In the Chinese economic success model, trade and investment are everything. The Chinese are especially obsessed with investment in infrastructure – arguably their best skill and asset. In shockingly quick time, Chinese cities have transformed themselves, built on the back of trade surplus money, cheap construction labour and heavy lending.
In 2013, Reuters photographer Carlos Berria published two images of the Shanghai skyline, twenty-six years apart from each other. The transformation was breath-taking enough to make it to all over the international press. In 1987, Shanghai’s financial district of Pudong was no more than a little swamp on the east China coast.
By 2013, the same area was packed with skyscrapers, rivalling downtown Manhattan and boasting the world’s second tallest tower – the Shanghai Tower – standing 125 stories high
Infrastructure is more important to the Chinese economy than most people realize on the outside. China’s economy is more dependent on investment spending than any other major economy in the world: In 2017, as much as 45 per cent of China’s GDP came through investment. More than a fifth of that came from out of investment in infrastructure.
With an ageing population and rising wages, the trend for the manufacturing sector has been downward. But the infrastructure sector is still expanding, in terms of share of the GDP.8 There is an obsession with world records too—not atypical of centralised authoritarian regimes. Over the years, China has built the world’s highest railway, largest hydropower project, and biggest water transfer system. A running theme is to keep besting its own records.
But China’s infrastructure mania has lasted long beyond its utility. In the mountainous Hunan province of southern China, a few years ago, there arose the splendid Chishi Bridge – another dazzling infrastructure project on China’s long and enviable list. Meant to connect the mountainous southern parts of the country with the prosperous east coast, the bridge cost some $300 million and ran over two kilometres long.
The local government had borrowed heavily from state-owned Chinese banks in order to finance the project. But as it soon realised, none of the farmers in the area were willing to pay to use the expressway. The project soon ran into debt, leaving provincial officials tied up.
Projects such as the Chishi Bridge have helped push China’s government debt to 73 per cent of GDP, according to the IMF. In the Guizhou province – the worst hit – debt flew as high as 170 per cent by 2018. Household numbers are no better: With heavy investment in swanky new ‘ghost towns’ where no one seems to want to live, Chinese households have racked up a whopping $6.8 trillion in debt.
High debt levels have forced Beijing to start tightening the screws on infrastructure spending at home, leading to a slowdown in economic growth. But Xi Jinping saw an opportunity in the mess: Much of the developing world languishes in poor infrastructure and admires China’s snazzy steel structures. So, if the Chinese can’t build in China, why shouldn’t they build around the world? That was the genesis of the massive Silk Road project – also known as the Belt and Road Initiative.
Building diplomatic ties
In 2013, during state visits to Indonesia and Kazakhstan, Xi launched his grand foreign policy vision to take China’s infrastructure-building prowess to the world. It rode on China’s history as a major destination for traders along the ancient silk route, running from East Asia to Europe. Xi’s plan was to develop highways, railways and maritime ports all across Asia and parts of Africa, involving more than 60 countries and covering two-thirds of humanity. China is supposed to have already spent around $200 billion on BRI projects around the world – from Djibouti to the Philippines – and according to Morgan Stanley, it could spend more than $1 trillion by 2027.
Even outside of BRI, China has been investing heavily in other kinds of infrastructure – from stadiums to hospitals – all over the developing world. According to an Ernst and Young report, between 2014 and 2018, China was the biggest source of FDI in Africa by far, and Chinese investment created more than twice as many jobs as investment from the US.
But this is not free money. Most BRI and other Chinese projects are financed – not through aid – but through low-interest loans from Chinese banks, granted to the receiving country, to pay mostly Chinese firms, employing largely Chinese labour. In some cases, Chinese assistance is paid back by the foreign government in ways other than a direct reimbursement of money – often giving Beijing outsized influence in that country.
Take Angola, an oil-rich country in southwestern Africa. From 2004 to 2010, Angola received $10.5 billion of credit from China’s Eximbank. These subsidised loans were tied to the use of Chinese companies to undertake 70 per cent of the country’s construction and civil engineering contracts and were to be repaid through commodity exports back to China. At the same time, the Chinese Eximbank also announced a $2 billion loan to finance Angola’s infrastructure reconstruction, and Chinese companies duly increased their investments in Angola.
The China Petroleum and Chemical Corporation (Sinopec) acquired majority ownership of several oil blocks and formed a joint venture with Sonangol, Angola’s national oil company. The result: Since 2007, Angola has been one of China’s top trading partners in Africa, and its oil reserves are heavily dependent on Chinese support.
When Indians or Americans invest in a foreign country, it is done mostly through private enterprises and private money. Governments have little say. But Chinese investment is a government-to-government deal. In Africa, for instance, more than three-quarters of all Chinese investment comes from central state-owned enterprises, and even the rest is largely by firms owned by provincial governments, or firms partly owned by the state. The domination of Chinese investment by state-owned enterprises is significant. It means that Beijing is able to use these deals much more strategically than other countries. If India’s potent foreign policy asset is its diaspora, China’s equivalent is that which has enticed mankind ever since its invention: money.
Excerpted with permission from Flying Blind: India’s Quest for Global Leadership, Mohamed Zeeshan, Penguin Random House India.