Special Monthly Round-up: BRI 1.5

The 2nd Belt and Road Forum in Beijing ended with a set of software patches to BRI 1.0

The 2nd Belt and Road Forum ended on Apr 27 with one message that everyone watching seemed to have picked up: change is needed. In the official parlance of the Chinese government, change is expressed in terms of traditional Chinese painting: from a big stroke, impressionist approach (大写意) to a style of precision and craftsmanship that focus on minute details (工笔画). In the words of Christine Lagarde, the head of IMF, change means “BRI 2.0”, with a focus on increased transparency, open procurement with competitive bidding, and better risk assessment in project selection. And in the words of Pakistan’s Prime Minister Imran Khan, a recipient country leader, change points to a new phase of the signature China-Pakistan Economic Corridor (CPEC) that places “greater emphasis on socioeconomic uplift, poverty alleviation, agricultural cooperation, and industrial development.”

BRF2

International coverage of the high-profile event depicts such rhetoric as a sign of China “allaying fear” of the BRI or “rehabilitating” the initiative’s image. Indeed, President Xi’s keynote speech at the forum indicates that China is responsive to external views of the initiative and its policies in general. In fact, the second half of his speech was widely read as sending messages to the West on key trade-related issues. In that sense, the shift can be regarded as an operational system upgrade responding to customer demand. But rather than a major upgrade as Lagarde’s 2.0 metaphor suggests, the changes made are far from a complete overhaul or reinvention.

For one thing, contrary to what leading BRI pundits and think tank experts have been advocating, there is still no sign that China is going to develop an actual “operating system” (permanent institutional structure with explicit mandates/rules) for the trillion-dollar initiative. Those advocates argue that the “under-institutionalized” BRI will be too easily hijacked by narrow economic interests of players involved. And the only thing close to an institutional upgrade coming out of the Forum is a set of recommendations made by the international advisory board to the Belt and Road Forum, which suggests China to consider turning the liaison office of the Forum into a full-blown secretariat for the BRI, or following the examples of G20, OECD or the Financial Stability Board to set up inter-sessional mechanisms to ensure coordination and continuation during intervals of the biannual Forum.

Absent of a major shift of the BRI’s modus operanti, the dozens of initiatives announced at this year’s Forum are more like patches to fix “bugs”. Below are some of those patches.

Framework for debt sustainability

Among the outcomes of this year’s Forum, the Debt Sustainability Framework for Participating Countries of the Belt and Road Initiative published by China’s Ministry of Finance is probably the most obvious attempt to fend off criticism of the BRI, in particular accusations of it pushing excessive debt burdens onto other developing countries.

The new analysis framework was developed based on the IMF and World Bank’s Debt Sustainability Framework for Low-income Countries (LIC-DSF). It rates a country as low, moderate, or high in terms of its risks of being in debt distress, taking into account its debt coverage, macroeconomic projections, debt carrying capacity, among other factors.

Despite being modelled on the IMF-World Bank framework, the MoF tool applies some customization to the methodology that carries a distinct “BRI signature”. For example, when it comes to the relationship between public investment, economic growth and debt, the MoF framework is distinctively bullish about the potential for productive public investment to drive up economic growth in the long run, “while increasing debt ratios in the short run.” In comparison, the IMF, in a 2017 Guidance Note about the LIC-DSF, sounded more cautious on that same topic:

“Proponents of scaling up public investment maintain that productive investment, while increasing debt ratios in the short run, can generate higher growth, revenue, and exports, leading to lower debt ratios over time. At the same time, high economic returns of individual projects do not always translate into high macroeconomic returns. DSF users should therefore carefully assess the impact of a scaling-up of public investment.”

The view that large-scale debt-driven infrastructure investment is “worth the buck” is at the center of a Chinese developmental model that is being promoted through the BRI. And it is not without its value as Bretton Woods institutions like IMF and World Bank moved away from large-scale infrastructure building, leaving a gap in the developing world. And China’s engagement with established multilateral financial institutions is in fact less antagonistic than conflict-filled news reports tend to depict. In April 2018, the People’s Bank of China launched a capacity building center in collaboration with the IMF, providing training for leaders and officials from countries involved in the BRI. One of the training courses the Center offers is on managing debt sustainability. According to the People’s Bank’s website, countries responded very positively to the course, in particular those that are already using the LIC-DSF: Bangladesh, Cambodia, Ghana, Ethiopia, Djibouti, Tajikistan, Uzbekistan, Myanmar and Vanuatu.

But like other patches that are offered at the Forum, the MoF’s framework is a voluntary tool. It is not clear how the analysis can be integrated into lending decisions in the future, except for the possibility that a Multilateral Cooperation Center for Development Finance might adopt it.

Environmental governance of the BRI

Another area where the Forum is clearly responding to external pressure is how it handles the BRI’s massive environmental footprint. “Green” elements were given very little attention two years ago at the first BRI Forum. But the situation is noticeably different this time, as “green” elements were reflected in both the leaders’ speeches and the final ‘list of deliverables’. While criticism of China “lacking real will to address the challenge of climate change as it relates to the Belt and Road” still abounds, climate factors are being incorporated into initiatives announced at the Forum, albeit (again) on voluntary basis.

The “Green” updates rolled out this time include the formal launch of the International Coalition for Green Development on the Belt and Road and the signing of the Green Investment Principles.

The controversial Coalition, first conceived by the Chinese Ministry of Ecology and Environment in collaboration with the UN Environment, was one of the green highlights this year. Consisting of 26 countries, 8 international organizations, 65 non-governmental organizations and academic institutions, and 30 businesses (as of Apr 2019), the Coalition is an “open, inclusive and voluntary international network” to ensure that the Belt and Road brings “long-term green and sustainable development” to all concerned countries, according to the UN Environment’s description.

China’s environmental policy for the Belt and Road has been criticized for being vague and rhetorical. The formal launch of the Coalition at least provides some articulation on what aspects of “green” is China considering for the BRI. According to a Terms of Reference (ToR) circulated to participants of the Forum, the Coalition’s main mission consists of the creation of 3 platforms: a platform for policy dialogue, a platform for environmental information, and a platform for green technology transfer. The activities (divided into core and thematic) are mainly facilitative in nature: policy dialogue workshops, sharing best practices, publishing regular “BRI green development reports”. The structure of the Coalition, with its 10 thematic partnerships, opens a channel for external stakeholders to influence the environmental governance of the BRI on issues from climate change to biodiversity. After all, China’s Minister of Ecology and Environment is its co-chair. But actual mechanism for it to give policy inputs or affect project decisions is unclear. As one participant puts it: “All the measures will probably lead to more green projects, but not necessarily less bad projects.”

BRIGC
Structure of the International Coalition for Green Development on the Belt and Road, from the Coalition’s Terms of Reference

The Green Investment Principles, co-developed by the China Green Finance Committee and the City of London, and signed at the Forum, follow the same facilitative style. According to a People.cn report, the initiators of the Principles will establish a secretariat that offers services for the signatories, which has the China Development Bank, China Exim Bank and Silk Road Fund among them. The services include a database for green projects under the BRI, a carbon emission calculator for development and investment projects, and a knowledge sharing platform.

Project portfolio

One of the most direct tests of all the upgrades and safeguards would be an examination of the actual portfolio of projects that China is supporting in the countries involved. The 2nd Belt and Road Forum provides a glimpse of where BRI is heading in this regard, even though it is understandably too soon for all the initiatives announced at the Forum to translate into tangible influence on project decisions.

Wang Yan from Greenpeace’s China office created a nice list of project deals signed during the Forum. Not surprisingly the list tilts heavily towards conventional infrastructure, comprised of mostly energy projects (concentrated in coal and hydro), railway and urban complex development. It is worth pointing out, though, that within the full list of outcomes, items do show renewable energy projects in the pipeline (e.g. a trilateral cooperation agreement signed among China, Ethiopia and Sri Lanka on renewable energy development).

The thing with infrastructure is that their long shelf life means projects built today will have long lasting effect for decades to come. Well-intentioned policy initiatives and safeguards are only useful if they kick in as early as possible in a project’s lifecycle. Five years and hundreds of projects into the BRI, we are getting a major update from the App provider that will likely only fix bugs of future features if components of the update get activated in a timely fashion.

The myth of the Belt and Road in Central and Eastern Europe

Analysis of media and parliamentary discourse shows that the BRI has hardly made a dent in Central and Eastern European perceptions of Chinese influence

By Tamas Matura

The rapid development of China is one of the most important global changes of the last decades. The rise of the Chinese economy and the Belt and Road Initiative (BRI) have had a major impact on its connections with Europe. Through the so-called 16+1 cooperation (now 17+1 since Greece signaled its support for the group earlier last month) exchanges between China and the Central and Eastern European (CEE) region have become more intensive than ever before. And this development does not go unnoticed. Voices of concern in Europe have been particularly strong. EU politicians worry that with China’s increased economic involvement in the region, its political clout could grow to an extent that it would be able to “divide and rule” Europe by undermining EU solidarity on multiple key issues such as transparency norms and human rights.

Given the polarized international debate over the BRI, it is easy to feed such concerns into the familiar narrative of a menacing China. Yet before jumping onto that narrative, it is important to take a step back and assess the true scale of China’s influence in the CEE region and key in-region differences when it comes to perceptions and attitudes. In the past two years, my colleagues and I have been working on a major international research project, called ChinfluenCE. The aim of the research was to assess the image of China and to understand how the wider public and political elites perceive topics related to China. Our research found major differences between media sentiments towards China in the Czech Republic, Hungary and Slovakia. Most significantly, despite all the anxieties about a rising China in the region, the BRI has not been high on the agenda in the above three countries since 2013 (when the initiative was launched by President Xi in Kazakhstan), in both the media space and political discourse.  Instead, our research suggests that intentionally or not, China has yet to developed a narrative about BRI or CEE-China connections on its own terms in the CEE region.

The Core 4

The core of the CEE region is represented by the so-called Visegrad Four countries, namely the Czech Republic, Hungary, Poland and Slovakia. Hungary has been playing a leading role in the 16+1, organized the first China-CEE meeting in 2011 and one of the annual prime ministers’ summit later in 2017, and may become an important link in the BRI. Budapest recently elevated its political relations with Beijing to the level of a comprehensive strategic partnership, and Hungary hosts the biggest stock of Chinese investment in the region. Meanwhile Warsaw and Prague are the two biggest trade partners of Beijing among the four. Due to their geographic location, these countries are an inherent part of any potential land-based transportation corridor between the EU and China.

As reliable public opinion surveys are not available for the time being, the only source of information is to analyze how the BRI is depicted in the media of the CEE countries, and how politicians perceive and talk about the BRI. In the first phase of the project, we have collected, coded and analyzed all printed and electronic media coverage on Chinese politics and economics in the Czech Republic, Hungary and Slovakia for the period between 2010 and Q2 2017. As a result, we have created an enormous dataset based on almost 8000 articles published in the three countries. (The research in Poland is still going on, and will be published in the coming months).

Analyzing the database, we found that the discourse in the Czech Republic and Hungary is heavily politicized. Czech media sources have taken a critical perspective of China with a particular focus on values such as human rights. Meanwhile the Hungarian media focuses mostly on economic issues and the development of bilateral relations, with political values or human rights almost completely missing from the agenda. What is noticeable in Hungarian media, however, is that almost all negative news on China comes from anti-government media, while almost all positive coverage of China comes from pro-government media, indicating the politicized nature of the discourse. In Slovakia the media discourse is overall neutral, and economic issues are the most widely covered topics. Where strong media sentiment is present, however, there is a similar trend as in Hungary of pro-government media adopting a positive tone on China and anti-government media adopting a negative tone.

In the second phase of the project, we looked through almost thirty years of stenographic transcripts of the debate on China in the Czech and the Hungarian parliament and analyzed how the attitudes of different political parties and individual politicians towards China have evolved over the past few decades. Like in the case of the media discourse, there are major differences between the Czech and Hungarian politicians’ attitudes towards China. The Czech debate have experienced significant ups and downs in the past few decades, as it has gone from criticism to a more pro-Chinese period and back to a rather critical standpoint. In the Hungarian Parliament the mood has never been outright pro-Chinese. Right wing parties used to be fierce China bashers in opposition, but they have been neutral or even pro-China since their election victory in 2010. Like the media discourse, the Hungarian parliamentary debate is ideologically less underpinned, and human rights or other values have mostly disappeared from the agenda since 2010.

The 16+1 cooperation and myth of Chinese influence

It has to be emphasized that BRI has never been the main framework of cooperation between China and the CEE countries. The 16+1 initiative is. The story goes back to 2011 when the Hungarian government organized the first China-CEE meeting, where numerous political and business leaders gathered in Budapest. The event was so promising that the Chinese Ministry of Foreign Affairs decided to establish a permanent cooperation with sixteen CEE countries.

16-1-map

The initial idea was to create a semi-institutionalized framework that would enable all parties to meet each other once a year. This was obviously a huge opportunity to the leaders of these relatively small countries to negotiate with their Chinese counterpart every single year. The framework has been developed ever since, it spilled over numerous fields of cooperation between the involved parties, ranging from tourism, through infrastructure cooperation to financial and economic issues. The success of this format is debatable. Some see it is a major success as it has increased the level of exchanges to unprecedented levels between China and the CEE countries, while according to others it is nothing else but a huge pile of unfulfilled promises, without significant economic gains on the side of the CEE countries.

Having grown an average of 9% per year over the past eight years, it is certainly true that CEE exports to China have grown significantly. However, the share of exports to China was as low as 1.2 percent of the total exports of CEE countries in 2017. The stock of Chinese investment equaled to EUR 5.5 billion, which was only 1.2 percent of the total stock of FDI in the five major economies (Czech Republic, Hungary, Poland, Romania and Slovakia) of the region in 2017. Meanwhile the total stock and share of Chinese capital in the five biggest economies (Germany, the UK, France, Italy and Spain) of the EU was EUR 92.3 billion in 2017. In fact, the export dependence of Germany, the UK and of France on China is considerably higher (6.3, 4.4 and 3.5 percent respectively, according to data from UNCTADstat) than any of the CEE countries. Thus, it has to be underlined, that none of the CEE countries are dependent on exports to or investment from China in any aspect. On the contrary, where China has gained real economic influence is in Western member states of the Union.

The BRI in the CEE region

Although Beijing tends to label every kind of cooperation nowadays as BRI related, in fact the number of real BRI projects in the CEE countries is very limited. This is especially true when it comes to the eleven EU member states of the 16+1, as these countries are entitled to receive EU funds for infrastructure development, thus the business model offered by Beijing is less than attractive for them. One prime exception is Hungary, as Budapest has agreed to the joint development of the Budapest-Belgrade railway line (what would eventually connect the Port of Piraeus in Greece managed by China’s COSCO cooperation to the heart of the EU). This project is definitely part of the BRI. However, the construction has not even started yet, and observers expect further delays. When it comes to transport cooperation, Poland is a forerunner in the region, as it has established a direct railway service between the city of Chengdu and Lodz in December 2012, well before the BRI was announced in late 2013. It is considered as the most successful BRI related cooperation of the region, as almost 800 freight trains commuted between China and Poland in 2018. In the Czech Republic, Hungary and Slovakia, the BRI has not achieved tangible results so far.

Consequently, the initiative has had an almost insignificant impact on the media discourse of these countries. Based on media analysis, the BRI has not been high on the agenda in the Czech Republic, Hungary and Slovakia since 2013. Altogether 126 articles (3.1% of the total number of coverage on China) touched upon the BRI from 2013 to mid-2017 in Hungary, 56 articles (2.1%) in Slovakia and only 24 articles (1.9%) in the Czech Republic. In comparison, thousands of articles scrutinized the development and status of the Chinese economy or Sino-Hungarian business relations.

Likewise, when it comes to parliamentary discourse, the impact of the BRI on politicians has been minimal. Hungarian Members of Parliament (MPs) mentioned China 92 times between 2014 and 2018 in the Hungarian national assembly, and the BRI was never mentioned as a topic of its own. The somewhat vague concept of the “new Silk Road” was cited in 13 speeches, but all of these occurrences were related to the topic of the Budapest-Belgrade railway line. One may speculate that the true nature and complexity of BRI is barely known by Hungarian MPs. The Czech case is very similar, as the BRI has never been mentioned in the Czech Parliament since 2013, as a clear sign that the initiative has had a minimal impact in the country.

In summary, despite the enhanced relationship between China and the CEE countries, public awareness of the BRI is still very limited in some of the most prominent countries of the region. Consequently, it would be easy to influence the discourse, as China has failed to develop a narrative on its own terms in the region. Of course, it is also possible that Beijing has never intended to induce public or political discourse on the BRI in the region, since the 16+1 (now 17+1) has served well to frame the narrative in the countries in question. In any case, it is highly probable that Western narratives will continue to shape the mind-set of CEE public and elites in the future, and given the increasing levels of anti-BRI criticism in Washington and in the EU, this important geographical link in the chain of the BRI may develop less friendly attitudes towards the ideas of Beijing.

Tamas Matura is an Assistant Professor of the Corvinus University of Budapest, the founder of the Central and Eastern European Center for Asian Studies, and the Hungarian representative in the European Think Tank Network on China.

 

The Politics of Vexed Capital: China’s Railway Projects in Southeast Asia

Alvin Camba develops a conceptual model to explain why certain Chinese overseas projects progress while others get stalled

By Alvin Camba

Why do some Chinese large-scale projects progress while others have been unable to do so? By interviewing political elites, Chinese officials, and members of various social movements, my ongoing research is currently examining four comparable cases of Chinese railway projects in Southeast Asia: South Rail in the Philippines (2017-), Sino-Thai high-speed railway (2013-), High-speed rail (HSR) in Indonesia (2016-), and the East Coast Railway in Malaysia (2016-2018). My preliminary research finds that the continuation or progression of China’s major railway projects depend on the coalition that Chinese actors form with host state actors. The success of these coalitions depend on (1) whether or not they hold the power resources to implement the project, which depend on the institutional structures of the state; (2) or how immediately vulnerable to electoral cycles or political turnover they are, which could usher in a new regime that reneges on the previous agreement with China.

To demonstrate the framework, this blog post focuses on the East Coast Rail Link (ECRL) case in Malaysia, which was started by former Prime Minister Najib Razak, suspended by the new Prime Minister Mahathir, and recently resumed ahead of the 2nd Belt and Road Forum in Beijing. The case is for critics a classic example of a developing country “pushing back” against China’s debt-driven Belt and Road Initiative. But my analysis will show that it is more of a case where a recipient country tries to leverage the BRI for economically viable and politically strategic projects that are with international credibility and domestic legitimacy.

ECRL-Malaysia
The ECRL will link the wealthier Malaysian states to the developing eastern regions. Source: Alvin Camba

In the ECRL case, a political elite coalition between Najib Razak and the Chinese firm (China Communications Construction Company, CCCC) was initially formed, which concentrated power resources in the hands of the United Malay National Organization (UMNO). Even though the project only began in 2016, it has made substantial gains in terms of land acquisition, rail track construction, and project coordination with state governments. Due to the centralization of power in the hands of the federal and state governments, the ECRL has made great progress relative to projects that have started earlier, such as Indonesia’s HSR and Thailand’s Sino-Thai Railway. Some officials of the “Alliance of Hope” (Pangkatan Harapan) attempted to derail the project but Najib’s power resources and UMNO’s control of the government limited these contentious activities.

Nonetheless, since the ECRL started seven years into Najib’s term, the project became very vulnerable to electoral turnover. This made Mahathir and the Alliance of Hope concentrate their efforts on winning the national elections, which capitalized on the 1MDB scandal, and the complicity of Chinese firms to corruption.

Numerous Chinese-financed projects were later linked to a massive rent-seeking venture for Najib. For instance, the MPP Malacca-Johor pipeline and Trans-Sabah Gas Pipeline (TSGP) were most likely used to illicitly transfer funds into the 1MDB fund by overpricing the project cost, which would have burdened Malaysia’s coffers, constraining medium- to long-term benefits and limiting welfare gains.

When Mahathir won the election, the state’s juridical power and political power resources were transferred to the new government. This led to the cancellation of both pipeline projects. However, the Malaysian government needed to compensate the contractors $2 billion USD or 88 percent of the total worth of both projects for just 15% of project’s completion rate.

The ECRL was more difficult to scrap because of the actual economic need to link the wealthier Malaysian states to the developing eastern regions. Furthermore, the Kuantan Industrial Park, which houses the Chinese firm Alliance Steel’s investment that employs locals and generates a multiplier effect on the state’s local economy, stands to benefit from the ECRL’s construction.  These considerations led to the negotiations to bring down to cost by roughly one-third. As of April 2019, the project is back on track.

AlvinGame2
Alvin Camba develops a conceptual model to explain why certain China-financed rail projects progress when others get stalled

The fates of rail projects in three other Southeast countries are all different depending on how a coalition between China and host state actors negotiate their way through political dynamics involving multiple obstructing and rent-seeking local elites. In Indonesia, Jokowi Widodo’s Jakarta-Bandung High-Speed Railway (HSR) started early in his term and China offered better project terms in order to win the deal over Japan. Project timing, limited geographical coverage, and Jokowi’s political position enabled the project to progress. In the Philippines, the project started at the beginning of Rodrigo Duterte’s tenure, forming a coalition between the Duterte administration and the Chinese firm. However, regional-local elites lobbied the Duterte government for train stops in their own provinces. For the elites, economic activity and political gain will cluster cities or province who receive the stop. The Duterte government and the Chinese firm mediated these conflicts, promising livelihood projects and electoral support in return. In Thailand, a coalition between the Yingluk Shinawatra and the Chinese state agreed on a train project in 2013. However, Thailand’s internal political dynamics, particularly Prayut Chan-o-Cha’s coup and the emergence of the military regime, effectively deposed Yingluk and delayed all the major projects. The Chinese government was willing to renegotiate with Thailand, but Prayut wanted better term than the ones that Yingluk acquired. Recently, new terms are being renegotiated.

In sum, the progression and delays of these major railway projects depend on the coalitions that the Chinese government and firms form with host state elites. Contrary to perceptions of China “dictating” tough terms, host countries do have some agency to decide which projects to finance, terms to accept, and conditions to execute.

Alvin Camba is a China Initiative Fellow at the Global Development Policy Center and a Ph.D. Candidate at Johns Hopkins University. He works on the political economy of Chinese foreign capital and elite theory. His works can be found at alvincamba.com

Lessons from my three years engaging with China’s hydropower giants

A first-person account of how China’s hydropower giants engage with civil society groups when operating overseas

By Stephanie Jensen-Cormier

PPDC-Hydro2
Flooded temples and homes, Lower Sesan 2 Hydropower Project in Cambodia, August 2018, International Rivers

Global hydropower is a big industry. It currently supplies around 16% of global electricity and, though capacity installation rates have remained steady since 2008, is seeing a huge rise in investments. In 2017 the amount of money committed to hydropower projects doubled from the previous year. Chinese hydropower companies hold by far the lion’s share of this market, up to 70% according to the People’s Daily.

Increasingly packaging their projects under the “Belt and Road Initiative”, China’s hydropower companies tend to speak of their overseas projects in terms of poverty reduction, improving livelihoods, protecting the environment, and encouraging development. The negative effects of large scale hydro projects have been broadly documented, however. To take just one example, dams have displaced over 80 million people worldwide and are estimated to have negatively affected 472 million people.

With evidence stacking up against their claims to bring green development to communities, it is important to assess and judge just how serious China’s hydropower companies are about their words. One lens through which to judge this is companies’ engagement with civil society, who play an indispensable role in increasing companies’ accountability and warning about negative environmental and social impacts which the company may otherwise ignore.

During my three years working for International Rivers in China I had the opportunity to engage with some of these companies on their overseas projects. I’ve seen companies take steps towards greater openness to engage, understand and learn about the environmental and social concerns surrounding their projects. This has even led to tangible results in some cases. On the whole, however, my experiences showed that there is a long way to go before China’s hydro giants are ready to take that extra leap away from their traditional operating models and towards one which is more transparent, accountable and open to engagement. This blog outlines some of my key observations from interactions with Chinese hydropower companies and thoughts about how such corporate – civil society engagement may progress in the coming years.

From increased budgets to limited engagement

Some companies have tried to improve their domestic and overseas operations by increasing the size of project teams responsible for environmental protection and conservation, increasing budgets to compensate resettled and affected communities and environmental management and biodiversity offsets. These actions can provide an important step in internalizing costs that are otherwise externalized onto local people and the environment. However, in order to avoid such endeavors from ‘green-washing’ harmful projects, companies need to prioritize efforts to meaningfully include communities and NGOs in discussions, especially in the planning and design stages.

The 1,075 MW Nam Theun 2 dam in Laos demonstrates the blind spots of simply throwing resources at the problem. Beginning operation in 2010, the dam was heralded by the World Bank as a way of ‘doing a dam better’, due largely to the amount of money allocated to resettlement (USD 16 million) and conservation (USD1 million annual conservation fund) out of USD 1.45 billion total budget. Nonetheless, reports published from 2010 through to today by the Independent Panel of Experts established by the World Bank and project proponents demonstrate that the project’s intention for genuine benefit-sharing failed and that outcomes had failed to ensure indigenous peoples’ rights, negatively impacted the livelihoods of displaced communities, damaged fisheries, and precipitated the degradation of forests and wildlife (Shoemaker, International Rivers).

What the Nam Theun 2 dam case shows is that there is a pressing need for hydropower companies to engage in frank discussions with civil society organizations and NGOs, often squeezed by local governments for speaking against their priorities,

Since 2009 PowerChina, which owns over 50% of the global market share for hydropower, has made efforts to communicate with International Rivers. The engagement has included dialogue over the Nam Ou hydropower cascade in Laos. Consisting of a seven dam cascade, the Nam Ou cascade is the first time a Chinese company has obtained rights to develop an entire river basin outside of China. Its location on a major tributary of the Mekong is of significant concern, as are limitations in the project consultations with affected communities and its projected impact on a large number of fish and other riverine species.

Over several years, PowerChina Resources and the Nam Ou River Basin Hydropower Co. Ltd (in which PowerChina Resources owns 85%) hosted International Rivers staff in meetings at the Nam Ou Hydropower Project head office in Luang Prabang and in site visits to the Nam Ou cascade. The company provided access to high level and relevant management personnel, documents related to the project and prepared presentations with updates on the project status. Company representatives endeavored to be welcoming, constructive and informative. These were all positive signs, but limitations remained in terms of the information shared, including non-disclosure of key project documents and impact assessments. This constrained the substantive dialogue on the social and environmental performance of the cascade that we were aiming for.

Nonetheless, the company have been open to receiving feedback and have indicated that they would like to have training sessions on some of the aspects in which their project could be improved to ensure better outcomes for the health of the river system and well-being of affected communities.

Nam Ou 7 construction site, Nov 2017, b
Part of the construction site at Nam Ou 7, Lao PDR, November 2017, International Rivers

Mismatched motivations

In 2015 International Rivers published a scorecard report on Chinese overseas hydropower companies. Ranking last out of seven companies, Huaneng Lancang River Hydropower Inc. (Huaneng Lancang), a subsidiary of energy monolith China Huaneng Group, used the moment to reach out to International Rivers, dropping an earlier unwillingness to interact with the organization over the Lower Sesan 2 dam in Cambodia.

In 2015 and 2016, International Rivers participated in a series of meetings with the Huaneng Lancang. Several executives, including the company Chairman, travelled from Kunming to Beijing on short notice in order to attempt to rectify the poor review of their company and project. The Chairman (who has since retired) even participated in exchanges with NGOs during the ‘2015 Greater Mekong Forum on Water, Food and Energy’ held in Phnom Penh.

The company’s willingness to meet and exchange with NGOs was unprecedented for them and a step towards greater transparency. But parallel to these efforts, the Lower Sesan 2 project continued to face community resistance and was marred by negative attention concerning the project’s extensive environmental and social impacts, involuntary displacement of indigenous peoples, and lack of adequate consultation with affected communities.

Huaneng Lancang were keen to use their unprecedented engagement with International Rivers to urge us to modify the report ranking, which would cast the company and the Lower Sesan 2 project in a better light. We did not revise the report, however, and the company has since declined to meet with International Rivers. From 2017 Huaneng Lancang deprioritized communication and delegated junior employees with responding to us.

From the three year experience of our interactions with Huaneng Lancang it was apparent that there was a significant gulf between the two sides’ motivations for engagement. While International Rivers were keen to use the opportunity to engage the company on issues such as benefit sharing, comprehensive impact assessments and community engagement, Huaneng Lancang appeared to be seeking a quick fix, namely, changing their ranking in the scorecard report.

Since our interactions with the company were downgraded to junior staff, numerous reports, including a statement in 2018 by the UN Special Rapporteur on Human Rights in Cambodia, documented the project’s violations of the rights of communities. China Huaneng Group was expelled from the UN Global Compact in September 2018 for “failure to communicate progress.”

Hiding behind contract types

There are two main contract types for hydropower projects. In Build Operate and Transfer (BOT) arrangements, companies assume the liability for environmental and social aspects of the project; they finance, design and build in exchange for operating rights, typically 20-30 years. Engineering Procurement Construction (EPC) contracts have less liabilities. In my interactions and meetings, Chinese companies with EPC contracts tended to deflect the responsibilities for environmental and social impact assessments and compliance with local and international laws to clients – usually the host country government. Under an EPC contract, the company designs, builds and delivers the asset in an operational state. The client (not the company) is responsible for the financing, preliminary studies (including environmental, social and cumulative impact assessments) and legal requirements. Companies building EPC projects therefore have convenient excuses for why they do not ensure that proper due diligence is conducted. When companies with EPC contracts do implement environmental protection measures or provide compensation to resettled communities, no matter how insufficient these are, they claim to be going beyond their contract obligations.

Hiding behind contract types can mean that companies do not strive to develop better policies, mechanisms and practice, related to due diligence, environmental impact mitigation and monitoring or benefit-sharing with local populations.

This creates reputational risks for companies. For example, the complaints about improper contracts, low pay and poor treatment from workers of subcontracted companies at the 183 MW Isimba Hydropower Project in Uganda, expected to come online in this year, has had a reputational impact on the contractor China International Water and Electric and the parent company, China Three Gorges.

Failing to obtain a social license to operate

Chinese entities involved in developing hydropower projects overseas prioritize amicable government-to-government relations, and typically fail to actively demonstrate their social and environmental responsibility and commitments or understanding of benefit sharing.

The World Bank defines benefit sharing as “the systematic efforts made by project proponents to sustainably benefit local communities affected by hydropower investments.” It also contains recognition that affected people must be consulted about plans for compensation. In my experience Chinese hydropower companies have shown very limited understanding of this concept, and that lack of understanding is at the root of companies’ failure to obtain a social license to operate in the eyes of the public.

When companies have outlined their plans for benefit-sharing, these generally include providing one off payments of cash compensation for displaced communities, infrastructural development such as leveling land, building or improving roads and bridges, building schools or local community centers, adding fish to reservoirs or gifting company vehicles after the construction team leaves. Benefit sharing at this level, focusing on short rather than long term outcomes, falls short on a number of fronts.

Firstly, the individuals who comprise the ‘affected people’ are usually defined very narrowly in scope. International practice includes people who have been displaced as well as those who are impacted upstream, downstream or in the areas surrounding the reservoir. For most Chinese companies, however, only displaced people are eligible to receive benefits which have been defined by the company. For example, the Lower Sesan 2 compensation plan lists only six villages, while independent studies have shown that the dam impacted at least 250 villages.

Secondly, initiatives like building or improving roads improves access to the work site often benefiting the company more than local communities. Consulting with local communities in the process of infrastructure development could help ensure the public is better able to benefit from the new infrastructure. Adding non-native fish to reservoirs, which companies frequently do, including at the Lower Sesan 2 reservoir, is likely to diminish the balance of ecosystems and exerts even more pressure on native riverine species.

Lastly, these ‘benefit sharing’ initiatives are generally short term. Companies need to consider longer term monetary and non-monetary benefits like providing free access or preferential electricity rates, payments for environmental or ecosystem services, establishing long term community development funds, creating long-term employment, and ensuring custodianship over wildlife and other natural resources (World Bank).

Planned projects as a test cases

There are opportunities for Chinese companies, banks and the government to show that they are responsive to discussing projects with civil society organizations. One of these opportunities has been in the headlines in recent weeks. The Batang Toru hydropower project is a proposed 510MW dam in Sumatra, Indonesia, which, if constructed, will cut through the habitat of the Tapanuli orangutan, the world’s most recently discovered and most endangered species of orangutan. Campaigners say its construction will almost certainly lead to the species’ extinction.

The project is packaged under the Belt and Road Initiative, slated to be built by PowerChina Sinohydro and likely to be financed by the Bank of China. In recent months the Indonesian Forum for the Environment (WALHI) has filed a lawsuit challenging flawed environmental permits and has attempted to communicate with the Bank of China and Sinohydro for almost a year, but have been unable to open the door to meaningful discussions. In March, WALHI garnered support from peers in twelve countries to deliver letters to their local Chinese consulates and Bank of China branches. Despite months of unresponsiveness, the Bank of China publicly acknowledged reception of the letters within one business day.

Projects as destructive as Batang Toru are currently under consideration by PowerChina Sinohydro and other Chinese hydropower companies. Similarly, the Koukoutamba Dam in Guinea, if constructed, would seriously impact Critically Endangered chimpanzees, flooding a protected national park area and resulting in the deaths of up to 1,500 specimens. If projects like these get built, they will not only damage the reputation of the financiers and builders, but also exacerbate public distrust in the intentions of the Chinese government’s Belt and Road Initiative, something which voices in China are increasingly expressing concern about.

Long term impacts

The foremost experts on dams have warned against a lack of consideration or monitoring for the long-term social and environmental impacts of dams. It is essential for companies to take into account the cumulative impacts of their projects as rivers perform tangible and intangible services on which we all ultimately depend. Yet, Chinese hydropower companies generally lack appropriate tracking and monitoring mechanisms to evaluate the cumulative impacts of multiple projects in their areas of activity. They tend to look exclusively at the project site, ignoring the broader repercussions on the environment and people.

If Chinese hydropower companies open to deeper engagement, their powerful interests will likely be challenged and they may have to change the way they conduct business. In particular, they may need to evaluate whether proposed large infrastructure projects are a means to decrease poverty and promote environmental conservation. They may also have to more closely determine whether governments in Belt and Road regions have sufficient capacity to evaluate, monitor and oversee such projects. Chinese hydropower companies would be able to adapt — they usually have broad energy portfolios and have elsewhere proven their ability to build clean energy projects like solar and wind.

China has the potential to be a global and responsible leader in developing clean energy, but it must not shy away from constructive engagement with civil society and communities. In its endeavor to connect the world in a “people-centered” manner, China must ensure that its SOEs build genuine relationships of open and constructive dialogue with local communities, indigenous peoples and NGOs. If Chinese companies and banks decide to ignore global civil society’s requests to engage, communities will inevitably resort to more confrontational actions to have their concerns and voices heard.

Stephanie Jensen-Cormier is an independent consultant based in Costa Rica where she works on themes that interconnect environmental and social justice. She lived and worked in China for eight years; her last position prior to leaving in 2018 was as International Rivers’ China Program Director.

Monthly Round-up: The Summit

What we know about the second Belt and Road Summit in April 2019?

On Jan 7, a note appeared on an obscure website for exhibition-related information saying that the National Conference Center in Beijing would clear its schedule for the entire April. Events that had booked the Center for April dates would have to give way to a major one associated with “the Party and Nation’s economic and diplomatic strategy.” The 2nd Belt and Road Forum for International Cooperation (hereafter “Belt and Road Summit”) is finally coming.

Dubbed the most important “home-field diplomatic event” of the year, the Belt and Road Summit has sucked up much oxygen from China’s diplomatic and propaganda space as soon as clock started ticking for 2019.

On Mar 8, at a press conference held during the annual National People’s Congress sessions, Foreign Minister Wang Yi highlighted three features of the Summit: higher level (more heads of state compared to the first one); bigger crowd (thousands of participants from 100 countries) and more activities (12 sub-forums and a gathering for entrepreneurs).

While the Summit will certainly be presented as a huge success domestically, the world would probably judge it with a difference set of standards. The information that is available so far can provide some guidance as to what to expect from the Summit.

BRIForum
The Belt and Road Summit’s official website still displays information from 2017. No information of next month’s Summit is available yet.

Roll call

As Wang Yi’s press conference has shown, the number of leaders attending is a key indicator of the global political support the Belt and Road Initiative (BRI) has garnered and will be keenly watched by observers around the world.

29 heads of state (and heads of government), not including President Xi himself, attended the 1st Belt and Road Summit in 2017. This year’s Summit will very likely beat that record given the fact that in the 2 years since 2017, more countries have signed up to the BRI. At the time when the 1st Summit was held, 39 countries or international organizations were on board. According to the National Development and Reform Commission (NDRC), now 123 have formally reached understanding with China with regard to their involvement in the BRI. A portion, if not all, of the new sign-ups will certainly translate into head-of-state participation in the Summit.

But quantity is one thing, some guests are more equal than others. For a BRI that has been dogged by negative media coverage internationally on its setbacks and a “hidden agenda”, high-level participation by certain countries has the narrative busting effect that would define how the Summit is viewed from outside.

Based on existing Chinese language media reports, the leaders who have confirmed attendance include Russian President Vladimir Putin, Philippine President Rodrigo Duterte, Ethiopian Prime Minister Abiy Ahmed, and Kyrgyz President Sooronbai Jeenbekov. While these “old friends of China” can be seen as usual suspects and do not change the dynamics of the Summit, other participants are more interesting. Malaysian Prime Minister Mahathir Mohamad, for example, has accepted the invitation despite his rollback of China invested pipeline projects. The Prime Minister’s renegotiation of Belt and Road deals that his predecessor had reached with China was widely interpreted as an indictment of BRI as pushing unsustainable debt burdens onto other developing countries. His presence at the Summit will help assuage some of the concerns that Malaysia is backing out of the BRI.

Another interesting guest is Italian Prime Minister Giuseppe Conte, whose government’s recent decision to formally endorse the BRI with an MOU drew pressure from Germany and the United States for undermining a Western united front, particularly the G7 group. Italy was reportedly frustrated with the EU’s inaction about its trade deficit with China.

It is worth noting, however, that both Mahathir and Conte’s predecessors were represented in the first Belt and Road Summit 2 years ago. Their appearance this time help to consolidate the BRI’s reception by their respective countries. But at this time of increasing global questioning of the BRI, particularly from the US, what China needs more is probably a breakthrough that resembles Britain’s surprising signing-up to the China-led Asia Infrastructure Investment Bank (AIIB) in 2015. But a polarized us-versus-them atmosphere around on the initiative would make such a breakthrough extremely challenging.

An evolving agenda

Beyond the political symbolism, what the Belt and Road Summit can actually achieve is another question that observers will be asking. For example, Will Mahathir use the occasion to determine the fate of the controversial East Coast Rail Link project that has been hanging in balance ever since his election?

China has its own criteria to gauge success. Dialing back to 2017, the first Belt and Road Summit produced two key documents, a Leaders’ Joint Communique and a List of Outcomes that contains 5 categories, 76 items and 279 action points. NDRC has apparently been tracking the completion of those action points. By Jan 22, 2019, 96.4% of them had either been completed or incorporated into the routine workstreams of the Chinese government.

The List of Outcomes provides a framework of understanding how the Summit’s substance is conceived and organized. The five categories (strategic and policy coordination, infrastructure connectivity, investment & trade expansion, finance cooperation, and people to people connection) correspond to the “5 Pillars” of the BRI. And the 76 items help translate those grand ideas into concrete, measurable steps:

BRIoutcome

Reuters recently got hold of a draft of the MOU that is being negotiated between China and Italy, which illustrates with a concrete example how “strategic and policy coordination” is being formalized at bilateral level. The draft is notably broad stroke but gives a prominent nod to sustainability, Paris Climate Accord and environmental cooperation, invoking an image of “high quality Belt and Road” that Beijing has been touting. While the basic framework of the MOU follows the 5 categories above, Environmental Cooperation is remarkably given a standalone place in the document, no longer a part of the “people to people connection.” The green message is more salient when compared to earlier MOUs China signed with other countries. A 2015 MOU with Poland, for example, was much more rigidly modelled on the “5 Pillars” with a heavy emphasis on infrastructure/investment and no sustainability component.

Some recipient countries have also been pushing to redefine BRI on their own terms. Indonesia, for one, recently laid out four conditions for its BRI projects, which include use of environmentally friendly technology, maximize hiring of local labor, technology transfer and added value for local industry. It is a sign that countries are maturing in their approach to BRI by voicing their own demands and conditions, which may find their way into the BRI agenda reshaped by bilateral and multilateral interactions.

Minister Wang Yi’s press conference also indicates that this year’s Summit might run with an “evolved agenda” by going beyond the original “5 Pillars” and providing more air space for topics that were grouped together before. At the first Summit, 6 parallel sessions corresponding to the 5 Pillars plus one on think tank collaboration were organized. This year, besides the main forum and the Leaders Roundtable which Xi will preside over, 12 sub-forums plus one entrepreneurs convention will also be offered. Information from the Ministry of Ecology and Environment seems to suggest that an ecological sub-forum is definitely being planned. Other topics of sub-forum might emerge in the coming weeks. The general trend appears to be for the Summit to go more granular on issue topic discussions.

Green Belt and Road?

The general elevation of green issues in official rhetoric, MOUs and forum agenda begs the question if any concrete outcomes on the green governance of the BRI will come out of the 2nd Summit.

At the beginning of this year, Minister of Ecology and Environment Li Ganjie announced that the International Coalition for Green Development on the Belt and Road (hereafter “Coalition”) would be formally launched in 2019. The Belt and Road Summit will be an ideal occasion to do that. The Coalition has been at the center of a controversy involving the United Nations Environment Program (in particular its former head Erik Solheim who was forced to resign for violating UN codes of conduct), the United States and China. The UN agency was questioned for its appeared coziness with the strategic initiative of a single member state. Whether China will successfully rollout the Coalition despite the setback is worth watching at the coming Summit. According to Solheim’s vision for the Coalition, which he laid out just before his departure, it should take up the roles of promoting green finance, creating basic principles and standards, and bringing in third parties to help countries along the Belt and Road achieve green development.

It is unclear at this moment whether specific environmental issues will be given a spot in the agenda. For example, China’s involvement in fossil fuel projects along the Belt and Road has received much global spotlight lately. Any institutional development under the BRI on climate change beyond a rhetoric nod will be significant progress toward harmonizing the initiative with the Paris Climate Accord. We have seen some concrete developments on the issue of desertification, where Chinese institutions have mobilized finance, technology and civil society support for afforestation projects along the Belt and Road. The Belt and Road Summit can benefit from an articulation of China’s commitment to “ecological civilization” in the implementation of the BRI.

Interview: What’s missing in the conversation about China’s expanding global presence?

Longtime Belt and Road observer Zhang Hong shares her insights about the historical evolution of China’s “Going Out”

ZhangHong
Former Caixin journalist and George Mason University PhD candidate Zhang Hong (Stella)shares her observations about China’s “Going Out”.

Within the Chinese journalistic community, a “foreign correspondent” is a rare species. Unlike their Western counterparts, Chinese media do not have a long history of dispatching reporters globally to cover events from where they are unfolding. Due to resource constraints and, more crucially, a lack of strong domestic demand for news thousands of kilometers away from home (with the exception of a handful of countries such as the United States), media organizations in China invest grudgingly into overseas operations. The situation differs between state-owned outlets (such as Xinhua News Agency and China Global Television Network), which in recent years have increased their global presence, and more independent outlets (such as Caixin). For the former group, the need to establish Chinese image overseas, more than the improvement of Chinese understanding of foreign affairs, has been the driving force of its global expansion. For the latter group, with all the intention of doing better international reporting, the lack of state support in setting up a stronger footing in foreign countries cripples its international ambition.

Zhang Hong (Stella) was, in her own words, one of the first-generation foreign correspondents working for a non-state Chinese media organization. Stationed in Europe and North America for Caixin Media between 2009 and 2014, she filed stories for Caixin’s readers on topics ranging from reforms in Poland to the Crimean crisis. She described her years in London and Washington as “drifting”, having to conduct journalism in a foreign land without much institutional support from home. While reporting from one country to another, she picked up an emerging theme that later became her research focus as a PhD candidate at George Mason University: the growing presence of China beyond its border and its political and economic implications.

In an interview with Panda Paw Dragon Claw, Stella shared her observations about China’s “Going Out” from both her standpoint as a journalist and a researcher. She believes a “China model” is indeed discernible from the practices of China’s state capital overseas, even though it doesn’t entirely fit the predatory image that Western media are accustomed of depicting lately.

Panda Paw Dragon Claw(PPDC): When you were a foreign correspondent for a Chinese media outlet, what was your mission?

Zhang Hong (Z): My intention was to write stories with more independence than what we usually saw in Chinese state media. I always believe that international news reporting should help our Chinese readership, citizens of a great power, to obtain an understanding of the world that matches China’s global status. A citizenry without empathy for its peers around the globe would become dangerously self-centered and hubristic.

But I found that I couldn’t do what I intended to do and was affected by a sense of powerlessness. Compared to Western foreign correspondents, we did not have the kind of institutional history and tradition that guide our operation overseas. Most non-state Chinese media only began to dispatch correspondents to other countries in the second half of the last decade, after a relatively liberalized period built up their coffer and ambition. When we were stationed in a foreign country, most of us did not have an office and had to build our sources and network from scratch. Since we were not part of China’s official media establishment, we were excluded from correspondence from Chinese embassies and consulates. We were largely “on our own.”

Situation of state media colleagues were slightly better, even though they were very much shaped (and constrained) by the nature of their outlets. Many of them couldn’t do reports that were at odds with the domestic and foreign policy agenda of the Party. And they were often stationed there to spread China’s own voices, more than they were required to do high-quality reporting about that country. For example, state media reporters were sometimes tasked to publish op-eds in local media, a not unimportant part of their job description.

PPDC: What kind of China “Going Out” stories did you cover when stationed overseas?

Z: I left journalism in 2014, and before that I was mainly based in Europe. It was before the Belt and Road Initiative (BRI) became an international spectacle. The pre-BRI stories about China’s “Going Out” that I ended up covering were mainly about Chinese companies shopping for European businesses and assets that were on sale after the debt crisis of 2009. The image of China around that time was that of a “nouveau riche” foreign investor. The Europeans were a bit skeptical of the Chinese’s ability to well manage what they had acquired. And that was the main discussion about China’s overseas adventures.

PPDC: Understandably, that story changed with the BRI…

Z: The BRI focuses very much on infrastructure building, with the Chinese state, not just Chinese companies, at the center of it. The level of Chinese overseas involvement (and the stake) is much higher now than when I was covering the space.

PPDC: With the BRI now so prominent on the global agenda, and popular narratives about it being reinforced by talks of “debt traps” and US-China arm wrestling, what do you think are elements missing in the current conversation?

Z: I think the first element that is not well understood and covered is the historical aspect. BRI should be viewed in the context of China’s multi-decade political and economic evolution. Modern China began its adventure into the global market in the 1990s, and not until 1999 was the concept of “Going Out” as a strategy first laid out. Major Chinese energy companies started to systematically move into other markets around that time. In preparation for the accession to WTO in 2001, a set of policies were also created to facilitate integration into the global market. The period laid the ground for an explosion of “Going Out” activities in the 2000s. On the one hand, China’s economic reform turned the country from a closed autarky to a world factory, driving up demand for resources from around the globe. On the other hand, Chinese companies, nurtured by strong domestic demand, ventured out for new markets and supplies. BRI is an extension to that two-decade journey. To some extent, China is almost driven by an urge to compensate for being absent from the global scene for too long. It is still retaking the globalization class.

Another aspect that’s worth emphasizing is that BRI reflects the “long view” that is embodied in the Chinese political system. China’s one-party system allows the ruling Communist Party to make long term plans and strategies. That’s why you find strong continuity from the “Going Out” strategy to BRI. This is not to say that Chinese leaders in the 1990s were particularly prescient. But it does appear that the approach of “crossing the river by touching the stones” works pretty well in China’s internationalization process, where later leaderships could build on the programs of their predecessors and adapt their strategies by studying the lessons learned.

In my opinion, the reason why stories of “debt traps” or China’s “predatory” behaviors become prevalent is that the international community does not fully understand this historical evolution. And the lack of transparency on the Chinese side is also to blame. When people cannot comprehend the seemingly “sudden” appearance of China on the horizon, they respond with fear and apply familiar narratives to make sense of it.

PPDC: Besides its historical context, what else is unique about the “Going Out” process? Is there a “China Model” being exported?

Z: What I’ve taken note of, as I have written in an article about Chinese investment in Sri Lanka, is the central role played by Chinese state capital in the “Going Out” process. Their prominence does speak to a powerful “formula” of economic growth in China, whether or not you’d like to call that a “model”. This formula is obsessed with infrastructure development, as this is where state capital has comparative edge over private capital. The vehicles of China’s state capital, the state-owned enterprises (SOEs), are a new class of international players in the global economic system that we have never seen before. Fed by a massive internal market and their monopoly status in key sectors, they have grown into gargantuan corporate conglomerates within a short period of time. With that much of capital on hand, they were able to take advantage of the vacuum left by the 2008 financial crisis and extend their tentacles to new places in the world, building and consolidating their access and control of world’s resources.

These conglomerates enjoy unique advantages in the current global economic structure. Backed with the state’s financial and political support, they are much more risk-tolerant than their Western competitors, which enables them to go into the infrastructure sector in developing countries with highly uncertain economic outlooks. Engaging in such strategic sectors in turn locks in long-term structural opportunities for China in these countries. For example, after building the standard-gauge railway for Kenya, Chinese companies will remain in Kenya for years to train the locals how to operate the system according to Chinese protocols; the next generation of Kenyan engineers will know more about how to build things according to Chinese technical standards than European ones.

PPDC: How does the Sri Lanka situation illustrate the model you outlined above?

Z: The Sri Lanka case demonstrates how certain elements of the “China Model” can indeed be exported through BRI. Under a strictly defined “market economy”, the construction of Hambantota Port does not make much sense. There is no natural demand supporting a major port built out of a traditional fishing village. But China’s state capital, coupled with its existing global network, may create demand to match the supply (a new port facility on the Indian Ocean). China Merchants Group, the state-owned Chinese conglomerate that will be running the Hambantota Port, could rearrange some of its global shipping routes to go through Hambantota, creating business for an industrial zone that is to be built adjacent to the port. With CMG’s global reach and resource allocation abilities, there is a fair chance that the Hambantota port may take off as a major trade node.

In this sense, China’s development model does have some “exportability”, even though China’s one-party system itself can hardly be recreated elsewhere.

PPDC: You speak of the Chinese leadership taking a “long view” when it comes to Going Out. Is exporting the China development model the ultimate goal?

Z: I guess the ultimate goal is the so-called “national rejuvenation”. As stated by the Chinese leadership, it is to build China into a real global superpower. Probably due to the Party’s Marxist ideology (which emphasizes the economic base as a determinant in all human activities), there seems to be a firm belief that the goal needs to be achieved through economic means rather than military means. Previous socialist regimes, such as the Soviet Union, never managed to plug itself so deeply into the global economy, let alone occupying structurally important positions. For China, becoming a global superpower in the new era means attaining a strategic, structural advantage in the global economy. And its SOE-driven state capitalism is an instrument to that end. In Party talks, there is already explicit language calling for SOEs to have “capabilities of global resource allocation” and “occupy a privileged position in the global value chain.”

PPDC: As you said, the understanding of those dynamics is still very poor outside China. Do you think there is a role that Chinese media, think tanks or others can play to help shape global perceptions of the BRI?

Z: There could have been a role for them to play, as theoretically speaking they should have better access to the Chinese actors participating in BRI, providing insights that outsiders often do not have. But in reality it is hardly the case due to the generally closed culture with regard to the press. It seems Chinese journalists (barring those from the state media tasked with propaganda) hardly have better access to Chinese companies and government officials than their foreign counterparts. This might also have to do with the fact that reporter tends to be an entry-level job in China; veteran reporters either get promoted to editorial roles (so they are no longer on the frontline doing reporting) or leave the profession after being disillusioned (I myself being an example). So you are left with young reporters who are energetic and passionate about doing good reporting, but without the necessary experience. Plus, Chinese media, when doing stories, still have the tendency of writing to the ears of the decision makers, hoping to have some influence there. So I am not quite sure the Chinese media as a whole is capable of shaping the conversation as part of the global civil society.

PPDC: In 2012, you’ve written a blog titled “the Cambodians who don’t want a dam”, which documented local resistance to a China-built dam and the rejection of China’s development-first mindset. Do you think Chinese media can play the role of safeguarding against the negative impacts of the Going Out process, as many have hoped?

Z: I’m not very optimistic that they can. Having left China’s media industry, I am not in a position to comment on my colleagues’ works today, as I understand that the room for independent reporting has shrunk even more compared to five years ago. However, I am a little disappointed that, for all the attention BRI is getting across the globe, we can think of very few cases of systematic and methodic reporting of BRI from the Chinese media that can draw wide attention. I get the sense that non-state media today are becoming more and more like their state media peers in reporting only one kind of BRI story: that of Chinese investment bringing benefits to other parts of the world. I understand the limitations Chinese journalists are facing, but for someone who used to have high hopes for the profession, this is disheartening.

PPDC: If media is not there as watchdogs, how should the Going Out process been governed given its massive political, social and environmental impacts?

Z: Scholars have described Chinese players as being more elastic with rules: they can follow higher standards when they enter developed markets but are more than happy to do the bare minimum when local governance is weak. At the end of the day, without strong regulation at home, adhering to high standards of corporate conducts is only “optional.” Paradoxically, for all my skepticism about Chinese state capital’s impact on the prospect of global human development, I think it might be easier to induce responsible behaviors in China’s SOEs than private firms in the short term. I think there is real appetite for it right now as the leadership wants China to be seen as a “responsible power.” SOEs are encouraged to take measures to protect the environment and provide services to local communities where they operate. Therefore, if the international community continues to push for these issues, they might gain enough traction in the political agenda, which can then be translated into requirements for SOEs’ overseas operations. That said, having the regulations is one thing, how they are implemented is another. To fundamentally create a system where Chinese players can be held accountable for their overseas activities, deeper governance reform and cultural change within China would be necessary.

Development blogging: understanding social media support for BRI

What a new genre in Chinese social media tells us about how the Belt and Road Initiative is perceived domestically

*Note to readers: I wrote this article originally for my other blog Chublic Opinion, titled “Anxieties of development: emerging voices in Chinese social media.” But the themes explored here are also relevant for readers who are interested in learning where China’s overseas initiatives sit in domestic public opinion.

In August 2018, an online post by “Shenzhen Ningnanshan” (深圳宁南山, hereafter “SN”) piqued the interest of Global Times chief editor Hu Xijin, who pointed his followers to the lengthy list of complaints about high property prices and education costs that, according to SN, threaten to sap the morale of an “urban middle class that has fundamental faith in China’s developmental trajectory”. Hu, who often presents himself as an interlocutor between the regime and the public, acknowledged the complaints’ “authenticity” and “sincerity”. In a published response, Hu reminded government officials to read SN’s article carefully, as it represents “the real worries of the People’s Republic’s hardworking constructors.” These people should be heard and shown the country’s future directions.

The exchange underscores the weight assigned to urban middle class voices by a political elite keen to monitor a constituency consequential to national progress and stability. But SN is no ordinary disgruntled working man. At the beginning of his post, he wrote that his articles were often read by “people up there”, meaning Party leaders and officials, and he hoped that this one reached them too. SN’s extraordinary influence in social media is part of a bigger story of development blogging‘s ascend in Chinese cyberspace. It has become a genre, fueled by the economic slowdown and heightened trade tensions with the United States. Microbloggers such as SN dedicate their social media space to big questions like China’s place in the world and if it can overcome the middle-income trap. And they find a growing audience, including “people up there”, tuned in to listen to their diagnoses of China’s ills and prescriptions for cures.

The escalation of the US-China trade tension in early 2018 became an assembly rallying cry for these online voices, who collectively shaped how the Chinese public perceived the clash between the two countries. SN’s Mar 24 post “Trade War: an interlude in China’s rise to surpass the US” was one widely read online analysis of what the trade war was really about. It distinguished itself from two kinds of “extreme voices”. On the left, Maoists were calling for China to go back to autarky, a state of non-trading economic self-sufficiency, while on the right, people were advocating for deep concessions that would surrender much of China’s industrial and technological agenda. SN’s views were essentially realistic nationalist, conceding that China was not ready to take on the US at this very moment but firmly believing in the inevitability of national rejuvenation through the conquering of technological commanding heights in multiple key industries.

The history of “online statecraft” by Chinese netizens dates to the dawn of China’s Internet age, as early users of chatrooms and BBS forums heatedly debated China’s geopolitical strategies and military posture. The perceived futility of such online discussions in a country with very limited political participation has been a subject of ridicule, as manifested in a popular online joke about a “basement-dwelling patriotic youth“, who preoccupies himself with questions of national security but can’t even guarantee his own personal safety against the intrusions of the state.

Different from the brand of juvenile statecraft that resembles an online projection of masculinity, the emerging development bloggers build their profiles to exude maturity and credibility. SN’s Zhihu page (Chinese equivalent of Quora) describes himself as a “middle class person moving bricks in Shenzhen” (“moving bricks” is a humorous online reference to making money). His Weibo account carries a tag line that says “re-recognizing our own country.” Although his true identity remains unknown, many believe that he works with supply chains in Shenzhen, giving him first-hand insights about the frontier of Chinese technological advancements. A Zhihu user tried to paint an imagined profile of him: “around 40 years old, grew up in a modest family, graduated from a top Chinese university, works at a major manufacturing company and earns 1 million RMB a year.” Some of SN’s peer bloggers are more upfront about their real-life identity. A group of Weibo accounts which frequently interact with and promote SN’s posts, self-identify as the Society of Wind and Cloud (风云学会), which is supposed to be associated with the University of Science and Technology of China (USTC). One of the key voices from the group, Chen Jing (陈经), is research director at Asia Vision, a company specialized in Optical Character Recognition (OCR). Beijing Saidong (北京塞冬, hereafter as Saidong), another popular development blogger who has friendly interactions with SN both online and offline, is a Peking University-educated computer scientist who works in the Internet sector.

Their technology/industry background gives them credibility when they write on issues related to China’s growing industrial might or its competition with other countries in developing next generation semi-conductors, even though their topic areas go way beyond their professional domains. Chen Jing, for example, writes extensively on microeconomics, trade, and… football. In 2016 he even published a book called “China’s government-organized economy” that claimed to have discovered the secret of China’s economic miracle: an economic model that is neither market nor planned, but run by multiple levels of the government using market-based approaches. The idea is not entirely new but it shows the appetite of typical development bloggers, who enjoy throwing out grand theories about China’s rise. They sometimes refer to themselves as the “industrial party”(工业党), people who firmly believe in a country’s industrial might as its passport to success.

The “industrial party” bloggers share a lexicon of terms such as “per capita GDP”, “demographics”, “supply chains” and “national fortune”, which reflects a tendency to think in aggregates and a competitive arena-shaped world view. Their interest in (obsession with) nations, their rise and fall, prosperity and poverty, fill their Weibo/WeChat pages with lengthy, data-heavy accounts of national competition and dominance. Popular posts written by SN in the past year include titles like “The competitiveness of China’s low-end industries“, “China’s development and the East Asian hell model“, and more bluntly, “Challenging white superiority: the competition a thousand miles away“. Collectively they depict a picture of a merciless ladder called “development” on which nations laboriously climb. At the top of the ladder sit countries with the highest per capita GDP, enjoying comfortable privileges, while other lower income countries fight to occupy favorable positions underneath. “Overall, the white world, Europe+North America+Australia/New Zealand+Israel, still makes up the top echelon of nations,” writes SN in a post responding to an IMF data release, “when per capita GDP goes above 40,000USD, only very few non-white nations can enter that area… Japan and a few ethnic Chinese economies, Hong Kong, Macau and Singapore managed to achieve that. We should have confidence in ourselves.”

The racial message is even more explicit in his wildly popular post on how China could break from the East Asian model. A sense of injustice oozes from the text when he observed how, in the past two decades, the 20 or so countries that surpassed Japan in per capita GDP were mainly European. “The life of Europeans is really laid back, while East Asians, whose intelligence and hardwork are universally recognized, have to endure intensive, hellish work hours.” He continued, “there must be a problem when a lazy people’s economic performance goes beyond a hardworking people’s.”

The problem, as SN saw it, was an “invisible hand that pinned East Asian economies on a few narrow and fiercely competitive industrial tracks”. Most of them lack vast agricultural lands or natural resources that support lucrative businesses such as agrochemicals or energy extraction, sectors dominated by Americans and Europeans. More importantly, he asserted that military shackles placed by the United States on East Asian states, particularly Japan and South Korea, suppressed their technological potential, as military-to-civilian transfer is a major pathway of technological innovation. He also maintained that Western capital had been extracting disproportionally high returns from investments in premium East Asian companies such as Samsung, exploiting their “capital superiority.” Those restrictions and suppressions limited East Asian states to a small number of industries such as semiconductors, forcing people in those countries to compete fiercely for a finite number of middle-class jobs generated by those sectors. China, free from the above constraints, could be the only East Asian nation with the potential to redefine an East Asian developed economy, he declared.

If this sounds alarmingly like a (milder) version of Japan’s complaint about a suffocating “Anglo-Saxon encirclement” prior to World War II, fellow bloggers only reinforce the impression by repeatedly invoking the imagery of shrinking “development space” for China. Only in this case, the “space” is not so much the physical territory that pre-war Japan was paranoid about, but rather the remaining seat at the table of developed economies in a game of musical chairs. The sheer size of China’s population makes some wonder how the current global order can accommodate another billion people to join the high-income club. “It took a world-class conglomerate like Samsung to pull 50 million of South Koreans into developed status. China has a population 28 times larger. How could the world absorb another 28 Samsungs?” wrote Weibo user Qingpuluo the day after Trump declared a trade war on China, using very rough mathematics. He believed that China would not reach developed status within the existing global framework by simply “trading with developed economies.” It needs new space.

This is also a theme that SN often explores, although his views are colored by a more ideological tinge. Again using back-of-the-envelope calculations, he asserted in one of his posts that 1.4 billion newcomers to the industrialized club would “completely change the face of “developed economies”, which currently cover just 800-900 million people. Racially speaking, Asians would replace Caucasians as the majority. Politically speaking, the West’s control over the world would be much diminished as China becomes the first developed Asian power that’s not subject to Western military control. Culturally speaking, the “cultural composition” of what it means to be “developed economies” would fundamentally change with China’s entry. He insisted that the white-majority developed world wouldn’t tolerate such tectonic shifts and would be prepared to stave off China’s rise.

In keeping with the industrial party’s manufacture-centric world view, some bloggers looked at the issue through a “global value chain” framework. Citing a recent report in Japanese media, Machinery & Engineering Strategy (机工战略), an industry voice represented on Chinese social media, observed how US companies took in as much as 40% of total global corporate profits (of 18,000 publicly listed companies from 100 countries).  Another blogger distilled the phenomenon into a globalization pyramid made up of 3 camps of countries: at the top are technology and capital providers, in the middle are labor providers and at the bottom are natural resource providers. China’s struggle to move from camp 2 to camp 1 and grab a bigger share from the highest tier of the value chain is considered a major uphill battle that the country has to fight. Saidong has found a real-life illustration of the battle in the global value chain of electronics, where China has evolved from an assembler to a major parts supplier and brand owner, chipping away, bit by bit, the economic cake from Apple, Samsung, and Japanese/Taiwanese manufacturers. “The extensive electronics value chain creates high-end R&D jobs, mid-level trade and logistics opportunities and low-end assembly line employments that can accommodate a huge and diverse workforce,” he argued, “it’s a godsent for any developing economy.”

The idea of “development space” shapes the thinking of development bloggers when they consider major strategic topics such as the Belt and Road Initiative (BRI). To be clear, unlike the way it is scrutinized and debated in the West and in recipient countries, the BRI is barely an issue on Chinese social media, likely due to its lack of connection with the day-to-day experience of ordinary Chinese netizens. One notable exception is the “industrial party”. Deeply concerned about China’s future position in the world, these bloggers quite often engage in intellectual exercises about China’s adventures overseas and what they mean for the country.

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Development bloggers are exceptions to a Chinese social media largely indifferent to China’s overseas endeavors. Image from an SN post discussing Chinese railway developments in Africa

In a recent long post for the Society of Wind and Cloud, Saidong did an extensive analysis of Africa’s future demographic changes and their implications for China. With multiple graphs, he highlighted the pyramid-shaped population structure of today’s Africa and marveled at how it resembled that of India 40 years ago. Based on a few bold assumptions, he calculated in a quick-and-dirty fashion, that Africa’s total population would reach 2.5 billion in 30 years while its GDP per capita would enter the 3000-4000 USD terrain. “We will witness the emergence of an Africa that’s 2.5-4 times the economic size of today’s India”, he predicted. By then, the continent would have produced a group of mega-population countries. Nigeria, Ethiopia and Egypt would all boast populations over 200 million. As he saw it, in 2050, these countries would still be relatively poor and not fully industrialized. Yet their vast internal markets would make ideal destinations for Chinese industrial products, infrastructure construction capacities (and overcapacities), and Internet services. “Africa, with its size and potential, represents a new market that a late comer like China can more easily access,” Saidong argued, apparently alluding to the resistance China may face when it enters existing markets with established players. At the end of the article he reminded his readers that in the 21st century, China’s “national fortune” would be decided by how it approaches the “6 billion people in African and Asian developing countries.”

When they apply such a world view inward to scrutinize China’s domestic developments, the development bloggers constitute a formidable force on the Chinese Internet, challenging some of the Communist Party’s most important policy agendas. Just as they are sensitive to demographic changes in other developing countries, they are keenly aware of China’s rapidly aging population and are some of the most vocal online critics of family planning policies. The perception of growing populations as a source of national strength and growth potential shapes their attitude toward the one-child policy. In a widely circulated Weibo post, SN took on China’s population control and real estate market at once. “Years of propaganda in our country treat population purely as a burden,” he wrote, “but a large and growing population can actually bring lots of benefits.” These benefits, in his mind, include a great number of entrepreneurial opportunities and the job creation ensued, cheap labor and service that propel new business models, and higher returns from property booms kept afloat by the continued urbanization process. Because of the depth of China’s domestic market, it has the guts to confront the United States without the fear of “economic collapses experienced by Turkey or Iran”.

In the same vein, development bloggers are perpetually worried about China slipping into the same  demographic predicament of its neighbors, Japan and South Korea. The abject lives of Japanese retirees and the country’s looming pension crisis are constant reminders of what China’s own fate may look like down the road.  At the beginning of 2018, confronted by China’s newly released birth statistics of 2017, Saidong warned that in 5-10 years China’s demographic atrophy would be as severe as, if not direr than Japan’s, thanks to 30 years of arbitrary acceleration of a natural process of lowering birth rates and other driving forces of an aging society.

In addition to their intellectual propensities on the population question, their own status as members of an upper-middle class rooted in China’s booming high-tech sectors seems to have made them advocates for certain middle-class-centric policies, all of them centered around child-rearing. The underlying message appears to be that, since high-tech manufacturing is the pillar of China’s next industrial revolution, people employed by such sectors need to be well taken care of by the state for them to concentrate on their excellent work. For instance, reforms in China’s pre-school system and primary education in recent years that tilt heavily towards burden-shedding for kids meet with heavy criticism from this group. Letting children off school at 3pm instead of 5 or 6 creates extra work for parents who need to find ways to fill those hours for which schools no longer bear responsibility. It also creates a massive extra-curricular education market that exploits parents who fear that their kids are not being given sufficient tutoring to prepare them for fierce future higher education competitions. The group also considers rising property prices in Chinese cities a major sore point for this social class and a drag on demographic improvements. Not only is living space being squeezed due to ever higher real estate prices, making it difficult to raise more kids under one roof, but also marriage and child bearing ages are being pushed back as young people have to work longer before accumulating enough capital to form families, if they do so at all.

Complaints like these, and the resonance they generate, tend to produce response from the likes of Global Times’ Hu Xijin. But as Hu himself reminded SN in his piece, the distribution of wealth in today’s Chinese society had made readjustments around issues like property price particularly challenging. While a city’s new comers may look for cheaper paths to property ownership, the city’s propertied class may, in contrast, hope for even higher real estate values for themselves. Measures favoring one side of the equation may stir discontent in the other.

Hu’s response highlighted the social class signature of SN’s brand of development blogging on which its critics often focus. Some of the more visible detractors claimed that, constrained by the narrow interest of their social class, policy prescriptions offered by SN and his peers are biased and could harm the nation as a whole. Maqianzu, a blogger associated with the left-leaning Guancha.cn, has argued that measures to lighten the burden on urban middle class, as SN advocates, would undermine overall social mobility. High property prices in big cities, as he sees it, are a way to continue funding infrastructure expansions in underdeveloped parts of the country and they will provide upward movement channels for the poor. He also has dismissed SN’s complaint about overburdened middle class parents, claiming that ultra-competitiveness in basic education is a result of more qualified students entering the system, another sign of positive, upward mobility in the society. “China has no hope if its middle class is allowed to have a laidback lifestyle,” he wrote provocatively. Instead, the country’s long-term prosperity depends on an over-worked mortgage-bearing middle class that’s constantly kept on their toes. For Maqianzu, the idea that the offspring of today’s middle-class are entitled to effortlessly inherit the social status of their parents is borderline reactionary.

More scathing criticism condemns SN’s writing as nothing more than a kind of “development porn”, using selective, misleading materials to depict an overly rosy picture of China’s economic prospects and industrial prowess, stirring up cheap nationalistic sentiments as its online predecessor, “military porn” often did.

Even if it is just another type of intellectual opium that the Chinese Internet routinely produces, if “people up there” are really paying attention to what the SNs are blogging about these days, they may find it reassuring that a not so small segment on social media is fully supportive of the leadership’s push to bring Chinese manufacturing to the next level against a strong trade headwind. They may be alerted by the intensity of frustration this group of people feel about the Party’s track record in managing the country’s population, education and property market. They may also be encouraged to find a reliable cyberspace ally more powerful in many ways than the official propaganda machinery in its ability to coalesce the hardworking middle class around an assertive agenda of Made in China 2025, Belt & Road Initiative and geopolitical adventures that reclaim China’s development space in the world.

Rising China in the eyes of its closest neighbors

What a collection of ethnographic studies about “neighboring China” can tell us about the Belt and Road

by Tom Baxter

At over 22,000 km, China has the world’s longest land border. Lined up along that border are a total of 14 countries, countless local communities and long histories of interaction and isolation, trade and suspicion. The Art of Neighbouring: Making Relations Across China’s Borders (pdf available for download here) is a selection of essays that look at the diverse experiences of living on China’s border from the perspectives of the communities who live with its presence on a daily basis.

From Laos to Nepal, to Mongolia and Vietnam, the regions along China’s long border are too often seen as peripheral, on both sides — the northern highlands of Laos and Vietnam border China’s mountainous Yunnan province, Nepal neighbors the Tibetan plateau. But as China’s economic, political and social presence and engagement across the Asian continent expands, not least via the official encouragement of China’s “going out” policy and the more recent Belt and Road Initiative (BRI), the experiences of these border regions are becoming increasingly important in understanding China’s role across the continent. At the same time, it is the communities on both sides of the border who often feel the most direct impacts of the increased interaction being encouraged by Beijing.

In attempting to understand and assess the impact and the on-the-ground reality of the BRI, this year celebrating its sixth birthday, it is important that we acknowledge those communities’ experiences and look at, in the words of the collection’s editors, Martin Saxer and Juan Zhang, the “smaller scale processes of exchange”, which are undergoing rapid change. Through a series of in depth, mostly ethnographic case studies, The Art of Neighbouring is a step in that direction.

The case studies in the book all date from before 2012. That is, from before the Belt and Road Initiative was announced in October 2013. Nonetheless, they reflect the impacts of a trend of China’s increasing presence outside its own borders which holds true both before and after Xi Jinping’s BRI speech in October 2013. Each chapter of the book focuses on a case study from a total of eight of China’s neighboring countries. Running through those geographically disparate case studies are couple of major themes which deserve highlighting.

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Reimagining histories

In a number of the book’s case studies the rapidly increasing interconnectivity with China is not a new phenomenon, but rather a revival of a historical norm. This is particularly evident in the case of Martin Saxer’s ethnographic study in northern Nepal where the trading relationships across a previously porous border was the basis of existence for borderland communities. It was only in the 1950s and 1960s that the border between China and Nepal became strictly demarcated and regulated. Where trade had once occurred wherever there was a passable valley, it now became limited to just six official border crossings. Before that, highland communities sought their existence as intermediary traders between the arid and harsh Tibetan plateau and the fertile lowlands of Nepal and India. Since the 1970s China’s increasing wealth and the renewed connectivity brought by new roads which link the borderlands to China much more directly and tightly than to Kathmandu revitalized this centuries old norm.

Along with these physically changing realities, local communities have also reimagined their place in the history of China-Nepal relations and understand their current occupations as following in the footsteps of their ancestors as borderland trading communities. “The new roads are primarily conceived of as ways back to what is remembered as prosperous trans-Himalayan exchange,” Saxer writes. In other words, in the eyes of local communities, a rising and more internationally present China is not so much a disruption of the world order, but is facilitating a return to normality after a comparatively brief interlude.

A case study of traders in Kyrgyzstan and Kazakhstan demonstrates a similar historical processes of a border region “under fuzzy sovereign rule” becoming closed borders during the Cold War to re-opening in the last thirty to forty years. Henryk Alff’s study of the traders reveals that they often attempted to rekindle (perceived) historical ethnic allegiances across borders with, for example, Hui Muslims in China. One Dungan trader from Kyrgyzstan states, “some of us had remote kinship ties with places in China where our ancestors originally came from.” In the post-Soviet and rising China period, traders have been able to take advantage of these perceived cross-border common identities to ease deals and partnership. It is another example of regional history re-imagined, which in turn informs how local people comprehend China’s growing presence and interconnectivity on the continent.

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A truck preparing to enter into China at Nepal’s border to Tibet in Rasuwagadhi, image by: Nabin Baral

China as threat / China as opportunity

Which leads on to the second major theme in the book’s case studies. Informed by local history and present day circumstances, communities all along China’s border are divided in their perceptions of China as a threat or an opportunity.

In Saxer’s Nepal case study he provides an example of an embracing attitude towards China’s presence. Moreover, it is a welcoming coming from local communities and a bottom-up approach, rather than via the top-down government initiatives involving state owned companies, banks and political MOUs through which we normally make sense of China’s presence abroad.

In 2010 a former member of Parliament and local to the northern border region of Humla pulled together local business people to form a Road Construction Committee which lobbied Kathmandu to provide funding to build a road through the lesser used Limi valley to China. They were successful and, after securing funding from Kathmandu, also managed to reach agreement with China to temporarily open the border through the valley for sales of diesel for the construction equipment. By the end of the year the first section of the road was complete, and a Chinese delegation even came to attend the inauguration ceremony.

In another example, a study conducted between 2009 and 2012 of Myanmar Muslim communities residing in Ruili in China’s Yunnan province by Renaud Egreteau reveals that to these communities China is seen as a refuge and a sanctuary compared to the situation they face at home. One of his Ruili-dwelling Myanmar interviewees even says “it’s paradise here!”

In contrast, the histories of Cold War suspicion, tension and conflict along China’s Russian and Vietnamese borders do not wash away overnight. Two case studies of these borderlands show that a perception of China as a threat persists through to this day. A Vietnamese border trader interviewed by Juan Zhang in her study of the Lao Cai – Hekou border crossing says, “even now the Chinese are not much better than before…One can never be too careful.”

Within countries there are of course also divided perspectives on China as threat or opportunity. These as yet unsettled perspectives played out in a number of high profile elections in 2018 in Malaysia, Sri Lanka and the Maldives. 2019 is likely to see more of this tension as more politicians, banks, constituents and other interest groups push back on some of the excesses of Chinese projects and work towards establishing national level strategies on how to interact (or how not to interact) with China and the Belt and Road. Elections in India and, in particular, Indonesia this year could display snapshots of this trend.

What can we learn?

The voices and the world views of communities experiencing and engaging in China’s increasing global presence are an important part of the Belt and Road “story” and the rapidly changing on-the-ground reality across Asia. For one, they represent world views that are often overlooked in mainstream coverage of China’s influence abroad and the Belt and Road. While media often seek comment from local communities on their attitudes toward a specific project, it is rare to hear their take on the larger scale shifting reality or on such big questions as whether China is primarily conceived of as a threat or as an opportunity. As narratives on BRI become more and more polarized between the Beijing story and the Washington story or the Brussels story, it is important not to forget the voices of those who are far more directly impacted by the, in some places, transformational, change BRI is bringing.

But these local community voices are not just “color” for media stories. They are also agents in and of themselves. Saxer’s fascinating case study of a local community proactively campaigning for infrastructure connectivity with China is a case in point. The agency of these local communities is also being played out at very local levels, in national elections and in the establishing of recipient country policies and strategies toward the Belt and Road. In a recent article on Euromoney, Djiboutian minister of finance, Ilyas Moussa Dawaleh, stated “we have problems with the current Belt and Road narrative”. His voice may represent that of a recipient country political elite, rather than the grassroots voices explored in The Art of Neighbouring, but it points to the same problem — the current narrative of the Belt and Road too often overlooks the diversity of agency playing out in its growth and development.

The Art of Neighbouring points a way towards a deeper and more complex understanding of China’s growing presence and engagement on the Asian continent and of the dynamics playing out along the Belt and Road. For these reasons it is useful for all of us in the emerging “Belt and Road watcher” community. Even better will be more recent ethnographic studies of local communities’ perspectives on China since the announcement of the Belt and Road in 2013. This watcher, for one, is waiting keenly for that.

December round-up: Reform, Opening, Belt and Road

As China celebrates 40 years of reform and opening up, the BRI needs to find its own place in and beyond Deng Xiaoping’s legacy

On December 18, 1978, the 3rd Plenary Session of the 11th Central Committee of the Communist Party began its four-day deliberation at the Jingxi Hotel in Beijing. These were the coldest days of a year. But Chinese history books often associate the meeting with the image of thawing ice. It marked the official launch of a grand transformation of China that has since been known as “Reform and Opening Up.”

The 40th anniversary of the historic event dominated the political and media agenda of last month. And it is worth noting how the Belt and Road Initiative (BRI) was presented against the backdrop of Deng Xiaoping’s legacy.

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The 3rd Plenary Session of the 11th Central Committee of the Communist Party marked the official launch of a grand transformation of China that has since been known as “Reform and Opening Up.”

At a high-profile gathering commemorating the anniversary on December 18, President Xi Jinping referred to the 1978 moment as a “great awakening of the Chinese Communist Party”. Whether or not the Party was asleep before that is debatable, but the significance of the historic watershed is unquestionable. In 1978, China waved goodbye to three decades of Maoist fanaticism and embraced a more pragmatic, common-sensical path toward development. The ideological restrictions on individuals, businesses and society were gradually loosened. The countryside quickly recovered from the shackles of collectivization. The private sector emerged and prospered. Foreign capital flowed in. And the result was a booming economy that lifted hundreds of millions out of poverty and enabled the Party to declare that a “national rejuvenation” was right around the corner.

The BRI naturally found its place in Xi Jinping’s speech that walked the audience through that journey again. It was presented as a logical extension to the decision to open up the country to the outside world, first through a few coastal special economic zones, then along the rivers that radiate inland. As China integrates into the global market, it’s time to go beyond its own borders and begin doing business around the globe. “We moved from letting in to going out,” as President Xi put it.

The idea of the Belt and Road as “Reform and Opening Up phase II” is not entirely new. Chinese experts had been making the argument ahead of the anniversary that BRI inherited and expanded the essence of Opening Up. In a narrow sense, one of the stated strategic objectives of BRI is to link China’s landlocked provinces to west-bound trade routes all the way to Europe through Central Asia. In a broader sense, BRI is seen as staying true to the reform’s key message of “integration”, fitting China into existing global institutions and frameworks such as the WTO.

At this point in history, emphasizing the continuity between BRI and the Opening Up would probably help remove some sharp edges of President Xi’s signature initiative in the eyes of external observers. But despite the insistence that BRI is the child of reform, it is undeniable that the initiative is not without tensions with Deng Xiaoping’s legacy. Its (perceived) geopolitical ambitions and challenge to existing international institutions and norms can be at odds with Deng’s teaching of “hide your capabilities and bide your time”. The dominating role played by state-owned enterprises (SOEs) in the initiative can also be read as a reversal of policies encouraging and nurturing the private sector.

Those tensions were tacitly touched upon in an earlier analysis by Chinese Academy of Social Science scholar Xue Li titled “BRI and the New Reform and Opening”. Xue argues that the BRI’s global impact is probably going to be larger than that of Reform and Opening Up. It continues on the path of opening the Chinese market (largely facing developed economies) but moves on to “unlocking others” (mostly developing economies). According to Xue, this is a departure from China’s traditional philosophy of “winning over others by perfecting one’s own virtues”(远人不服则修文德以来之). Instead, the new administration decides to go all the way to the distant “others” and help them with social and economic development.

He notes that China does not have the power/right to set development strategies for other countries and cannot force them into the BRI. The initiative is a “development strategy” for China, but can only be a “cooperation proposal” for the outside world. This leads to the elevation of “neighborhood diplomacy” in terms of strategic importance, another departure from reform-era diplomatic priorities that “put major power diplomacy, especially with the United States, at the absolute center.” The pivot towards neighboring developing countries, Xue contends, is a clear trend since 2016 and a response to the perceived shrinking/stagnating space for furthering diplomatic relations with more developed countries. His article also implies that China is no longer content with simply accepting the global frameworks and is making efforts to fix some of their flaws through negotiations rather than confrontations.

The analysis underscores the extent to which BRI needs to maintain a linkage to the 1978 legacy while distinguishing itself as an update and reinvention. And that need is not all externally focused (i.e. to placate Western critics). Internally, the public may also need some convincing that with a full-throttled push for the BRI, they are still on the Reform and Opening Up bus that they bought tickets for. One Weibo post captures the difficulty for the Chinese public to appreciate why they should be concerned with the development of, say, Africa or India. “40 years ago, our own opening up helped developed economies find an outlet for their capital and enterprises that their internal markets and free trade agreements within the OECD bloc could not provide.” Now, the Weibo commentator argued, it’s China’s turn to wanting that solution for its internal difficulties: employment, environment, etc, and the public should come on board with that logic in mind.

With all the talks of fixing the global order and “neighborhood diplomacy”, the celebration of the 40th anniversary was still largely a tribute to the past. One item of the program was the awarding of Reform Friendship Medals to 10 foreigners who had made distinguished contributions to Reform and Opening Up. They were American, Japanese, German, British, Swiss, Spanish, French and Singaporean. No one from the developing world received that recognition. It would be interesting to see if in 2028, when Reform and Opening Up policy turns 50, Pakistanis, Sri Lankans or Kenyans would be honored in the same manner for assisting China in its renewed quest for national glory.

Belt and Road insiders: What we think about “greening” the initiative

Interviews with banks and SOE executives shed light on what motivates Chinese players to (not) go green in BRI projects.

By Huang Wei and Tom Baxter

When it comes to issues arising from the Belt and Road Initiative (BRI), be they debt burdens, local community engagement or environmental sustainability, external stakeholders are often more confident with prescribing what China “should” do than offering convincing arguments about “how” Chinese actors can be made doing the right thing. One of the key barriers of translating visions into actions is the lack of access to the actual thinking of Chinese actors involved in the BRI, thanks to the opaqueness of the Chinese political, business and financial institutions.

With the aim of overcoming that very barrier, my team and I recently conducted a round of intensive interviews with practitioners who are at the forefront of China’s overseas endeavors, with a focus mainly on energy investment. The interviewees include large state-owned construction firms; financiers and insurers; and third party consultancy firms that provide accounting and legal services to the Chinese companies. We would like to use this rare window to understand more about the driving forces and roadblocks for greener investment along the Belt and Road.

The Chinese government appears to be increasingly willing to engage in discussion on the environmental sustainability of BRI, with numerous high level officials, including President Xi himself, calling for the Belt and Road to be a “green” initiative. In May last year a government document containing “green belt and road” guidelines was issued to promote such a vision. The document, however, consists of non-binding “guidance”, rather than legally enforceable regulations. In addition, being issued by multiple government departments, it left confusion more than guidance in its wake.

In the twenty months since that document was issued, advocacy groups, think tanks and even industrial associations have worked to flesh out and clarify the government’s intention, producing a proliferation of “voluntary compliance standards” and initiatives targeting everything from banking practices to corporate social responsibility.

But to what extent are such policies actually “greening” the BRI? Are “voluntary standards” and “initiatives” shaping the behavior of Chinese actors participating in the initiative? What is the real impetus for green investment along BRI? These are crucial questions that need to be addressed.

The interviewees were asked a set of questions that focus on their decision making process with regard to environmental standards, the motivations behind those decisions and their perceptions of “Green BRI” in general.

This article will not list out their answers in full. Rather, it attempts to pull out some of the main insights and common themes in order to shine a light on the thinking of key Chinese players when it comes to introducing higher standards for sustainability in BRI projects.

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The Chinese government appears to be increasingly willing to engage in discussion on the environmental sustainability of BRI, Image: cbcgdf.org

The Profit Equation

The most evident conclusion from the interviews was that banks and companies generally don’t have motivation to go beyond recipient countries’ local standards and regulations as they still operate within the simplest market logic of profit maximization.

When we posed the question: How do you decide on your choice of environmental standards for a project? The majority of interviewees would understand the question as, what do higher environmental standards mean for profit.

During the initial process of bidding and negotiation for an overseas power plant, for example, companies need to come up with a project design plan that is both most economically desirable and that ticks the boxes of local environmental requirements and electricity demand. It is an extremely practical process, similar to solving a maximization problem under constraint that economics students are often faced with at school — choices are computed based on input of numbers into a standard formula. Inputting a higher standard will automatically shrink the profit margin and absorb capital that would have been earning money elsewhere. This serves to weaken a company’s competitiveness in a highly competitive field.

It is often argued that environmental risk need to be factored into this calculation for its potential negative impact on profit. But, as was evident from our interviews, when companies and banks talk about “environmental risks”, they are in fact referring to costs and penalties arising from non-compliance, which are real monetized indicators. “Risk” would only influence choice if it is considerable and tangible enough to be input into the profit formula, such as the risks of fines and penalties many heavy industries in northern China face since the introduction of strict emissions standards.

Shielding against market risks

A commonly used argument by critics of fossil fuel-based BRI energy projects is the potential risk of “stranded assets.” Expensive projects may end up as facilities inutilizable as environmental standards and climate change mitigation measures become more restrictive over time. Companies and banks are therefore urged to look beyond short term profit calculus. To many of our interviewees, however, this argument did not ring any alarm bells.

Companies tend to already see themselves as shielded from such long-term risks through the means of contracts at the project planning stage. One example of such a contract is the Power Purchase Agreement (PPA) signed during the initial stages of investment in power plant projects. The PPA provides certainty in future price, volume and time period for electricity sold, meaning that any further cost of retrofitting would be borne by the recipient country government, not by companies. Whether or not local governments are aware of the risks that are left on their shoulders in signing such agreements is another question, and one that certainly deserves digging into.

In addition, the most common form of Chinese investors’ participation in overseas project is a short term, “turn-key” EPC (Engineering, Procurement and Construction) contract, which ends immediately upon construction completion. Under an EPC arrangement, long term risks are not a consideration. Longer term contracts, such as Built, Operate, Transfer (BOT), do exist and entail a different set of considerations where longer term risk is a more important factor. The BOT model tends to be more common in investments in overseas hydropower projects.

As for the banks, lending is prioritized in capital structure and potential risks are usually covered by insurance companies such as Sinosure, meaning that banks are sheltered from revenue shock, significantly eroding the effect of the stranded assets argument.

Reputational risks

Advocates for a greener Belt and Road have also argued that companies’ potential reputational gains or losses, and political recognition that could confer, are a key factor in project decision making. Given the state-owned nature of the vast majority of Chinese companies and banks involved in Belt and Road projects, China’s domestic politics, including image and reputation, no doubt do play a role. Our interviews showed, however, that such factors have yet to be seen as tangible indicators for companies to enter into their profit formulas. In fact, contrary to conventional belief, going beyond market norms would put a company under greater scrutiny, which may or may not lead to greater recognition, but certainly adds extra risk to company operations.

Who holds the keys to change?

What and who can motivate for greener investment then? Well, it’s a billion-dollar, and potentially billion tons of carbon, question. But the interviews did uncover some of the key players and factors that are most influential over Chinese companies’ behavior. In my experience, the below “keys to change” are generally not well understood in the communities working to green the BRI.

SASAC:

The State-owned Assets Supervision and Administration Commission (SASAC) is an institution under direct management of China’s State Council. It is authorized to act as a shareholder of SOEs with responsibility over their performance evaluation. The SASAC performance evaluation is, then, the closest thing to a tangible measure of SOE reputation. It also gives SASAC distinct power over the career progression of heads of SOEs.

According to interviewees, the performance evaluation (which is not publicly available) still relies heavily, if not entirely, on profit indicators, leaving SOEs with zero incentive to jump out of the profit maximization mindset. Indicating SASAC’s influence over SOE investment behaviour, one interviewee said: “If SASAC could incorporate ‘green’ as quantitatively assessable criteria into the performance evaluation, it would be implemented in no time among SOEs.”

Sinosure:

Sinosure is the single Chinese state-owned insurance corporation that provides export credit insurance. The fact that many advocacy groups categorize Sinosure insurance as financing is somewhat misleading, as insurance is actually more like the pre-requisite of financing during real investment cycle.

More often than not, Sinosure’s involvement in a project is what gives it the green light. Banks would rarely say yes to an overseas project without the nod from Sinosure to assure that political and market risks associated with projects far away from home are covered. With few alternatives on the market, Sinosure holds a near monopoly over “life or death” insurance for Chinese companies’ overseas investments and, by end of 2017, had enabled over 2.9 trillion RMB of overseas financing.

Given their vital role as risk-covering agent, there is huge potential to lobby Sinosure to be more attentive to environmental risks.

MSCI:

Morgan Stanley Capital International Index (MSCI) is the most commonly used equity market index for investment portfolio managers around the world. Since 2017, MSCI has been going through a long process of integrating China A-shares (Shanghai and Shenzhen stock exchange traded RMB shares) into its Index. It is a milestone for China as the integration would enable publicly listed Chinese companies to gain access to international capital.

Significantly for our purposes, after being included in MSCI a company would be required to undergo Environment, Social and Governance (ESG) assessment and classification. Good performance would allow that company to be included in an ESG index called “the Green Leaders Index”. Any underperforming companies would be removed from that index. This would help portfolio managers who are wary of the risks behind bad ESG performance in emerging market to come to informed decisions. Given MSCI’s large client base, the impact of this indicator on a company could be significant.

Currently, many listed companies that underperform on ESG are seeking solutions from consultancy firms who provide advice on how to improve. This dynamic is not only an engagement chance for those who work on greening BRI, it also has broad implications for environmental advocacy within China.

Signs of Change

Despite the seemingly unbreakable profit calculus of Chinese SOEs, there have been some cases of projects adopting standards higher than the bare minimum required. Three special circumstances stand out:

  1. When there is willingness of a recipient country to go beyond average standards, such as for a flagship project. An example would be the ultra-supercritical Hamrawein coal power plant soon to enter construction in Egypt. For this mega-scale project, the Egyptian government has required higher standards and promised to pay for a higher electricity price. In return, the Chinese financier will give a discount on loan terms.
  2. When a project is backed by a syndicate loan that involves international banks, the project will have to reach the highest standard within the syndicate group (normally that of multilateral development banks such as the World Bank or European Bank for Reconstruction and Development). This effectively forces Chinese financiers to adopt higher standards than they would normally be required to.
  3. Some projects with extremely handsome rates of return will consider raising standards for a win-win outcome on both profit and reputation, according to one interviewee.

Where next for Green BRI?

No systematic change will come from special circumstances, however. To effectively leverage for a genuinely green BRI, stakeholders will have to consider closely how they engage with the dynamics of Belt and Road investments as well as carefully consider what exactly they are advocating for. As one interviewee bluntly put it, his company would only act differently if green requirements are translated into “departmental rules from the government, SASAC performance evaluation criteria, and clear reward-penalty mechanisms.”

The takeaways from the interviews are clear:

Firstly, stakeholders must always be mindful of the communication gap. In order to influence investors, advocates for a greener BRI must be able to speak to them in their language. This requires us to question our assumptions and make sure to study the nitty-gritty of the investment process.

Secondly, “profit” is clearly front and center in investors’ decision-making process. We should not put “green” on balance, hoping that it would outweigh “profit”. Instead, we need to put “profit” on balance, and think about how “profit” can be outweighed by environmental and other factors.

Lastly, outside of profit calculus, there are two strangleholds for investors: one is an assessable “green” benchmark and a clear reward-penalty mechanism from supervisory bodies; the other is a requirement for higher standards from capital providers. This has put the keys to unlocking “green Belt and Road” in a selected few players’ hands. Advocates would do well to focus their efforts on those who hold the keys.

This blog is co-authored by Huang Wei and Tom Baxter. Huang Wei was a Climate & Energy campaigner with Greenpeace East Asia. Her expertise is in China’s overseas energy investment, coal and air pollution in China.

** This article was updated on 27 December to clarify that ESG assessment for a company would occur after inclusion in MSCI, rather than as a prerequisite for inclusion. **