Belt and Road actors brace for coronavirus shock

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

By Ma Tianjie and Tom Baxter

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

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

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

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

Scrambling SOEs

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

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

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

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

Contract worries

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

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

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

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

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

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

“Friend in need”

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

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

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

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

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

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

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

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

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

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.”

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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.”

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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.

Why “Panda Paw Dragon Claw”?

China’s increasing visibility and influence on the global stage have induced a mixed response.

Many in the field of studying Chinese involvement overseas have invoked the image of the dragon. Professor Deborah Brautigam, an authoritative scholar on China’s aid programs in Africa, named her groundbreaking book about that subject “the Dragon’s Gift”. Professor Kevin Gallagher, a Boston University expert on China-Latin America economic relations, titled one chapter in his book “the Dragon’s footprint”.

Fully aware that the dragon metaphor might be clichéd and stereotypical, we believe that it nevertheless captures the menacing posture that many associate with China. Its ambitious global program to boost infrastructure building, to finance development projects and to expand the reach of its industries overseas at times seem like the muscular claw of the dragon trying to snatch its preys, be it energy or mineral resources.

But we should not forget China’s other global image, which is more cuddly and warm, as represented by the giant panda. Like the affection those chubby animals invoke in zoos across of the globe, many Chinese projects and initiatives overseas are actually welcomed and embraced. These include its longstanding medical aid program to Africa since 1960s, and more recently, its South to South climate aid.

The overused and value-neutral concept of “footprint” is inadequate in its imagery force to truly reflect the complexity of China’s involvement beyond its own borders. Here we take the liberty of juxtaposing the two polarized images, panda paw and dragon claw, and leave it to our readers to decide which one they see. We hope the site can work like a hologram.

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We hope the site can work like a hologram.

We are also acutely aware of the fact that stories about China’s overseas adventures are often told from the standpoints of elites, in and outside the country. While documenting and analyzing the decisions and activities of politicians, financial institutions and business leaders are important, telling the story from the “civilian perspective”(民间视角) is also crucial to complete that story. To us, the words from a Sri Lankan fisherman are no less relevant than those of a European finance minister.

This blog is started by those who aspire to tell a better story about China’s involvement beyond its borders. We are journalists, campaigners, analysts, scholars and practitioners with years of experience navigating Chinese politics, bureaucracy, finance and their ramifications overseas. We hope that it will serve as a convening place for the community of China “storytellers” to share, discuss and debate about China’s impact globally, with a particular focus on developments in the energy and environmental fields.