OBOR AND CPEC MY PRESPECTIVE

 

OBOR AND CPEC MY PRESPECTIVE

1.                   Govts have and unwritten - what is known as a - "Social Contract" with the population, because of which the population pays its taxes (which pays for the govt) fulfils its duties and in return the Govt guarantees some rights and meets the aspirations of the  population. To take an example, the Mughals and the British ruled India by an understanding that internal strife would be minimised and conditions for free trade would be maintained. Its only when the British started imposing its own products and thereby interfering with the free trade that the freedom mov got its impetus. India of 47 however, expected freedom from internal strife and self reliance while since 80s and 90s growth and prosperity have been incl in our social contract providing an impetus for the govts at all  levels to strive for the same.

2.                   The Social Contract in China - betn the CCP and the population - imposes restns on many areas (which are normally accepted as rights elsewhere) like speech, religion, ownership etc for the population; while in turn the CCP assures a assured employment and continuous improvement of the std of living for the population. This implies that the govt (CCP) has  to keep creating addl jobs for

(a)                     All those entering the employment mkt fresh.

(b)                     All those who lose their jobs for some reason.

3.                   Various research suggests that for this to be maintained, China needs a growth rate in excess of 6 to 6.5%. Historically, failure to maint the social contract led to many a upheaval in the Chinese history. In the modern era, with citizens returning post western education and exposure over the internet, the consciousness of denial of rights is higher, hence, the criticality of maintaining the social contract is also higher.

4.                   Growth implies GDP growth, which is a sum of three maj factors export surplus / deficit, Govt Investment and Consumption and one minor factor i.e. remittances from overseas citizens. With remittances forming a very minor change it is essentially ignored in the calculations.

5.                   A bal economy is one in which all the three components – export surplus, consumption and investment – are equally balanced and displaying healthy growth. The Chinese economy however, has not been so.

(a)                     Till the first decade of the twentieth century, the focus was exclusively on export surplus. China in this period became the bulk of manufacturer of the world by producing very cheap. Production costs were kept down by: -

(i)    Keeping workers wages low.

(ii)  Cheap loans to factories (especially state run) which in turn implied very low interest rates on savings.

(iii) Non availability of indl investment options thereby ensuring large savings being avlb to banks despite low interest rates.

(b)                     This however, led to certain inefficiencies being built in the sys. The prominent ones being: -

(i)    Combination of low wages and lack of investments led to lack of surplus income for the population which in turn was detrimental to consumption by the public at large.

(ii)  As most of the preferential loans were given to ‘State Owned Enterprises’ (SOEs), they were allocated for reasons other than market efficiencies. This resulted in build up of a large No of Non Performing Assets (NPAs) in the Chinese banks.

(iii) To manage NPAs – an Asset Management Company (AMC) was formed in 1999 to which all the NPAs were transferred; the AMC was supposed to recover the loans and return the money in 10 years i.e. 1999. This managed to clear up the banks bal sheets however, when the money was to returned in 2009, it was found that the loan rec was less than 20%.

(c)                      This model suffered a setback, when the US and Europe went through a financial meltdown. Suddenly, the buyers were not able to purchase any longer. This necessitated a need for China to diversify its markets and its growth model. However, very few countries elsewhere had the buying power to absorb China’s production.

(d)                     Hence, GDP model was then adjusted to incl investments. This was done by fuelling large loans from banks to infrastructure companies. This loosening of the purse strings of the banks was done when

(i)    More NPAs between 1999 and 2008 had already built into the sys.

(ii)  The money due from AMCs was not being returned.

(e)                     To clear up the bal sheet of banks once more: -

(i)    The new NPAs were again transferred to the AMCs. This enabled the banks to clear their bal sheets, raise more funds and in turn fund the infrastructure investment drive.

(ii)  The tenure of the AMCs was again increased by another 10 yrs i.e. they now had to return the loans by 2019.

(f)                       Post 2009, suddenly there was news of large scale infrastructure constr in China – flyovers, bldgs, towns etc. However, this drive led to a lot of corruption. Under the Chinese governance sys, the provincial administrators are given tgts to meet but little resources. The latter have to be raised by them on their own. In this ph, they borrowed funds from the banks, acquired land cheap, built infrastructure and then sold them at much higher prices. Loss making SOEs also resorted to the same. Individuals and party officials too made use of the opportunity to make money for themselves. This worked perfectly till the property prices were rising, but post 2013 these also crashed. Stories of ghost towns of China – with apartments, rds, all facilities and no one to live in them – were in the media. This led to NPAs of the banks. The quality of these NPAs was even more worrying, as the provincial govts were also defaulters for large amounts.

(g)                     2013 also brought into focus another inefficiency built into their sys – Chinese exports till then comprised a large part of basic goods (like steel, cement etc) or low tech consumer products. Post 2008 meltdown, there was a surplus of infrastructure products. However, instead of reducing the surplus, the investment drive only built addl capacity into the same. Post 2013, this surplus had reached unmanageable levels. Simultaneously, post 2008, with an aim to shift from low tech products to high tech products, a large No of Chinese students were sent to the west to study science and maths. By 2013, they had started returning having firsthand experience of the liberties and freedom in the west.

(h)                     The third leg of the GDP – consumption – then came into focus. For the first time the Chinese officials started acknowledging the importance of the local population being able to absorb a large part of the production, to keep the economy healthy. But consumption can only come from a surplus income of the population – something which they can spare after meeting the essential reqmts. To give the population an income surplus, the options were: -

(i)    Raise wages, this however would have made Chinese exports less competitive at a time when the export surplus was already down.

(ii)  Raise savings interest rates, however, this would have made loans more expensive and with banks already struggling with NPAs it could have threatened the economic backbone.

(iii) Give the population alt investment opportunities – stock markets, debt markets, commodities trade etc.

(i)                       The last option was followed and sometime in end 2013 trading was liberalised in commodities especially precious metals and stock markets were established. However: -

(i)    The liberalised trade in precious metals was used by corrupt party officials and influential people to siphon their wealth abroad. At one point in 2016, China was losing close to 100 billion dollars daily – leading to restriction being imposed on it again.

(ii)  Stock markets to be successful had to attract more funds, which in turn would come only if they were attractive. In the absence of quality listings, once again funds were routed from the banks to the SOEs into the stock markets. This worked for a while as the rising Chinese stock markets attracted many an investor and trader. However, their quantities were never sufficient enough to overcome the Chinese bank / SOE funds. When the investors anticipated their reduction / withdrawal they withdrew their money leading to a major collapse in the Chinese Stock markets in 2015.

6.                   It is not that the Chinese Govt did not have the resources to meet the challenge. By this time it had the largest foreign exchange res in the world. However, the problem that it faced in this was: -

(a)                     Most of the res were in dollars while the debt and consumption boost was required in local currency. Conversion – either by selling foreign exchange or by printing more yuan – would only lead to more money following the same No of goods and in turn inflation.

(b)                     Most of the res were held in US bonds, whose interest rates post the 2008 meltdown were close to zero i.e. much less than the inflation. Hence, they too were losing  value.

7.                   Simultaneously, post the 2008 meltdown, China was working feverishly to diversify its trade and look for addl trade partners. In this quest, Africa, South America and Australia emerged as the maj sources of raw material, while SE Asia, Russia and Europe emerged as the possible markets. However, infrastructure issues hampered trade with all.

(a)                     Sea trade, was always under threat from the island chains on its east necessitating an aggressive effort to control the South and East China Seas.

(b)                     Bypassing the Malacca dilemma became an essential imperative both for seeking supplies from the Indian Ocean and to route exports to it.

(c)                      Lack of road connectivity through the Central Asian Region forced it to depend on the sea route resulting its exports to be subjected to: -

(i)    Two bottlenecks of Malacca and Suez Canal apart from traversing the troubled waters of SE Asia and Gulf of Aden.

(ii)  Multiple transhipments involving switch over to varied modes of tpt thereby increasing cost.

(d)                     Lack of access to inner Africa thereby hindering China’s ability to extract resources from there.

8.                   Hence, in 2015 the Chinese were faced with a sit wherein: -

(a)                     The GDP was falling and – unless the trend was reversed – was likely to reach a level where maint the social contract was looking difficult. For GDP growth – exports though still strong had weakened from earlier levels, investments had reached their limits and consumption had not picked up.

(b)                     A large surplus existed in the infrastructure industries (especially cement, steel and construction) which needed to be absorbed. The issue was not economic alone as shutting down excess capacity would lead to job losses and in turn threaten the social stability.

(c)                      A portion of the youth had returned having experienced the freedoms and liberties in the west.

(d)                     Debt levels were already high (some believed reaching unsustainable levels) and a large part was coming up for payment post 2019.

(e)                     Foreign reserves holdings were at record high however: -

(i)    Neither could they be paid to repay domestic debt nor for fusion of capital into the domestic industry.

(ii)  The value of holdings was reducing due to the abysmally low interest rates in the west.

(f)                       Lack of adequate infrastructure hampered its trade diversification efforts.

9.                   In face of the above, China initially announced support to a large No of Infrastructure projects especially in Africa. These included: -

(a)                     Central corridor connecting Dar es Salaam in Tanzania to through Kenya, Uganda, Rawanda and Burundi to the Great Lakes region of DR Congo.

(b)                     Northern Corridor connecting the Kenyan port of Mombansa to Ituri region of DR Congo through Uganda, Rawanda and Burundi.

(c)                      Ethiopian surface transport system.

(d)                     Pipeline Infrastructure in East Africa.

10.               Later, One Belt One Road (OBOR) initiative was announced. The same was later renamed as the Belt and Road Initiative (BRI). It basically comprised of the following: -

(a)                     Road Corridors

(i)    New Eurasian Land Bridge from Western China to Western Russia through Kazakhstan.

(ii)  China Mongolia Russia Corridor from North China to East and South China.

(iii) China West Asia Corridor from West China to Turkey and later to be extended to Western Europe.

(iv) China Indochina Peninsula Corridor from South China to Singapore.

(v)  China Myanmar Bangladesh India Corridor connecting Myanmar to South China and India.

(vi) China Pakistan Corridor from Western China to Pakistan coast.

(b)                     One maritime silk route from the Chinese Coast through Singapore to Mediterranean. The projects along this basically consisted of development of ports which can be used by large merchant fleets as refuelling stops. Their utility for Naval vessels is left unsaid.

11.               The focus of above shows that the areas selected were those which facilitated: -

(a)                     China direct access to the Indian Ocean Region thereby bypassing the Malacca Dilemma.

(b)                     Facilitate move of its production by road and railway till Western Europe, Russia and SE Asia.

(c)                      Provided port facilities to its Naval fleet and merchant shipping.

(d)                     Most of the areas were those: -

(i)    Who could not themselves invest in such massive infrastructure bt would benefit from it.

(ii)  For various Geo Political reasons international funding was not available to them.

(iii) Lacked the technical expertise to build the proposed infrastructure themselves.

12.               Later fine print and limited implementation experience showed that this was being implemented through: -

(a)                     Tied loans from China – in that while loans were provided by China the same could be used only to give contracts to Chinese companies, who in turn would employ only the Chinese workers. This is contrary to international funding norms wherein loans are given for a project and the nation receiving it is free to choose its implementation contractors.

(b)                     The loans were at rates in excess of 6 – 7%. This was far in excess of the international norms of 1 – 3% from other international bodies.

(c)                      In the event of the host country being unable to repay the loans, the loan amounts were to be converted into equity held by China.

13.               This therefore enabled China to: -

(a)                     Make use of its foreign exchange reserves and earn interest much higher than it was earning in US bonds.

(b)                     Manage ownership of critical assets through equity ownership, which can later be used both in peace for trade facilitation and for move and support of assets in war.

(c)                      Re-route funds to the loss making infrastructure companies thereby making them profitable and enable them to repay their NPAs.

(d)                     Absorb the surplus capacity of infrastructure industries.

(e)                     Create jobs for its population.

14.               CPEC is essentially a part of the above, just one of the six road projects. While details of its projects etc are available, certain aspects which both the Govts are not giving clarity on need to be highlighted. These include: -

(a)                     Its funding has been revised at least three to four times from 40 billion dollars to somewhere around 64 billion dollars now. The final amount is still not clear.

(b)                     How Pakistan is going to fund its part of the project is still not clear. Pakistan Govt is yet to make the details public.

(c)                      The interest rates on the loans given by China, for its part of the project are not known. Its affect on the budget of Pakistan in the subsequent years needs to be studied.

(d)                     Conditions to be met in the event of Pakistan failing to repay the loans are again not known.

(e)                     The subsequent profitability of the projects. It has been pointed out by many commentators how: -

(i)    The electricity produced would be nearly four times what is normally available in Pakistan (though largely unavailable due to shortages) and the inability of the common man to pay for it.

(ii)  The road and railway network would essentially bypass the existing industry of Pakistan.

(iii) Pakistan did not have the products to export from the ports.

(iv) The dams being built would inundate agricultural lands held by influential landowners, who are likely to resist it. This phase is likely to start from early 2020.

(f)                       All in all unless India joins the project and buys its products (from electricity to passage for exports and imports), the economic viability of CPEC is highly questionable.

15.               The major implications of the project for India include the following: -

(a)                     Overall the OBOR / BRI creates a diplomatic space. Unless an alternate is provided it would embolden the recipient countries to China, maybe even force them to hand over critical assets (e.g. Hambantota port) to China.

(b)                     Increased connectivity to Central and South Asian countries would be available for trade and access to resources there.

(c)                      CPEC runs through territory claimed by India and endorsing it may reduce / eliminate India’s claim on it.

(d)                     India does not gain economically from any of the projects which are part of BRI leave alone CPEC. Moreover other South Asian countries look towards guidance towards India on their own approach to the project.

(e)                     It would not only enable China a foothold in the Indian Ocean but also allow it to establish its hegemony in Pakistan. Some commentators are calling it the East China Company.

(f)                       It would facilitate move of military transport and personnel if China and Pakistan so desire, and would be detrimental to India.

(g)                     The ports being built, can be used to interfere with Indian trade in the event of a conflict.

(h)                     The mega dams being built in PoK can transform the hydro dynamics of the region.

(i)                       It will dwarf the Indian Chabhar initiative and make us dependent on Pakistan for trade with Afghanistan and Central Asian Region.

16.               The only good I see in the project that it will economically bankrupt Pakistan even more and to an extent where even China will not be able to fund it. Moreover the inundation of land in Pakistan may at some stage create a movement against the existing Pakistani establishment thereby changing their overall approach to India and other nations.