CASS Scholar Xue Li: The Foreign Affairs Risks for China of “The Silk Road Economic Belt” and “The 21st-century Maritime Silk Road”

This article from the often very intriguing Chinese-language Financial Times website by Chinese scholar Xue Li of the Chinese Academy of Social Sciences discusses the problems China could face in implementing the big foreign investment and development plans of President Xi Jinping.

The growing concerns of many states near China about China’s growing military strength and its behavior in the South China Sea could endanger these plans, warns Xue Li.  Xue Li notes that while for many countries China is their top trade partner, these countries still look to the United States on security issues.   Xue Li sees China’s economic cooperation plans as a response to the US rebalancing to Asia-Pacific.  Xue writes that while many Chinese see the rebalance strategy as an attempt to strangle or contain China, Xue sees the US rebalance as a traditional power balancing and hedging strategy that leave much room for a more productive U.S. – China relationship that is both cooperative and competitive.

 Xue Li’s perspective matches closely the observations by Li Cancong of Beijing Normal University and Ge Yuanjing of Yunnan Normal University  in their June 2015 World Regional Studies 世界地理研究 article “An analysis on the formation and cause of anti-China sentiment in Myanmar” 2015,24(2):20-30   [More details at https://gaodawei.wordpress.com/2015/07/06/chinese-scholars-on-anti-chinese-sentiment-in-myanmar-and-non-interference-in-politics-policy-mean-supporting-dictatorships/ ]

 “Just as the scholar Fan Hongwei has said, Myanmar may become trigger a re-assessment of Chinese thinking on foreign relations. These circumstances are not limited to Myanmar — Chinese investors in Africa and the Middle East face them as well. China is a hot spot in the economies of the countries getting Chinese investment but politically it feels a chill. The unhappiness of local people towards Chinese companies is a big problem for Chinese investment overseas. It is a problem shared across many different Chinese investments overseas. This is a problem that the Chinese government and Chinese companies should reflect deeply upon. Li Chenyang has said that Chinese foreign policy in its relations with neighboring countries should pay attention to the details. The policies of “non-interference in domestic politics” and “separating economics from politics” are the fruit of China’s diplomatic experience. However, as China rises and the world geopolitical environment changes, will the Chinese policy of non-intervention while engaging in economic cooperation remain suitable in the changed geopolitical situation?

“We need to think deeply about this. When considering how to solve the difficulties of Chinese overseas investment, we need first of all to think about China’s current foreign policy and how it needs to be adjusted, and become clear about China’s diplomatic strategy and position. During military rule in Myanmar, the Myanmar people were very unhappy about the dictatorship and the people came to oppose the military government. China according to its “non-interference in domestic politics” policy engaged in economic cooperation with the military government so the Myanmar people have reason to feel that China was the “accomplice” of the military government and helped the military government implement its dictatorship. Therefore, we need to clarify our foreign policy and to make our position clear.”

Perhaps considerations like these will make China want to cool things in the South China Sea. More magnanimity could pay big dividends for China.  Noblesse oblige and all that.

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December 30, 2014

The Foreign Affairs Risks for China of “The Silk Road Economic Belt” and “The 21st-century Maritime Silk Road”  

By Xue Li, Director of the International Strategy Research Office, World Politics and Economics Research Institute of the Chinese Academy of Social Sciences.

[Full translation of  “一带一路”折射的中国外交风险.  Chinese text at http://www.ftchinese.com/story/001059886?full=y ]

[Editor’s Note: This article is the first in a series of articles on “The Silk Road Economic Belt, the 21st-century Maritime Silk Road and the Transformation of China’s Foreign Policy” from the perspective of the author’s research.]

During 2014, the key words for Chinese diplomacy were “The Silk Road Economic Belt” and “The 21st-century Maritime Silk Road” [abbreviated as the “One Belt and the One Road”].   One Belt and One Road has already become the overall strategy for China’s foreign policy.  Over the next eight to ten years, China will gradually implement this policy in the economic, political, military, cultural and other realms.  Academics generally say that 2013 was the year for planning, 2014 was the year for rolling out the strategy and 2015 is the year for its implementation.

Noteworthy aspects of roll-out work during 2014 : in the political and security arenas, the  Conference on Interaction and Confidence-Building Measures in Asia (CICA) and the dual track approach; in the economic arena, several economic corridors (Bangladesh, China, India, and Myanmar; China and Cuba; China, Mongolia and Russia) and an enhanced China – ASEAN free trade area; in basic infrastructure arena several land-sea transportation routes; in the trade arena, the Asia-Pacific free trade area; in the financial arena, the establishment of new bodies (the Asian Investment Bank, the BRICS New Development Bank, the Silk Road Foundation, and the planned Shanghai Cooperation Organization Bank). This mechanisms and concepts were either proposed and established by China or strongly promoted by China.  These measures send a strong signal that China’s foreign policy strategy has changed completely from “keeping a low profile while building one’s capabilities” to the operating principles of “taking an active role” and “take the initiative, start with the surrounding areas, focus on the economy while also paying attention to other matters”.  China’s diplomatic engagement with its neighbors is a particularly important part of China’s foreign relations, perhaps even more important than its great power diplomacy.

Many problems remain to be solved if this strategy is to be successful.   The most important of these questions are:

  • First, what does the US rebalance to the Asia-Pacific mean?  Is it strangulation (also  known as containment) or is it hedging?
  • Secondly, how can we get the acceptance and cooperation of the countries along the Silk Road Economic Belt and the 21st-century Maritime Silk Road?
  • Thirdly, how will China best plan to avoid economic and political risk?

China needs to face these questions about the “one belt and one road”.    These questions about how to evaluate the external environment and adjusting its development strategy are the kinds of questions that China will often need to address during its rise.  The present government, by proposing the “one belt and one road” strategy, drew the roadmap for China’s rise to become an all-round global power.

Should China Re-evaluate the US “Rebalance to the Asia-Pacific”? 

One could say that if there were no US, then the goal of China’s rise would already have been accomplished.  The US strategy of “Rebalance to the Asia-Pacific” was principally a response to the rise of China.  Moreover, one of the goals of the new Chinese government’s “one belt, one road” plan is to counteract the disadvantageous effects the “rebalance to the Asia-Pacific” has on China.

Therefore, China’s judgement about the strategic goal of the “rebalance to the Asia-Pacific” will in large part determine the principles behind China’s response and the methods it chooses to implement them.  If the US is carrying out its “rebalance to the Asia-Pacific” in order to completely strangle (or contain) China, if the “rebalance” is simply the 21st century edition of the Cold War containment strategy against the Soviet Union, then China has no alternative but to oppose that kind of hostile strategy.  This opposition would involve building and expanding alliances, tactics aimed at increasing the number of allied or friendly countries, and gradually expanding its own sphere of influence in order to, starting from China’s immediate surroundings, to gradually exclude, repel and push back US influence.  That is the traditional response of a rising country.

However the response could be different if the goal of the US rebalance to the Asia-Pacific is not to contain China but is instead is meant to send China this message:

  • The US is capable of an all-out confrontation with China but that would be a last resort.
  • First of all the US wants to constrain China, that is, to persuade China to use as much as possible methods for pursing its national interests and peaceful rise that are acceptable to the international community.

This is, in sum, a hedging strategy that combines engagement with keeping one’s guard up.  In that case, there would be a large space for exchanges and cooperation between the US and China as they seek to accomplish their own strategic goals.  “Competition and cooperation” can in this way become a new normal.

Many people give these reasons to argue that the US wants to contain China:

  • They say that US wants to contain China by westernizing China’s ideology and political system;
  • They say that in the security realm contains to contain China by

strengthening US alliances and by supporting countries that have disputes with China,

as well as by embargoing the export of advanced high technologies and weapons to China;

  • They say the US wants to contain China in the economic realm by inducing it to further promote the development of its market economy, and
  • They say that the US wants to contain China in the educational and cultural realms by infiltrate it using exchanges of personnel and training.

All the activities in these areas can, however, are explained under the framework of a hedging policy.  Only the “westernization of ideology and political system” fit the criteria of a containment policy.  However, the US with its beliefs in pragmatic philosophy is simply unable to westernize China. Therefore, we don’t need to worry about the US trying to achieve that goal.  In conclusion, the “rebalance to the Asia-Pacific” is just an embodiment of the old traditional international strategy of the Anglo-Saxon countries.

The essence of Anglo-Saxon strategic thinking is “creating a balance of power”.  What it comes down to is helping weaker states in order to create a regional balance of power and preventing the big power in a region from further aggrandizing itself at the expense of the security and interests of the weaker states.  For the United Kingdom this was the “continental balancing strategy” that it pursued for several hundred years by supporting the weaker parties in order to create a balance of power on the European continent.  If a balance of power already exists then the UK would just be an “inactive observer”.

In fact another way of putting this way of thinking into practice can be seen in the UK colonies.  “Support for an ethnic minority so that it becomes the ruling class” was often seen in UK colonial policy.  After the Second World War, the United States used this strategy as the foundation for its “principles of regional strategy”.  In Europe, it supported Western Europe against the Soviet Union and its Eastern European allies.  In the Middle East, it supported Israel’s opposition to the Arab countries. In South Asia, it supported Pakistan’s opposition to India.  In East Asia, through a string of bilateral alliances (US – Japan, US – ROK, US – Philippines, US – Thailand) it helped many East Asian countries to oppose the socialist countries (such as the China – USSR alliance, the USSR – Vietnam alliance, and the China – DPRK alliance).  We can see this today in the US support for Japan on East China Sea issues and for the four ASEAN claimant states on South China Sea issues.

The United States cannot balance China with the help of the Asia-Pacific countries alone.  The Southeast Asian countries and in particular India need to be involved.  This is why the Indo-Asia-Pacific concept was introduced.  This means building an even larger “Rebalancing to the Indo-Pacific”.   The attitude of India, which itself has ambitions to become a great power, to this US strategy is “I am mostly concerned with my own issues but depending upon the situation I may participate in some aspects of it.”  Japan, ASEAN (and particularly the East China Sea claimant countries) have generally welcomed the US rebalancing strategy.

The Greatest Risk is the Mistrust and Suspicion of Neighboring Countries

In early September 2013, Xi Jinping during his visit to Kazakhstan proposed building a “Silk Road Economic Belt”.  In early October during a visit to Indonesia, he proposed building a “21st Century Maritime Silk Road”.   These two concepts have been steadily gaining support.  Thus far,  30 of the 60 states affected by “The Silk Road Economic Belt” and the “21st-century Maritime Silk Road” view it positively.  That is certainly good news.  There are still many uncertainties however, between talking the talk and actually operating projects and finally reaching the goal of win-win.

Currently China is the most important trading partner of 120 countries worldwide.   China is the most important export market of 70 countries.  This includes most of the countries on China’s periphery.  However, these countries have adopted a dual strategy to serve their interests.  They “rely on China for commerce and on the United States for security”.  The successful implementation of “The Silk Road Economic Belt” and the “21st-century Maritime Silk Road” will depend on the strong support of the countries along these routes.  Therefore, we must persuade the countries along these routes that building “The Silk Road Economic Belt” and the “21st-century Maritime Silk Road” will not harm their security but actually increase it, the economic advantages exceed the disadvantages, and that their culture will not be impacted. Therefore, China needs to think about this question differently.  China needs to look at the “The Silk Road Economic Belt” and the “21st-century Maritime Silk Road” from the perspective of the countries through which it will pass.

A factor of post WW II history is that some of the countries along these routes have built their security on their alliance with the United States.  Japan, ROK, Thailand and Philippines are examples.  Some other countries along the route, such as Mongolia, Singapore and Vietnam, although they are not allies of the United States and have some disagreements with the US, do rely on the US to some extent on security issues.  This can be for a variety of reasons such as no better option is available; not worried about the US claiming their territory; and the practical role the United States plays in maintaining the security of the Asian region. Some of these countries have increased their security and military cooperation with the United States in recent years.  One striking case is the Philippines which in 1990 revised its Constitution and expelled the US military but now is seeking in effect the return of the US military.  An important part of Japan’s important goal of become a normal country is hoping to reduce its dependence on the US for its security.  However, in order to achieve that goal, the nationalist PM Abe has had no alternative but to strengthen the US – Japan military alliance.

Lack of clarity in foreign policy is natural during the process of a country’s rise.  This can easily cause security concerns among its neighbors. These factors have been particularly evident during the process of promoting “The Silk Road Economic Belt” and the “21st-century Maritime Silk Road”.  China has already created a variety of international institutions which are centered upon it.  China has stressed to the great powers that it will not make alliances.  China has taken some measures on maritime disputes that have increased the concerns of the neighboring countries.

For China to accomplish its peaceful rise, it must do all that it can to dissipate the security concerns of its neighbors.  This is the biggest challenge to China’s strategy in promoting its strategies of “The Silk Road Economic Belt” and the “21st-century Maritime Silk Road”.  Perhaps can try addressing the issue with a specific functional approach and building small multilateral security mechanisms such as building for example, a joint fishing moratorium system in the South China Sea,  carrying out joint patrols, and taking part in bilateral and multilateral military exercises.

In the economic arena, China in the course of promoting the “The Silk Road Economic Belt” and the “21st-century Maritime Silk Road” projects chiefly makes use of economic incentives such as investing in factory construction and joint construction of infrastructure so that the countries along with route will share in the fruits of China’s economic growth.  However, some of the smaller countries have their own concerns.  They worry that their countries will become too economically dependent upon China.  They may fear that they will become a new kind of “banana republic” as large numbers of Chinese flood in and fear that increased official corruption will be a result.  These were issues that did not exist or were not very important when the now developed countries made their foreign investments.  China, however, must face these issues.

Another challenge is that some of the countries along these routes fear the environmental side effects of big projects.  Some of these countries fear that large scale investments will change their culture, traditions, and lifestyles.  These are problems that China is groping towards a solution domestically.  Asking China to solving these same problems before large scale foreign investments will be both difficult and hard to avoid.

How to Avoid Political and Economic Risk

States during their rise often seek to build their own political, economic and cultural space.  These spaces are often exclusionary.  Even the US with its policy of rebalancing to the Asia-Pacific seeks to build an exclusionary security and economic system.  However, the systems that China is now building, such as the Asia-Pacific Commercial Ara and the Asia Investment Bank, are open and inclusive and so are morally preferable.

Building its own space and area of influence is part of China becoming a world power.  However, China’s principal advantages are in the economic domain.  The “one belt and one road” are mainly about economic cooperation, including building factories, roads, bridges, ports, airports and other infrastructure as well as electric power grids, telecommunications networks, oil and natural gas pipelines and related projects.  Many people are calling it the “Chinese Marshall Plan”.  The Marshall Plan rebuilt the economics of the developed European countries.  The “one belt and one road” plan, however, promotes economic development in economically backward countries.  More than 60 countries are involved and so its overall implementation will be much harder than was the Marshall Plan.  Speaking frankly, sparking economic development in all the states along the route is beyond the capabilities and responsibilities of any one country.   China must consider the economic risk and the political risk inherent in the implementation of the “one belt one road strategy”.

Reducing foreign exchange reserves and moving out excess production capacity has been seen as domestic economic factors driving the “one belt, one road” strategy.  Accomplishing this through the “one belt, one road” strategy, however, would be very difficult.  If this strategy is implemented hastily, what may result will be enormous projects that, after construction stops midway or after completion, sit abandoned.

“Foreign exchange reserves are the people’s wealth outside of China”. This formulation limits the use of foreign exchange reserves to economic activity outside of China.  However, foreign exchange reserves are not fiscal income. They are a credit for the wealth of citizens or enterprises and are a kind of virtual government income.  Therefore, the three principles for managing foreign exchange reserves are security, liquidity, and profitability with security being more important than profitability.  This is the main reason why China has invested most of China’s foreign exchange reserves in government bonds of the US, Europe or similar countries.

Most of the states along the “one belt and one road” do not have an overall investment climate comparable to that of China or to that of the developed countries in the US and Europe.   In China, the outlook for the return on investments in infrastructure or in the secondary sector is either pessimistic or in some cases money losers.  Taking foreign exchange reserves and investing them in money losing assets would violate the three principles for managing foreign exchange reserves and so must avoid doing this.

How effective could moving excess production capacity overseas be?  Thus far information on such investment projects has not been published so it is difficult to get a sense of the scale of this kind of investment.  We’ll take the classic case of excess capacity is steel production.  If we assume that the demand generated by the “one belt and one road” construction projects will be comparable to the Chinese domestic demand for steel used for railway construction (a very large amount) then that comes to 21 million tones or only 7% of the 2014 excess steel production capacity of 274 million tons.  This would only have only a limited effect on reducing excess construction capacity.  We can conclude that China has a very large excess production capacity and it would not be possible to solve the problem by transferring it to the countries along the routes.  “Closing them down in place” very likely is the only effective solution.  This is painful but unavoidable.

In conclusion, its very large foreign exchange reserves are the necessary result of irrational economic structures and irrational economic policies.  The severe excess capacity is strongly related to the hastily put together 4 trillion RMB (Note: USD 640 billion) economic stimulus measures.  As a very large economic entity, China’s economic problems can generally only be solved by making internal adjustments.  We cannot pin our hopes on the undeveloped countries along the two routes.

China must not ignore the political risk in implementing the “one belt and one road”.  During the next stage, China should prioritize research that can determine which countries are politically stable, have economic potential, and are willing to cooperate with China.  These are the countries which will become the strategic points for building the chain that will become the “one belt and one road”.

The “one belt and one road” strategy is in competition with the “rebalance to the Asia-Pacific” strategy and so can show the comparative state capacities of China and the US.  If China implements its strategy well, it may be able to transform the “Asia-Pacific” of the US into “China’s neighborhood”.  However, if the strategy is not handled well, the “one belt on road” could become a case of   “China’s problems are America’s opportunity”.

However, the “one belt and one road” is an attempt and a pathway for China to change from being a regional power with worldwide influence to a “world power with comprehensive power”.  China has no better options.  It must confront the difficulties in these plans and work towards the best possible result.  The plan has already been set but the details will determine its success or failure.  Everyone recognizes that China is a country with great overall strength.  However, in implementing this strategy, it will need to choose where to concentrate its efforts. China should first determine its capacity before moving ahead to implementation, and to avoid become the “Development and Reform Commission” and the “Ministry of Finance” for the states along the two routes.

(Note: This article represents the personal views of its author.)

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