Some significant shadows overhang China’s Belt and Road Initiative (BRI) despite the success of the Beijing conference where plans for the next phase were deliberated, an influential research house has said.

The Belt and Road Initiative is a web of hard infrastructure, ports, power, rail, roads and other infrastructure spanning Asia, Europe and Africa which will drive Chinese trade and exports. This is the first issue to be watchful of, Peter Cai, a research fellow at Australia’s Lowy Institute, told Asia Cargo News.

China is motivated by a number of different strategic drivers. There is the need to open up and link with overseas markets and set up infrastructure it controls, often in neighbouring countries. Underscoring this are soft power drivers such as exporting Chinese technological and engineering standards, and maybe even the Chinese language itself.

However, China is also motivated by pressing domestic economic challenges. Chief among them: what to do with excess steel and cement capacity but also how to tackle growing inequalities as the coastal provinces power ahead while the interior flounders.

“The Belt and Road has a very large domestic component,” Cai said in a phone interview with Asia Cargo News. “Many people are missing this very important domestic issue.”

One way forward is for a lot of building to be done in China first, Cai suggested, but the strategic and economic drivers are not always easy to reconcile. This will become more evident and possibly more fraught as the initiative proceeds.

Key to this difficulty is the lack of trust between China and some of its neighbours. The pick of a good bunch here is India, whose absence was highly visible at the recent Beijing Summit. “Quite clearly, India is against having anything to do with the Belt and Road Initiative,” said Cai.

India’s motivations are quite simple. While some India corporates like the idea and see advantages in taking part, India doesn’t fancy being involved unless it’s significantly consulted – and left without Chinese steel and concrete.

This is a widespread idea within India, says Cai, but in this respect, India may be alone, as many other countries enthusiastically attended the Beijing Summit.

Xinhua, China’s official news agency, reported that all G7 countries sent representatives to the summit, which means that even those countries leaning towards isolationism, such as Brexit Britain and Trump’s America, were there. Even countries that didn’t need to be there, such as far-off Mexico and oil-rich Persian Gulf states, were in attendance. Let there be no doubt about it, there is serious global interest in the Belt and Road Initiative.

Part of India’s pique is Pakistan’s Gwadar Port, which is the ocean-end of the China-Pakistan Economic Corridor (CPEC). Not only has this touched on India’s sensitivities about sovereignty as the route goes through the disputed Kashmir, it brings into question the issue of security.

India has big questions over how safe some links in the corridor will actually be. The Pakistani military has promised to deal with this by raising a special force, some 12,000 strong, to protect CPEC projects.

“The challenge in Pakistan is the security situation,” said Cai, adding the South Asian country was “not unique” in this respect.

This should give many pause for thought. Potential flashpoints surround China, including North Korea, the South China Sea and Iran, as well as insurgencies in Myanmar, Afghanistan and elsewhere. While India’s huff is a storm in delicate diplomatic tea cup, what Pyongyang and Taliban remnants might do is another, very different problem.

But this is also part of Cai’s critique that the Belt and Road is seen in geopolitical terms when, really, it should be seen as an economic one. Beyond the issue of China’s surplus in certain basic products, its neighbours and those in the initiative don’t bring much to the counting table. “Two-thirds of Belt and Road countries have sovereign debt junk ratings,” said Cai. (Some 68 countries have so far signed up.)

Many of the financiers doing China’s bidding are state-owned entities which will ultimately finance many of the projects. The funds, which are abundant given China’s surplus, are matched by cautious, almost hesitant, lending, given the lack of decent projects available.

A chief investment officer from one of China’s largest state-owned financial institutions told Cai: “I prefer to invest in places like Canada and Australia, where I can get safe and decent returns. However, where I have been ordered to invest in [Belt and Road] countries, I will only allocate the minimum amount.”

Pointing to China’s budget surplus, Cai is skeptical of the suggestion that the Belt and Road could trigger a financial crisis. “I don’t think it will [but] it can add burdens to Chinese financial institutions, which are already exposed to debt,” he said.

This can already be seen in the reluctance of institutions to finance projects such as high-speed railways in sparsely populated areas and in Thailand, where a dispute over the interest rate (2% against 2.5%) has stalled rail lines and, with them, the Belt and Road.

By Michael Mackey

Southeast Asia Correspondent | Bangkok