseas operate, it is important for us to understand these different models.

Engineering, Procurement, Construction (EPC) was the dominant form of overseas investment for Chinese companies until 2018. An EPC contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct a functioning facility or asset as specified in the EPC contract. EPC+Finance (EPC+F) is one common derivative form of EPC, in which the project owner also wants the contractor to solve project financing.

Build-Operate-Transfer (BOT) and Build-Own-Operate-Transfer (BOOT) are typical types of public-private partnerships (PPP). In a BOT or BOOT project, normally large-scale, greenfield infrastructure projects, a government will grant a company the right to finance, build, own and operate the project with the goal of recouping its investment. Once investment has been recouped, the control of the project will then be transferred to the government after a specified time, normally 20 to 30 years.

Equity investment refers to companies’ investing in other projects or companies in the form of cash, tangible or intangible assets, in order to obtain an intended return in the future.

In the power sector, EPC revenues come from project payment as the plant function fulfills the contract, while BOT/BOOT rely on power purchaser’s continuous buying electricity from the plant during the project period, which is ensured by a Power Purchaser Agreement (PPA). Thus, long-term and steady project revenue is a determining factor in securing project financing.

In many cases, Chinese companies will set up a special purpose vehicle (SPV) via equity investment, registering it in the host country. The SPV becomes the project operator and engages with local and day-to-day businesses.

Chinese companies, therefore, play multiple roles in overseas power plant development – as investors, owners, designers, contractors, and operators.

From EPC to equity

Since 2013 Chinese companies have significantly increased equity investment in overseas coal power. In 2018 equity investment for the first-time outpaced EPC, the traditional investment avenue, in terms of newly-installed capacity. In the past decade, a total 10.8 GW of coal capacity had gone online with the backing of Chinese equity investment, 96% of which came after 2013 (Fig. 1). This shift from EPC contractors to equity investors with strong financing capacity appears to be the trend for future overseas coal power investments.

PPDC-coal-1
Fig. 1. Coal power projects (capacity) with Chinese equity investment and EPC over the past decade.

Why the shift?

The transition from EPC to equity investment fits into the broader arc of China’s ‘going-out’ strategy, which began in 1999 and increasingly encouraged outbound investment, besides merely product and service export. The Belt and Road Initiative (BRI) has spearheaded China’s ‘going out’ since 2013, and in that time China’s outbound direct investment (ODI) in BRI countries has occupied a growing share of China’s total ODI, with 12.5% of China’s direct investment going to BRI countries in 2017. Despite a 19.3% year-on-year decrease in China’s total ODI in 2017, direct investment in BRI countries witnessed a 3% growth.

Equity investment brings more return for investors. As owners of a project, equity investors can potentially get higher returns in the long term. Equity investment also brings flexible options to investors. They can invest not just with cash, but also with current assets like materials and fixed asset. This offers both flexibility and lower cash flow risks.

In addition, equity investment, especially from state-owned companies, plays a credit checking role. It tends to enhance borrowers’ credit and lenders’ confidence and willingness, as well as attracting other types of lenders for project financing, such as seed banks and foreign capital banks. This means that equity investment can help a project to raise more money in less time, potentially lowering the overall cost. Lastly, with ownership of the project, equity investors take initiative for project management and risk control, and receive more rights to local resources, which also serves to lower the cost of the project.

In terms of coal plants, there are three key drivers underpinning the transition: global market trends, the company’s transition needs, and China’s top-down support.

1) The long-term benefits of exploring new markets, integrated industry chain and decision making power brought by equity investment. Equity investment allows companies to lock in long-term partnerships, acquire local resources in a lower-cost way, and ensure quick or steady growth in a foreign market.

Many Chinese companies are currently transitioning from EPC contractor to whole industry chain service providers. China Machinery Engineering Corporation (CMEC), one of China’s oldest and largest coal plant constructors, noted in its 2018 yearbook that the company has tried to diversify and widen its industry chain in recent years, with more projects conducted via ‘EPC+Investment+Corporation’ model. As part of this transition, the company has also formed partnerships with GE in multiple overseas equity investment projects.

2) A more competitive environment for the EPC-driven model meets the rising need for private investment in public projects. Driven by a desperate need to ease power shortages, while worried about tighter public funding and debt burdens, host countries are embracing private investment into public projects, or EPC contractors with its own financial support.

For example, in 2015 Pakistan updated its 13 year old electricity investment policy to allow for 100% foreign capital ownership of project companies, increased allowed return of investment, and “take or pay mechanisms”, an electricity payment mechanism which will ensure investors’ returns. The updates were all intended to increase potential profit margins for foreign companies, attract foreign capital, and reduce electricity generation cost.

3) Top-down financial support and policy signaling for equity investment overseas. Boosting overseas equity investment in power sector markets has been highlighted in a number of China’s diplomatic agreement and official BRI documents.

For example, in China’s new cooperation with Africa on infrastructure development, the integration of investment, construction and operation has been underlined in developing power, transport and communications projects. These investments are supported either by loans from China’s policy banks, or from commercial banks. China’s concessional loans require Chinese companies’ holding shares in overseas projects.

More equity investment, more risks?

But higher returns come with a higher risk profile. Along with the responsibilities of designers, constructors, or equipment-providers that normally come from the EPC model, the equity model also brings Chinese investors in on feasibility study, business negotiation, financing plan, construction, to long-term operation and management with a variety of foreign and domestic stakeholders. Chinese companies, along with banks and insurers who give financial support, are more attached to long-term steady returns and interlocked in multiple project stages, exposing them to complex risk patterns. Fig. 2 illustrates the risks exposed at each stage of an equity power project.

 

PPDC-coal-2
Fig. 2. Stages and risks in project development (see Feb 2018 article in Infrastructure Economics 《建筑经济》

Most of China’s overseas coal power investment is in developing country markets (Fig. 3), which frequently present higher investment risks due to financial insecurity, political unrest, sovereign debt or uncertain business environment, causing uncertainties for China’s overseas investment.

PPDC-coal-3
Fig. 3. Total capacity of coal plants with Chinese equity investment in different regions. South and Southeast Asia are hotspots for China’s overseas coal investment, and together host 94% of Chinese equity-invested coal plants.

One of the most pressing challenges is changing or stricter electricity investment policies, which are already leading to project delays or cancellation. In Indonesia, for example, a gap between forecast electricity growth rate (8.3% for the period 2017-26) and actual growth rate (3.6% in 2017) has resulted in the postponement of 22GW of planned electricity generation projects.

In addition to electricity sector regulation changes, investors should not underestimate the risk posed by strengthening environmental regulations. As the principal culprit for air pollution and climate change, coal plants are in a particularly vulnerable position as governments race to strengthen their environmental regulations as they develop. This is also likely to cause project delay or cancelation, resulting in companies’ breach of agreement, economic loss or reputation loss. Meanwhile, many countries are aggressively making strides to speed up their energy transition and incubate renewables markets with ambitious policy goals, as in Vietnam for example. Public opposition, including protests and court cases, are also a major risk that can lead to project postponement or even cancellation, as happened to the Lamu coal plant in Kenya, for example.

Chinese companies’ investment in coal power plants overseas comes in multiple formats and is evolving as both domestic and international dynamics change. To become forward-looking investors, Chinese companies must raise their awareness of regional energy transitions and ongoing climate change action, and incorporate such aspects into their investment decisions. Beyond that, Chinese banks, insurers and supervisory bodies should also pay closer attention to the risks their overseas projects tie them to.

For anyone working on the issue of Chinese overseas energy investment – a “make or break” issue for global climate efforts – these types of investment arrangements and the opportunities and risks they entail are essential details. Policy makers, researchers, students and journalists should all take note.

Wang Yan and Li Danqing are both climate campaigners with extensive experience in Chinese overseas energy investment

 

Empty trains on the modern Silk Road: when Belt and Road interests don’t align

China’s provinces are sending empty freight trains to Europe. Chinese media explains why.

China is sending empty freight trains to Europe through one of its key Belt and Road Initiative (BRI) projects: the China-Europe Railway Express. The bizarre phenomenon caught the attention of Depth Paper (等深线), a Chinese online news platform. In a rare move by a Chinese media outlet in today’s media environment, Depth Paper probed critically into one of the BRI’s most visible “connectivity” projects, uncovering the perverse incentives that are luring China’s local governments and companies to create huge “bubbles” of ostensibly flourishing rail routes that run tens of thousands of kilometers across the vast landmass of Eurasia.

The revelation partly confirms what some observers have suspected all along: that China’s central government lacks the ability to keep BRI strategically tight and coordinated. Sub-national stakeholders, as they do in other policy areas, have the incentives to bend the initiative to their own narrowly defined interests and in the process undermine the overarching strategy, if such a strategy indeed exists at all. The curious case uncovers some important dynamics playing out among Belt and Road’s diverse stakeholders.

China Railway Express
Depth Paper uncovered the perverse incentives that are luring China’s local governments and companies to create huge “bubbles” of ostensibly flourishing rail routes that run tens of thousands of kilometers across the vast landmass of Eurasia.

The China-Europe Railway Express

Transporting goods between China and Europe through railroads is not a common choice for traders. Up to now, it only makes up 4.8% of the total bilateral trade volume, far behind commodities moved by sea (68%) and air (19.4%). For many years, the China-Europe rail routes were interrupted by the fragmented customs, quarantine and taxation regimes of countries along the way. As a rail transport agent in west China told Depth Paper, sending cargo to Germany through rail was unimaginable as recently as 1997. “Central Asia was as far as we could go.”

But, according to the report, things changed about a decade ago. Years before the advent of the Belt and Road Initiative, the instigator of this change was in fact the American computer company Hewlett-Packard. In 2009, as the computer giant negotiated a major investment deal with Chongqing, the city on the upstream Yangtze River with no easy access to a sea port, it included a condition that it should be able to transport its products to the European market by train: westbound directly from the city, instead of first going east to the sea. The Chongqing government accepted the condition and after two years, the Chongqing to Duisburg rail route was made navigable, allowing HP to ship to Europe in a relatively low cost (compared to air transport) and speedy way (compared to shipping by sea).

Before 2013, the year when BRI was formally announced, a few other freight rail routes were made possible by such bottom-up commercial interests. The city of Wuhan in central China, a major base for car manufacturing, developed Wuhan to Europe routes upon which half of its car outputs now depend for transportation. Similarly, Yiwu, the light industry powerhouse of Zhejiang province, opened up its own rail route to ship large quantities of small commodities, from garments to needles, to Europe. Ironically, those early trials, mostly developed by landlocked Chinese municipalities, received little central government support around that time. According to Depth Paper, China’s railway administrators even charged a fee for the extra burden those freight lines created. Its attitude toward such initiatives would make a 180 turn after BRI came into being.

2013 saw the creation of BRI and the incorporation of China-Europe rail links under the umbrella of Xi’s signature initiative as a key connectivity component. As China’s 2015 Vision and Strategy document for the BRI declared the intention of building the rail routes into a “brand name service”, the number of routes began to explode. Dozens of Chinese cities, including those on the east coast with easy access to ports, joined the bandwagon of rail transportation.

China Europe train routes
Planned train routes from China to Europe through Central Asia/Russia, source: NDRC

Growing bubble

In 2016, the National Development and Reform Commission (NDRC) laid out a five year plan for the expansion of westbound rail routes. And China’s railway planner published a blueprint document on building up the brand reputation of China Railway Express. China State Railway Group Corporation, which used to be the railway ministry, began to highlight the growth of Europe-bound voyages as a major achievement.

The elevation of the freight service in political importance created powerful incentives for players to “rig the game”. Depth Paper reveals two groups of schemers in the game:

Provincial and local governments: As the number of freight trips to and from Europe become a measurable indicator, local governments, particularly those sitting at key railway hubs, saw a clear opportunity to boost their visibility under the BRI (and probably to the leadership). At their disposal were subsidies to lower the cost of freight services and make them competitive with cargo ships.

The Ministry of Finance provides a guiding subsidy ceiling of 0.8USD/container/kilometer. But ambitious local governments circumvent it by inventing all kinds of additional rewards to lure businesses to their train terminals, sometimes even compensating for the extra mileage of truck transportation to bring containers from thousands of kilometers away. According to a chart collated by Sino Trade and Finance, many municipal government offer around 3000USD per container for a one-way Europe bound trip and a whole train could receive a total of 123,000USD worth of subsidies per trip. These local governments also use tax rebate and land use subsidies to sweeten the deal for freight service companies.

International railway service companies: Competition with each other and pressure from local governments eager for BRI visibility has incentivized the companies who actually run the numerous rail routes to Europe to increase the number of train trips. Every month these companies have to book planned trips from the railway regulators and get what is called a “route slip” that permits them to run those trains. The ratio of actual trips to the applied number is called  “realization rate” that regulators use to monitor rail capacity utilization.

The interplay of these incentives drives both groups to boost indicators that make them look good in this game, creating scenes that are outright bizarre. The government of Xi’an is one of the most active players starting from 2018. The city, 1000 kilometers to the west of Beijing and the former capital of Tang Dynasty more than a millennium ago, considers itself the “starting point of the ancient Silk Road” and strives to restore its glory in the Belt and Road era. With full support from its provincial bosses, it is the most generous with subsidies, dwarfing other provinces by a wide margin. “Subsidized per container transportation price from Xi’an is constantly below RMB 8500, while it costs over 20000 RMB from Shandong,” a trade agent told Depth Paper.

The subsidies are of the scale that they bend the gravity of trade. In the most extreme cases, traders in the far west Xinjiang Autonomous Region, which already borders Central Asia and is itself a Belt and Road rail hub, would move their cargo thousands of kilometers to the east to capitalize on the Xi’an government’s free handouts before transporting west across the Eurasian continent. Similarly, traders in coastal Shandong provinces would truck their goods all the way to Xi’an and load them onto trains, as it is cheaper even after taking into account the 5000 RMB per container transportation cost by truck (for which the Xi’an government also partially remunerates). The result is that Europe-bound freight train trips from Xi’an grew by a whopping 536.6% in just one year from 2017 to 2018.

The railway service companies, on the other hand, blow up their trip numbers even when they have very little to ship. Before Xi’an arrived on the scene in 2018, the competition between Chongqing and Chengdu, two nearby cities, was so fierce that the two cities would refuse to merge cargo loads back from Germany despite neither being able to fill a whole train themselves. When the pressure (and reward) to be the top railway service company facilitating “Belt and Road” trips to Europe becomes huge, the companies simply start loading empty containers to their trains. They must ensure that each train meets the regulator’s 40-container minimum before it leaves the station, but there is no obligation and no ability (for lack of demand) to fill those containers.

In the most extreme case, one train carried 40 empty containers and just one full container all the way to Europe. This makes the China Railway Express’s impressive growth number highly dubious, and most certainly a “bubble”. Even with all their tricks, companies can barely fulfill their promise to regulators: they have overbooked railway resources. In Q2 of 2019, Chongqing’s “realization rate” dipped to as low as 64% for some routes.

BRI undermined

Artificially enabled transportation routes are more of a disruption to than facilitation of trade, as China’s policy makers are slowly but painfully beginning to realize. Subsidies are both unsustainable and capricious: “Sometimes a city changes a Party Secretary and the new boss has other priorities for his budget.” This makes it hard for businesses to make long term plans and build China Railway Express into their logistic strategies.

Heavy subsidies also encourage opportunistic behavior that runs against the original intention of the policy. “[Subsidies] are supposed to help first-time users overcome initial transition difficulties and cultivate user acceptance of freight rail as a reliable means of transportation”, says one anonymous Liaoning provincial official to Depth Paper. “[But] what Xi’an does can hardly nurture real needs. Traders will go back to sea and air as soon as subsidies disappear.” The official also warns that such unpredictability and fluctuation would hurt the China Railway Express’s reputation overseas and permanently scare clients away.

The Ministry of Finance is reportedly determined to pierce the bubble by enforcing a schedule for phased subsidy reduction. Subsidies by local government are to be no more than 40% of a route’s total cost in 2019. The ceiling will be further lowered to 30% in 2020 and zero by 2022. The Ministry is hoping that by then the trains running up and down routes would be completely market driven and China Railway Express will stand on its own two feet.

The episode reveals the fundamental difficulties for China’s central leadership to implement its vision by reducing it to seemingly measurable indicators and supposedly workable incentives that mobilize local players to participate in a central government cause. Distortions and outright undermining of central government agenda happens with GDP numbers, air pollution targets, and other domestic issues. BRI is no exception.

It also calls into question a key underlying assumption of the BRI, that the power and “deep pocket” of the Chinese state can overcome problems that the market cannot solve when left alone. Trade flows, it turns out, are not easily bendable by the sheer will of the state. It is a rare occasion for a Chinese media outlet to so directly call out systemic problems in Xi Jinping’s signature initiative. As China embarks on other overseas adventures that premise on the ability of state capitalism to shift the center of gravity of global trade (through new ports and rail hubs), the troubles of China Railway Express should serve as a cautionary tale of the limits of state power.

Additional food for thought… when personal guanxi is more important than national strategy

CDBCaixin
Caixin’s frontpage story about the corrupt deeds of disgraced former CDB president Hu Huaibang

In another example of Chinese media exposing the “underbelly of BRI” , on August 3, Caixin Media published a frontpage story about the corrupt deeds of China Development Bank’s former President Hu Huaibang, who was recently investigated by the disciplinary arm of the Communist Party. The report, which has since been taken down from Caixin’s website, contains jaw-dropping, mind-boggling details of how recklessly senior officials of China’s largest policy bank (and a major instrument of the BRI) pursued their own interests at the expense of the bank’s financial health.

Hu’s tenure at the CDB (2013-2018) overlaps with the inception of the BRI. But according to Caixin, he was never much into the bank’s international adventures, which got expanded substantially under the leadership of Hu’s predecessor Chen Yuan. Hu reportedly shrank the bank’s international presence by cutting its commercial banking businesses overseas and only involved the bank with overseas financing when directed to by the top leadership (e.g. at deal signing ceremonies during state visits). The revelation somewhat shatters outside impression that CDB has been masterminding China’s BRI financing strategies, as one source told Caixin: “CDB almost never proactively sought overseas financing opportunities under Hu.”

Instead, Hu concentrated his political resources on two major clients: HNA Group and CEFC, both were offered exceptionally generous credit lines from CDB (at least 80 billion RMB for HNA Group, 42 billion RMB for CEFC). In both cases, Hu Huaibang rammed the deals through the bank’s internal risk management and gatekeeping mechanisms. In the face of resistance, he did not hesitate to replace officials who dared to disagree. The payback to his family members and political allies was fat, which, at one point, supported Hu’s unsuccessful bid to take the helm of China’s central bank.

As both companies later got embroiled in scandals in 2018 (CEFC founder Ye Jianming was detained in January and HNA Group’s chairman Wang Jian died in France in July), CDB faced the prospect of tremendous loss. HNA Group is reported to have accumulated 40 billion RMB of overdue loans to the bank, while the exposure to CEFC would cost CDB at least another 20 billion. Whether this will dampen the bank’s appetite for increased BRI involvement is unknown. But the Caixin report opened a rare window into the inner workings of arguably the world’s most powerful policy bank, and what it depicts is troubling.

With Belt and Road a top priority in Chinese foreign policy, space for calling out its flaws and problems is inevitably being curtailed. That makes reports such as Depth Paper’s and Caixin’s all the more remarkable, and all the more valuable for Belt and Road Watchers.