2023 OCTOBER ISSUE
CHINA
THE GIANT JUGGERNAUT
PART 16
Written by : Andrew Sia
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From the Desk of the Publisher
We spent a lot of effort to comment about China’s Belt & Road Initiative which also happened to be in its tenth year anniversary. It was initiated by Xi Jinping on September 7, 2013 right after he came into power. This has been used as a tool for China to leverage with the Western world to grow the power along the belt and road.
There are currently 120 countries involved and China has been using it to grow their business relationship with its partners. Due to the financial default, failure in repayment of the loans and the interest, some countries, especially those from the developing countries are falling out with China. There are cases like the promise of opening the China market for the partners to enter but ended up only the other way around, the countries are importing more from China instead. This kind of one-sided business practice has put the partners off. Italy is one of the example, who has expressed the desire to leave the Belt & Road arrangement.
We don’t know what is going to develop, especially the world is in a very difficult situation. The COVID-19 has brought the inflation to all the countries. The war in Ukraine has been disrupting the supply of the oil and gas when these energies are needed during the winter season. The terrorist attack of Hamas in Israel has added more uncertainties.
The development of the BRI has received the least attention although at this moment the forum has been held in Beijing with 100 countries who sent their representatives to attend. We have found the President Putin from Russia has attended and because of his appearance, it has put the world’s media away.
Another Mineral – Nickel – Is Controlled by China and Used in the Electric Car Batteries
It is being unlocked from Indonesia, an archipelago in between the Pacific Ocean and Indian Ocean by Chinese companies. Nickel ore is being used in electric-car batteries and it gives China an edge in the global race to secure minerals that are critical to the energy transition. It also gives the Biden administration another challenge to diversify energy supply chain from China.
So far China has at least three EV-focus processing plants in Indonesia in operation now. It has attracted the investment from Ford Motor. On the other hand, Indonesia has grown from a marginal supplier of nickel for car batteries in 2017 to the top source for around half of the global supply in 2022.
Indonesia holds one of the world’s largest nickel reserves. It is created millions of years ago when the tectonic plates collided and trusted the mineral-rich ocean floor to the surface and produced the rich nickel deposit. It was known as the laterite and was refined mainly for stainless-steel production previously.
The Chinese companies came and changed the process. They first brought along their method known as high pressure acid leach (HPAL) which relies on extreme heat and pressure but frequently damaged equipment. Eventually they improved and changed the process and stabilized the production process.
But environmental analysts warn the significant risks as HPAL facilities are carbon intensive and produce lots of waste that is difficult to safely store in rainy and earthquake-prone countries like Indonesia. The untreated solution would contaminate nearby waters. Indonesian government said that it won’t allow HPAL waste to be deposited in the ocean.
China’s Tech Industry is Bracing More Sanctions
The latest is the restriction of Chinese companies’ access to the U.S. cloud-computing services. If the new rule has been adopted, it will require the U.S. cloud-service providers such as Amazon.com and Microsoft to seek the government’s permission before they can provide their services that are using the advanced artificial-intelligence chips to Chinese customers.
This is closing the loopholes as the Chinese AI companies might have bypassed the current export restriction for using the cloud services. These services are allowing customers to gain powerful computer capabilities without purchasing advance equipment. This is including the chips which are on the control list, such as the A100 chips by the U.S. technology company Nvidia. Without owning the advance computer equipment, this technology is available and skipping the control list.
This measure will be announced by the Commerce Department within the coming weeks as part of the expanded policy for its semiconductor export control policy. This is part of the concerns about China’s advancement in artificial-intelligence technologies and their military applications.
This new policy will affect the U.S. cloud-service providers, Amazon Web Services and Microsoft’s Azure because of their presence in China. There is also Google, another leading providers for cloud services. But the local providers, such as Alibaba, Huawei, Tencent and Baidu, together they represent nearly 80% of the total customer spending of $30.3 billion in according to Canalys, a Singapore-based research firm.
Considering to curb the U.S. operations of Chinese cloud-service providers will stop the loophole.
In the coming weeks, the U.S. is going to unify the list of controlled chip-making equipment with the Netherlands and Japan.
China is Limiting Two Key Minerals To Retaliate the US Curbs of High-Tech Export to China
China is restricting the export of gallium and germanium and this is threatening the two countries, Japan and South Korea, for their semiconductor industries that would be threatened to the shortage. China’s Foreign Ministry mentioned that this would take effect on August 1. This is used by China to retaliate to the restricted exports of the advanced semiconductors and related technology to China from the U.S., Japan and South Korea.
China mines, processes and exports large quantity of gallium and germanium, and provides them for the manufacturing of advanced semiconductors, military radars, LED panels, solar panels, electric vehicles and wind turbines. The restrictions are the series of the latest in trade-related measures that put upon the pressures on other governments and those multi-national companies who have to face the geopolitical risks. It is pushing the countries and international companies to shift their production and supply chain away from China. In the longer run, this will isolate China from the global business.
This will lead the countries to source the supply and redevelop alternative materials that can be less dependent on imports from specific countries.
We come to know that gallium is used mainly for research and development of next generation products. Germanium goes into some gases used in semiconductor production. The compound gallium nitride is used to make semiconductors for high-voltage electrical flows, like the power-management chips widely used in cars and certain radio-frequency chips for telecommunication devices. But both of them can be replaced.
Already the gallium and germanium can be found in the U.S. and Australia and both are typically recovered as byproducts from zinc and alumina refineries. They can be recovered and processed from the zinc smelters.
China, Its Next Forty Years
For China’s last four decades, its dynamism was powered by building factories, building commercial and residential properties and constructing roads and transportation systems. And because of all these effort, China successfully attracted the western countries to come to invest in China. The has rapidly lifted China out of poverty and turned it into world second largest economy.
But now we have seen that China is running out of steam for multiple reasons—stagnant of its property market, underused bridges and airports, factories run out of export orders, high leverage leads to the mountain of debts, unemployment killed the domestic spending, poor return of investments, bad decisions and also its foreign policy by its ruling CCP leaders have brought the country the difficulty to demise all these challenges.
On top of all these, the COVID pandemic not only damaged the global financial situation, but also started to kill China as its zero-COVID policy proved to be a disaster due to the one man decision.
Economists now have all agreed that China is entering into an era of slower growth, made worse by a widening divide between the U.S. and its allies, and has paralyzed foreign investment and trade.
We are keen to know what the future looks like for China? The International Monetary Fund puts China’s GDP growth at below 4% in the coming years. For China Economics, a London-based research firm, figures China’s growth trend to slow to 3%, and will fall to around 2% in 2030.
It was not long ago, in fact it was in 2020 that its president, Xi Jinping said that China’s economy size would double by 2035. This sounds unrealistic now.
Political tensions with the U.S. would make it harder for China to lead the electric vehicle and renewable energy industry. Innovations in technologies such as artificial intelligence and semiconductors have been blocked from export by those western countries.
Its housing market, for many years, has been accounted for more than 25% of China’s GDP, but about one-fifth of apartments in urban China, or at least 130 million units, were estimated to be unoccupied, and this was available from the latest available data in 2018. The situation can be worse today.
We have to know that China’s boom was underpinned by unusually high level of domestic investment in infrastructure and other hard assets. This was accounted for 44% of China’s GDP on average between 2008 and 2021. Regarding this area, according to World Bank data, the global average was 25%, and for the U.S. it was 20%.
There is no significant change in the direction that the country will take to bail it out from such difficult position. Xi Jinping still manage to cling to power with the tight fist. There is no naming of any new successors either.
The western economists would suggest for China to move forward and promote its consumer spending and service industries. This can be more in line with what the western world has been doing. But because of the ambition of China, which has always been prioritizing its expansion of its political global influence, in many cases it has left the people’s interest to the minimum. Very good example is to demonstrate its household consumption which only accounted for about 38% of its GDP, while comparing to the U.S., is around 68% according to the World Bank.
In order to encourage the domestic spending, China has to expand its relatively meager social safety net with greater health and unemployment benefits. It has to aim at measures to encourage people to spend more and save less. Over the years under the communist ruling, people haven’t developed the confidence and tend to hold on to their savings for the rainy days.
This is going to be hard for its government to change as it is afraid to lose its control on its people’s spending with too much empowerment for them to determine for their lives going forward. End of the day the country would become hard to rule and to enforce its policy.
Unfortunately, its present regime under Xi Jinping has the lack of vision, and in his ten years of ruling the country, we have seen the loss of its financial power over grandiose projects and the typical one is the One Belt One Road Initiative. We don’t know the latest BRICS would have cost China to be its leader.
Written Before the Belt & Road’s 10th Anniversary Forum
Belt & Road Initiative also known as BRI was founded on September 7, 2013, is a global infrastructure development strategy adopted by the Chinese government to invest in more than 150 countries and international organizations. It is aiming to accelerate economic growth across the Asia Pacific, Africa, Central and Eastern Europe, and also South America.
China aims to connect Asia with Africa and Europe via land and maritime networks with the aim of improving regional integration, increasing trade and stimulating economic growth.
China’s BRI projects have caused unease in the U.S. and India for instance, this is due to their impact on their neighboring regions and countries. There is the significant differences in democratic governance, debt sustainability, and caused concern to the international monetary system, and even affected the environmental and labor standards.
It alerted the World Bank and the International Monetary Fund as China is not following the rules. It has also caused concern from the U.S. military leaders for creating geopolitical tensions. This has created the China-US strategy competition.
There are claims that the BRI has failed to follow international standards and has been using corrupted practices by Chinese enterprises and financial institutions in the countries along the Belt and Road routes. Winning over these countries along the route has jeopardized the U.S. interest.
Its Belt & Road Initiatives have caused significant damage to environment and labor standards when the projects have involved mining. Not only they have exacerbated climate change in vulnerable regions, for instance by clearing the forestry, but also increased pollution and led to water and soil erosion. In many of these cases, labor forces have been exploited and unfairly treated.
China boosted the project as the “project of the century” and claimed that more than 150 countries have joined the BRI with hundreds of agreements being signed.
To China’s benefit, it claimed the BRI has been linking up with many national economies and enhancing long-term foundation for world development. They claimed the act is to de-westernization by rebalancing maritime and land globalization, rebuilding a more inclusive and equitable global economy.
One of its goals is to connect its vast inland western regions, such as Xinjiang and Yunnan, with those less developed regions and along that corridor. It is trying to increase the activities for the international trade and facilitate closer economic integration with China’s inland western regions.
Between 2008 and 2021, China spent $240 billion bailing out 22 countries that are almost totally indebted to China with their infrastructure projects. These countries including Argentina, Pakistan, Kenya and Turkey. Many analysts have criticized China’s lending through the BRI as “debt trap diplomacy” designed by China to give China leverage over other countries and even seize their infrastructure and resources. They are also backed by these countries signing of the sovereign debt agreement. BRI has also proven to have alleviates energy poverty in energy-rich and energy-poor countries.
In June 2021, the G7 countries— with the support of the Biden administration, launched the Build Back Better World (B3W), as an attempt by the U.S. and its allies to counterbalance China’s BRI.
This time we come across a writing about China’s Belt & Road Initiative and we thought that it is worth to look at the matter from another perspective. From our reading of the Foreign Affairs, it started by mentioning that the BRI is the largest and the most ambitious infrastructure development project in human history.
China has lent $1 trillion to more than 100 countries through the scheme. This has dwarfed the spending of the Western countries in the developing world. Many analysts have criticized China through their lending and give China leverage over other countries and even seized the strategic infrastructure and natural resources.
An example from the Hambantota Port of Sir Lanka in 2017 which left the country failed for their payment and resulted the port to be handed over to China for a 99-year lease on property as part of the deal to renegotiate the debt. When the project was announced, it brought discomfort to India as the Hambantota Port was right on the Indian Ocean. Beijing’s behavior caused concerns to the Western world as we can find China’s footprints throughout the Indian Ocean, the Persian Gulf, the Mediterranean, the African coastlines and the Americas.
During the last few years, especially during the pandemic, the picture of the BRI has changed and many of the Chinese-financed infrastructure projects have failed to perform as they were first planned. It has been found that those developing countries who negotiated the projects failed to perform the repayment of the debts and some even have difficulties to pay for the interest. They resulted to create default and unable to look for new finance to service the debts. It is not just Sri Lanka, also for Argentina, Kenya, Malaysia, Montenegro, Pakistan, Tanzania, just to mention a few. This created problems for the Western countries as these countries are forced to turn to the International Monetary Fund (IMF) and other Western-backed financial institutions for help to repay their Chinese loans.
In fact, many of these countries have costly projects that have pushed their debts to GDP ratios to the unsustainable levels as the result of overleverage. To obtain the loans, sovereign guarantees are made to cover any payment shortfalls, but they are not known to the citizens of the countries and to other creditors, not to say that the interest rates are often higher than those set by the IMF and other finance institutions. Bribery to the corrupted and authoritarian governments have been inevitable for signing those deals. We have found out that the interest rates the Chinese charged for those loans are very high as well.
Now these countries are turning to the IMF for debt relief and very often they have to deal with tough conditions and terms, rather than only trying to negotiate further relief from China. As a result many countries have secured the support from IMF in recent year as the following:
- Sri Lanka in 2016 for $1.5 billion
- Argentina in 2018 for $57 billion
- Ethiopia in 2019 for $2.9 billion
- Pakistan in 2019 for $6 billion
- Ecuador in 2020 for $$6.5 billion
- Kenya in 2021 for $$2.3 billion
- Suriname in 2021 for $688 million
- Argentina in 2022 for $44 billion (second time)
- Zambia in 2022 for $1.3 billion
- Sri Lanka in 2023 for $2.9 billion (second time)
- Bangladesh in 2023 for $3.3 billion
Not all these financial reliefs have brought the positive outcome for the indebted countries when they tried to revive the projects. The debt crisis can be far worse than the previous ones as the economy damage on their vulnerable economies that can’t be easily solved. And usually the IMF relieved funds are more meant for their economic development, social spending and deal with the challenges like the climate change for instance. These countries are caught between creditors and their need to keep their economies afloat.
China has multiple objectives for the BRI, first and foremost, it wants to promote its Chinese companies, again most of them are those state-owned companies, to make money abroad, to keep its huge construction sector afloat and to preserve the jobs of millions of Chinese workers.
We have seen China’s GDP growth over the last thirty years was very impressive and not to forget that they were all fueled by the construction sector for their manufacturing of steel, concrete and cement. That led to their booms in building factories, commercial and residential properties and constructing roads, airports and transportation systems. With their excess capacity, they started to unload them in the BRI projects.
BRI increased China’s leverage geopolitically. Their lending to the less developed countries often don’t require them to go through stringent due diligence and contracts are negotiated directly through China state-owned banks to Chinese state-owned enterprises and the borrowers’ state-own enterprises. Because the contracts are negotiated directly, they don’t have to be opened to public for biddings and in the contracts there are clauses that would have to be agreed that they are often undisclosable. The transparent market mechanism for ensuring the projects to be financially viable is lacking already in its initial stage.
As the result, one project after the next started to crumble. But so far we have only seen the Greece’s Piraeus port project which has been successful.
China’s BRI doesn’t posted problems for Western countries. They have created financial pressure that can destabilized those developing countries who are indebted to China. These countries turned to seek assistance to international institutions such as the IMF and the European Bank of Reconstruction and Development.
There are ways for members of the G-7 and the Paris Club, an institution developed 60 years ago, to deal with issues regarding sovereign defaults, to address the BRI debt crisis. They can help those indebted countries to coordinate with one another, to improve transparency, and to enable these borrowers to negotiate with Chinese creditors as a group instead of bilaterally.
For the going forward, IMF should also establish a clear criteria for those distressed BRI borrowers to meet before they can receive new credit facilities from the fund. This criteria should get approval from its board members and China is also a member. If there is any conflict that it should be overcome.
We have to know that this kind of funding is not something that China invented. The Western world began by exploiting the third world centuries ago. Being the predators, they built their empires and brought painful experiences to those natives. They created debts that they couldn’t pay and we have seen the latest ones in 1980s in the Latin American countries, also known as the “lost decades.”
We will report after Beijing’s Belt and Road forum from October 17 to 18. It was announced earlier that 90 countries have confirmed their attendance for this meeting.