This is where China is investing its billions (and why)

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China’s Ministry of Commerce lists 55 countries “along the belt and road”, meaning they are in the corridor from China to Europe including South Asia. Another 92 nations have agreed to work with China under the auspices of the initiative.

New Zealand, which has a noticeably softer attitude towards China than Australia, is among those on the list. The state government of Victoria also signed on but the Morrison government scrapped that agreement last year, describing it as “inconsistent with Australia’s foreign policy”.

Unlike other sources of development dollars such as the World Bank or the International Monetary Fund, China does not require recipients to commit to legal or economic reform. Many of the countries Beijing is working with score low on corruption indices.

However, China’s dollars are usually loans, not aid. When Sri Lanka couldn’t keep up with loan repayments due on its Hambantota International Port, China Merchant Port Holdings paid $US1.2 billion to become the majority shareholder of a 99-year lease on the port. China’s critics say this is debt trap diplomacy. China says the funding received from the Chinese lessee was not used to repay the China loans, but was used to repay other, non-Chinese lenders. Some in Sri Lanka say they never would have received the funds to build the port from the IMF or the World Bank.

The AidData concluded that 42 low- and middle-income countries with debts to China now exceed 10 per cent of gross domestic product, though because many of these loans are to state-owned enterprises or joint venture companies rather than sovereign borrowers, they are often not picked up by credit rating agencies.

Not all has gone to plan. In 2019, then Tanzanian president John Magufuli termed the $US10 billion Bagamoyo port project as “exploitative” and suspended the construction. Chinese financiers set “tough conditions that can only be accepted by mad people”, he added. But last year – with a new president in place – the two countries said they would again co-operate through Belt and Road projects.

The Asia Society Policy Institute says many projects still fall short in areas including land rights, community health and safety, gender equity and labor standards. It has created a digital toolkit to help developing countries better contend with problematic practices in Chinese initiatives.

2. Which countries are getting the most attention from China (and why)?

The GFDC report shows the major recipient of Chinese investments so far this year has been Saudi Arabia, while countries that saw no Belt and Road engagement include Russia, Sri Lanka and Egypt.

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China has viewed the Arab states that border the Persian Gulf as the next destination for projects for some time now, according to Meia Nouwens, a senior fellow at the International Institute for Strategic Studies in London.

“Traditionally, we haven’t seen the high level of investment in the Gulf as we have in sub-Saharan Africa or South Asia, but it is definitely growing,” Nouwens says. “All those countries are trying to diversify their economies and, in addition to infrastructure projects, it’s interesting to see the proliferation of Chinese tech investments in the Gulf.”

Russia has played a key role as a conduit on the China-Europe Railway Express, a network of 73 rail routes that connect China with Kazakhstan, Russia, Belarus, Poland, Germany, the Czech Republic, France and Spain. Last year, 15,183 train trips were made along the Eurasia route passing through Russia, compared to just 17 a decade ago, according to China’s state railway operator.

The war in Europe has reduced trade going via Russia to central and eastern Europe. “The question is how long will [the transport of cargo via rail through Russia] be up and running,” Nouwens says.

3 What type of projects is China investing in?

Early Belt and Road projects related mainly to infrastructure development in the transport, energy, mining, information technology and communications sector. Also included were industrial parks, special economic zones, tourism and urban development.

Health, agriculture and entertainment projects are also now in the mix. Seasoned observers say there is an increasing focus on building new export markets.

“Beijing wants to turn low-income countries into mid-level countries that can purchase Chinese goods,” says Isaac Kfir, a Sydney-based researcher with a long-standing interest in the strategy.

It also wants to guarantee supply. There are discussions going on in Mauritania and Algeria around access to phosphorus or precious metals – while Beijing organises a low-cost loan to help expand port capabilities.

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4. Why (and how) is China spending big on energy?

A key element of Belt and Road is securing China’s energy supply. In 2017, it passed the US to become the world’s largest net importer of crude oil. Last year it was the world’s biggest buyer of LNG – though demand has fallen back this year thanks in part to COVID-19 lockdowns in manufacturing hubs.

The GFDC report shows energy sector projects accounted for most Belt and Road engagement in the first half of this year. Just over half of the $US11.9 billion went into gas, followed by solar, wind and oil.

Saudi Arabia has received the most energy engagement so far this year, followed by Iraq. A year ago, China’s Silk Road joined a consortium that’s investing $US12.4 billion in Saudi Aramco’s oil pipelines. The group, led by EIG Global Energy Partners, has bought a 49 per cent stake in an Aramco subsidiary that will collect tariff payments for oil passing through Aramco’s pipelines for the next 25 years.

Since 2013, Belt and Road energy projects have ranged from gas pipelines from Central Asia to China and in Azerbaijian, dams in Cambodia and Pakistan, hyrdopower plants in Uganda and Tajikistan, and the Yamal LNG project in Russia.

China has not engaged in coal-related investments or construction projects since 2020, but some previously announced coal projects have now secured financing permits, although it is not clear if these will go ahead.

5. The next biggest area of investment is transport …

China has invested in road, rail, aviation, shipping and logistics projects around the world. The focus for rail this year has been East Asia and includes high-speed rail projects aimed at connecting China to Thailand and Malaysia to Singapore.

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No port-related projects have been announced in the past six months. With some developing countries facing an uphill battle to stay on top of debt repayments as economic headwinds increase, China is expected to shift its strategy in transport.

There will be a focus on completing existing projects, rather than starting new ones.

“These projects are capital intensive, even if they do have favourable terms with concessionary loans. One concern I am hearing out of China, particularly in relation to sub-Saharan Africa, is that they expect some countries will push back and want to renegotiate repayment terms,” Nouwens says.

This happened at the start of the pandemic when China waived some debt owed by the Democratic Republic of the Congo. “I’m not sure that, given the state of China’s economy, it will be able to do that again,” she says.

6. China isn’t the only one spending big … (though a dip is coming)

Foreign direct investment in both developed and developing economies recovered strongly last year after a big pandemic dip.

According to the United Nations Conference on Trade and Development, this was largely because of a surge in retained earnings at multinational enterprises, many of which had a very good 2021. But that was before Russia invaded Ukraine, the global inflation crisis hit and markets tanked. Expect a dip in foreign direct investment this year.

Multinationals accounted for $US403 billion of $US493 billion that flowed out of the United States. German outflows reached $US152 million, followed by Japan and then China at $US145 billion.

On June 26 in Germany, US President Joe Biden put a $US600 billion target on a partnership hatched with G7 countries to fund infrastructure in low- and middle-income countries. This appears to be a recasting of the awkwardly named Build Back Better World project announced by the White House in June 2021. The US will “mobilise” $US200 billion – including private capital – while the EU will kick in €300 billion ($440 billion at present rates).

There’s a lot of catching up to do. The AidData study, which reviewed 13,427 China-supported projects, concluded China is spending twice as much as the US each year on development finance.

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