The China Connection: The Belt and Road Initiative

Author Argus

Podcast: A deeper look into China's Belt and Road Initiative (BRI) and how Xi Jinping is positioning it globally, regionally and domestically.

The BRI is often seen as a global power move, and while this is the case, it’s not the whole story. In this China Connection podcast episode, Argus Chief Economist David Fyfe and Argus Vice President, China Crude and Products Tom Reed discuss what even smaller countries are finding to be the pros and cons of the BRI.

From crude oil to metals, Argus covers a wide range of global energy and commodity markets.

Transcript

David: Hello and welcome to another in Argus Media's series on "The China Connection." Today we're in London, and we're going to be talking about China's Belt and Road Initiative. I'm David Fyfe, chief economist for Argus Media, and with me is Tom Reed, who is VP for our China oil service [Argus China Petroleum]. Now as I say, we're going to talk today about the Belt and Road Initiative, or the BRI, which many see as President Xi Jinping's signature policy. It involves expenditures of anything up to $1.2 trillion in 85 countries by 2027. Tom, it sounds a very ambitious program, and we're going to talk today about a bit of where it comes from - what it means for commodities. But can you fill us in a little bit on the origins and the rationale for the BRI?

Tom: Yeah. Thanks, David. Xi Jinping came to power in 2011, '12, and this is one of his very early initiatives as he was stamping his mark on the Communist Party on China - I guess on the world as well. And he coined these two aspects which make up the BRI, the Silk Road Economic Belt and the Maritime Silk Road during a trip to Indonesia, to describe policies that would really put China back at the heart of global trade where it belonged. And today, the BRI, which celebrated its sixth anniversary last month, describes those two big axis of trade. Somewhat confusingly, the economic belt countries, loosely defined, follow the Old Silk Road Overland trade routes via Central Asia and up into Europe — and the Maritime Silk Road routes follow the sea lanes into Southeast Asia, the Indian Ocean, and up as far as the Adriatic. From China's perspective, enhancing the BRI trade ties provides an outlet for China's surplus manufacturing capacity and gives a means for capital-deficient countries to secure investment. It's a win-win, as the Chinese government would say, so what's not to like? Well, I think it raised hackles almost from the off, didn't it?

David: I think you're right. I mean, there's a certain amount of reticence amongst some of the nations within the region. And we're talking about Asia in its broadest sense because the BRI extends into Central Asia. It's looking at Southeast Asia. It's including South Asia and, indeed, East Africa. And of course, historically, there are some countries within the region who rather resent this rather more overbearing approach from China. There are territorial issues long-standing between, say, China and Japan, China and India, and also the Philippines and Vietnam. And as much as these countries may be happy to go hand-in-hand with China in terms of investment and accessing funding from the Chinese, there is a reticence about becoming overly dependent upon China in this project.

There are another group of nations, we could name Myanmar, Sri Lanka, Malaysia, perhaps, for whom it's more a sovereignty type issue. They've dipped their toe in the water with BRI, indeed some infrastructure has been built. But what they're concerned about is very much the terms of debt, the use of predominantly Chinese labor in a lot of these projects, and in certain cases a lack of concern for environmental standards with some of these projects, so there is pushback. The US, China, Japan, but also some of the smaller countries in the region have a number of concerns about the overarching plan.

Tom: Absolutely. And one of the recent flashpoints we've seen, obviously, and this bears indirectly on China's territorial claims in the South China Sea is the flashpoint over oil exploration in seas claimed by China and claimed by Vietnam. Ironically enough on Philippine Friendship Day, a Filipino fishing boat was run aground on...I think, it might've been even the Friendship Shoal. But I think from China's perspective, in hindsight, possibly, it was kind of misbranded from the off. And I think it's likely to be one of the considerations that play in the trade war. It's been seen by Washington, I think, as part of a new assertive phase in China's development. And when Xi Jinping tied it to the Chinese dream, part of which, of course, was the great rejuvenation of the Chinese nation, warning flags went up, you know, in Washington.

And now barely a day goes by without, you know, some mention of the two countries' relations, involving the turn of the Thucydides's trap - the idea that one country cannot rise without threatening another directly. I think that's probably not what Xi Jinping meant. His desire [was] to stamp an indelible mark on Chinese politics at a very fraught time in the country because, of course, when he came to power in 2012, it was in the teeth of some internal opposition. He was actively battling factions that opposed his presidency. We see that in the anti-corruption ‘tigers and flies’ campaign where he's imprisoned a large number, hundreds of Communist Party officials, and the BRI initiative came along at that time. So it was very much part of Xi stamping his authority on the country, and I think, in some way, that did end up being projected as Xi attempting to stamp his authority on the world.

And I don't think that's what he was doing at all. I think it's possible that it was overbranded, you know, the BRI. It didn't help, of course, when he announced it, he was in Indonesia, and he name-checked a Ming dynasty general called Zheng He, who was part of an expansionary Ming dynasty policy. You know, he went out into the Indian Ocean to battle pirates and assert, you know, Chinese claims to those waters. So I think some of the semantics associated with the BRI really didn't do China and Chinese PR any kind of favors in terms of how this was viewed internationally.

David: Sure. I mean, let's turn to energy and commodity markets because, for many years, arguably ever since the late '90s, early 2000s, China has been attempting to secure supplies of commodities for its domestic market, and, you know, that policy predates the BRI. You know, if you look at a combination of the equity that Chinese companies hold in overseas oil and gas reserves combined with oil-for-loan deals, arguably China has access to not far off 3.5 mn b/d of oil supply through those means overseas, which is pretty much what they produce at home.

China fuel exports to BRI countries 

Tom: The irony being, how is that a benefit to their energy security? Not tremendously. Essentially, they’re cut off from US, the Iranian oil flows. They're struggling to access Venezuelan oil flows. In Sudan, there was unrest that complicated, you know, the extraction of oil there. It turns out that buying into these upstream reserves does not necessarily improve your energy security, and your greater risk, as far as China is concerned, is the financial system. Until you internationalize the Renminbi, until you've insured yourself against, you know, the dollar economy in some way, you're terribly vulnerable.

David: And actually, the bulk of China's oil produced overseas actually is sold into markets overseas as well. It doesn't come back [directly] to China.

Tom: But I think that's a common misconception about what China's doing overseas — and this is commercial.

David: So, you know, BRI is not overwhelmingly or solely about energy and commodities, but all other things being equal, the project is about boosting intra-Asian trade or indeed trade from Asia as far as Europe. Let's face it. And it's also about building infrastructure.

Tom: Yes.

David: And both of those net-net should be pretty positive for the commodity complex. In other words, for metals, for iron and steel markets, industrial metals, mining, and indeed for oil, in as much as the greater the flow of trade, that tends to be pretty positive for fuel oil, and diesel, etc. So all other things being equal, it's a policy thrust that will just exacerbate the fact that Asia is the last big net short in the petroleum market: 15mn b/d of net imports in 2000, [and nearly] 30 mn b/d net oil imports into Asia today. And this project plays into that narrative very much. But [are there] any other areas in terms of BRI, in terms of its implications for commodity markets, do you think?

Overseas share in CNPC oil, gas production rising 

Tom: Yeah, I mean, it's interesting that a lot of commodity companies seized on this, the BRI initiative. I was giving them justification for going overseas, but also improving their ability to tap Chinese development bank credit to do so. And one of the big instances where we saw that was a conglomerate, which appeared to come out of nowhere, called CEFC snapped up an awful lot of overseas assets. They bought upstream oil fields in Abu Dhabi and Chad. At one point, they even came close to buying a pretty substantial stake in Russia's state-owned Rosneft before they went bust. And when they went bust, they sucked the main Chinese policy bank, the China Development Bank, into a fairly wide-ranging corruption probe. And, of course, China Development Bank, CDB, was one of the main backers of the Asian Infrastructure Bank, which was essentially created to help finance BRI projects.

And it's sort of made it look as though a lot of companies in China were quite cynically taking advantage of Xi's policies to export China's manufacturing surpluses and just sort of piggyback on that cheap credit. And some of that has come crashing down around their ears. I t rather sort of tarnished the image, I think, of the BRI when things like that happen.

David: And I think there are several areas where we can say, what has the reality of the BRI been, compared to the rhetoric? And you'd mentioned there, the handling of finance and the way that...I hesitate to use the word manipulated… but to some extent, the project has been manipulated in that sense to some degree. As I said, the goals are expenditures of up to $1.2 trillion, maybe about $100 billion has been spent so far. We've talked about the debt trap that certain countries in the region are concerned about. The terms of debt repayment, etc. have been troubling. And Myanmar...

Tom: Another PR blow to China: all the fuss about the 99-year lease they got on the Hambantota Port in exchange for this debt that Sri Lanka's never going to be able to pay back.

David: Yeah. So there's been a little bit of a step back from some of China's neighbors in terms of their initial enthusiasm for this rather grandiose project: lots of cheap money, lots of shiny new infrastructure. That's not to say it won't happen, it won't be built, and certain key projects are going ahead. You k now, there are rail links that are being built. There are new ports that are in place. I guess one of the key problems is that this is happening just as the world heads into, arguably, either a concerted economic slowdown, if not outright recession. So what does this do in overall terms for the BRI?

Tom: You do not want, I would think, to be borrowing short and lending long at a time of a global economic slowdown. And I think, you know, what we are now starting to see is a kind of a dialing down of the BRI rhetoric. And, in fact, when you look at China's spending priorities, they're domestic. It's shoring up the [domestic] economy. [China reported its] lowest growth rate in the third quarter since 1992. The IMF is predicting 5.8pc growth next year, which would be even slower. And again, you know, Beijing has defaulted to propping up the domestic economy through expenditure on infrastructure. And that, I think, probably does diminish its appetite for...

David: A bit of impetus, so the BRI's still there. It's still gonna run. It's still a key policy priority for Xi. On the other hand, we've seen Chinese domestic imports of coal, LNG, crude oil, so far, in 2019, are up by about 10pc year-on-year.

Tom: Huge.

David: So it seems, as you say, the priority for China has become, you know, look after number one, batten down the hatches in the face of economic slowdown. So let's keep watching BRI. It's gonna remain important for commodities overall, but it may not be quite the top priority that it was when President Xi came in. So with that, I think we better leave it. So, Tom, thank you very much.

Tom: Thank you very much.

David: Thank you, everyone, for listening. Listen out for the next episode in The China Connection.

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