The risks to China’s A Silk Road Economic Belt. Double-Edged Sword By Friedrich Wu, Vidhya Logendran and Wan Tin Wai hina means business when it comes to the Silk Road Economic Belt and Maritime Silk Road. That was evident at the Boao Forum in March where President Xi Jinping delivered a keynote address providing the first in-depth explanation of China’s vision for the Belt and Road Initiative. Envisaged as both a network of physical infrastructure such as railways, highways, oil and gas pipelines, and power grids, as well as a facilitator of greater trade and financial integration, China fore- Csees the Belt and Road Initiative feeding the demand for infrastructure investment and fostering greater growth in Asia, Africa, and even Europe. Of course, China would reap benefits from this bold initiative, too. The Chinese implemented a “Going Out” strategy in 1999 to complement their country’s stellar inward foreign direct investment-driven economic growth. In fact, China is expected to be a net exporter of foreign direct in- vestment in 2015, not unexpected for the world’s second-largest economy holding the world’s largest official foreign exchange reserves.Y et China faces some formidable domestic economic challenges, one being the un- even development between its coastal and inner regions, especially the western provinces of Xinjiang and Tibet. Indeed, the Silk Road Economic Belt would provide new impetus for China’s western development strategy THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY 220 I Street, N.E., Suite 200 Friedrich Wu is adjunct associate professor at the S. Rajaratnam Washington, D.C. 20002 School of International Studies at Nanyang Technological University Phone: 202-861-0791 Fax: 202-861-0790 in Singapore. He was a former director of economics at Singapore’s www.international-economy.com Ministry of Trade & Industry. Vidhya Logendran and Wan Tin Wai are [email protected] recent MSc. graduates from the same school and university. 68 THE INTERNATIONAL ECONOMY SPRING 2015 Wu, Logendran, and Wan and create new opportunities for accelerating the eco- nomic transformation of the country. China has already been building trade and invest- It was China’s thirst for energy that first ment linkages with the Central Asian republics since their independence in 1990. Yet doubts persist as to whether China would succeed with the overland vision drove it to the Central Asian republics. of the Silk Road Economic Belt, particularly when faced with headwinds of extremism in a region characterized by latent ethnic conflict, porous borders, and shaky re- gimes. Bilahari Kausikan, Singapore’s ambassador-at- advancing its economic influence. State-owned enter- large, claimed recently that the Chinese initiative might prises have been able to parlay this influence into busi- fail in Central Asia because “it is building on the very ness wins. For example, in 2013, the Kazakh government treacherous sands of intrinsically unstable regimes.” used its preemptive rights to buy an 8.33 percent stake What lessons can China learn from its experience in in the Kashagan oil project, which it then sold to China Central Asia thus far as it embarks on its ambitious Silk National Petroleum Corporation, thereby blocking a pro- Road Economic Belt? posed sale to India’s Oil and Natural Gas Corp. Another factor facilitating China’s success in Kazakhstan is the HOW CHINESE BUCKS GET acceptance of the Kazakh government’s stipulation that THE BIGGEST BANG IN CENTRAL ASIA all Chinese investments must involve the Kazakh national It was China’s thirst for energy that first drove it to the oil company, KazMunaiGaz. China often sweetens deals Central Asian republics both through investment and also by offering loans and aid to the Kazakh government so trade, where China quickly became the largest trading part- that it may purchase stakes in these Chinese investments, ner for all the Central Asian republics except Uzbekistan. like in the case of the 2009 purchase of MangistauMunai China imported oil and gas from the natural resource- Gas where China National Petroleum Corporation pro- rich countries such as Kazakhstan and Turkmenistan. vided KazMunaiGaz a loan of U.S. $5 billion to secure 51 Turkmenistan is China’s largest foreign source of natural percent of the company while China National Petroleum gas, accounting for over 52 percent of Chinese imports in Corporation itself retained 49 percent. China is a major 2013, and in turn, China has replaced Russia as the big- source of money and a benefactor, but has refrained from gest market for Turkmeni gas. Kazakhstan is the region’s interfering in these countries’ internal politics, a practice largest oil supplier to China, accounting for 4 percent of it is likely to continue with the Belt and Road Initiative. It China’s total crude petroleum imports in 2013. differs markedly from Russia, which often seeks political By investing in oilfields and pipeline infrastruc- concessions in return for financial support, or the West, ture such as the China-Central Asia pipeline, China has particularly the United States and the European Union, helped reduce the reliance of Central Asian republics on which often place conditions on funding. the legacy of Soviet-era pipelines and diversified their energy exports. China National Petroleum Corporation POTENTIAL SPEEDBUMPS ALONG THE SILK ROAD is the majority owner of two of Kazakhstan’s major oil But Chinese investment in Central Asia has been a double- companies (it owns 85.42 percent of AktobeMunaiGas edged sword. Chinese transactions are often shrouded in and 67 percent of PetroKazakhstan) and is involved in secrecy, executed through forging links with the political several oil exploration and production projects through- elite, thus stirring up the suspicions of both lower-level out the country, accounting for about 25 percent of bureaucrats and concerned citizens in the host countries. Kazakhstan’s oil production. Chinese enterprises are also often criticized for their Moreover, trade with the Central Asian republics is poor labor conditions, unfair pay, abuse of local work- closely tied to the Xinjiang region, where China seeks ers, and unsustainable environmental practices, leading to counter increasing unrest with accelerated investment to protests and even violence against them. In October and generous economic subsidies. Two-thirds of the 2012, the head of the Chinese Chamber of Commerce trade between China and Kazakhstan, for example, con- in Kyrgyzstan, Li Deming, wrote in a state-run Chinese sists of trade with Xinjiang, while 49 percent of invest- media outlet that doing business in Kyrgyzstan was “not ments from China were by Xinjiang-based companies. easy.” This was after 250 Chinese workers from China’s How has China been able to gain traction in Central Superb Pacific Limited were forced to flee operations at Asia? China has used government-to-government mech- the Taldy-Bulak Levoberezhnyi gold field after a protest anisms and the Shanghai Cooperation Organisation for Continued on page 91 SPRING 2015 THE INTERNATIONAL ECONOMY 69 Berry begin raising rates as soon as possible, noted recently that Stone & McCarthy Research Associates, a financial “readings on some indicators have been unexpectedly markets research firm, surveys its clients shortly before weak in recent weeks, some of which may be attributable each FOMC meeting about their expectations for policy to unseasonably adverse weather. It’s too soon say how decisions. Currently the key question was when lift off much, however, and the more prudent approach is to look would occur. The committee earlier said it would not hap- through very short-term fluctuations and assess emerging pen at the late April meeting. A few of the SMRA clients trends based on a longer run of data.” For one thing, the thought the action might come at the mid-June or late healthy gain in payrolls since the middle of last year will July meeting, but a solid majority said mid-September is help consumer spending to continue to rise, with overall the most likely time. GDP growth of more than 2 percent this year. Former Fed Vice Chairman Donald L. Kohn, who Lacker’s counterpart at the New York Fed, William is now at the Brookings Institution, said that Yellen ap- C. Dudley, is more cautious than Lacker about raising pears to be trying to downplay the timing of the lift off. rates. “The unemployment rate is still too high and the Correctly so, in his view, because when rates are first in- inflation rate too low,” he said late last month. “Because creased they “will still be extraordinarily low, and what the economic outlook is uncertain, I can’t tell you when determines financial conditions is not today’s federal normalization will occur. The timing is data dependent.” funds rate but the expected trajectory out into the future.” Then he used a phrase that caught the attention of many The focus on the trajectory also makes it clear that analysts: “When, hopefully, the data support a decision under the leadership of Yellen, Fischer, and Dudley, the to lift off later this year…”. Fed will be moving cautiously because of all the uncer- “Hopefully” means that Dudley, who is also vice tainty about the economy and the state of financial mar- chairman of the FOMC and is the only one among the kets. And at this point, they all believe that if a mistake dozen bank presidents who has a vote at every meet- is made, the consequences of waiting too long for lift off ing, like Yellen isn’t going to rush to raise rates based on or moving too slowly thereafter can more easily be cor- some outdated rule of thumb. rected than moving too soon or too aggressively. u Wu, Logendran, and Wan Continued from page 69 by Kyrgyz workers against mistreatment and environ- and high-technology sectors.