IITM CSC Special Report No. 3 13th February 2015

China’s New Silk Road: Foreign Policy, Security and Economic Implications

Kalyani Subbiah, Intern, IITM China Studies Centre

Introduction

The Chinese government’s ‘New Silk Road’ (NSR), a global economic, strategic, and cultural project, aims to

boost international connectivity and trade flows by reviving the ancient Silk Road system. There are two parts

to the NSR: a land-based Silk Road Economic Belt and a sea-based 21st century Maritime Silk Road.

President Xi Jinping’s vision of the ‘Chinese dream’, calls for the ‘great renewal of the Chinese nation’.1 The

‘Silk Road’ narrative is contextualized in a historical period when China was the largest economy in the world

and the centre of global trade. Building on this, the New Silk Road aims to realize the Chinese dream on a

global scale.

Figure 1

(Silk Road Economic Belt – red Maritime Silk Road – blue)

Source: Xinhua. Available at:

<http://www.xinhuanet.com/world/newsilkway/index.htm > [Accessed 19 January 2009]

Xi introduced the Silk Road Economic Belt (SREB) in a speech at Nazarbayev University, Kazakhstan in

September, 2013. He laid out five objectives for the SREB:

1. improved communication flows and regional integration;

2. increased connectivity;

3. facilitating trade and investment;

4. promoting local currencies and:

5. strengthening people-to-people exchanges.2

Following this, Xi Jinping unveiled his vision for the Maritime Silk Road (MRS) in a speech at the Indonesian

Parliament in October, 2013.3

The above map released by Xinhua shows the Silk Road’s paths and the main cities in its trajectory.

According to the map published by Xinhua, the SREB begins at the point where its ancient counterpart began

– Xi’an, and proceeds westward through Lanzhou, Urumqi (Xinjiang), and the border city of Horgos in China;

the Central Asian republics (Kazakhstan [Almaty], Kyrgyzstan [Bishkek], Uzbekistan [Samarkand] and

Tajikistan [Dushanbe]), Iran [Tehran], skimming through the north of Iraq and Syria, and then passing

through Turkey [Istanbul], then swinging north through the East European republics of Bulgaria, Romania,

through the top of Moldova, mid-Ukraine, Belarus, Russia [Moscow], then swinging back through Poland,

Germany [Duisburg], Netherlands [Rotterdam], Belgium, East France, Switzerland, finally ending in Venice,

Italy.

The Maritime Silk Road begins in the Eastern ports of China [Fuzhou, Quanzhou, Guangzhou, Zhanjiang,

Haikou] followed by Vietnam [Hanoi], the Malacca Strait and Malaysia [Kuala Lumpur], Indonesia [Jakarta],

Sri Lanka [Colombo], India [Kolkata], after which it runs through the Indian Ocean to Kenya [Nairobi], then

tunnels through the Persian Gulf and the Suez Canal to reach Greece [Athens] before ending in Venice, Italy.

Both routes confluence at Venice. The leaderships of all involved countries have expressed their commitment

to the NSR.

Some ongoing projects may be integrated with the NSR such as the Bangladesh-China-India-Myanmar

(BCIM) corridor and the China-Pakistan Economic Corridor (CPEC).

The New Silk Road project is currently a mass of bilateral infrastructural investment and trade deals between

China and the involved countries or regional organizations. However, no clear plans of the initiative have

been released so far, nor has a Chinese or international organization/forum been set up for the NSR. In

November 2014, Xi Jinping created a flutter by announcing $40 billion for a ‘Silk Road Fund’. In October,

2014, China also led the establishment of an Asian Infrastructure Investment Bank (AIIB) with an initial

capital of $100 billion, (It is expected to pledge up to $50 billion, and has pledged $41 billion so far). This is

apart from the New Development Bank (BRICS) set up with an initial capital of $50 billion (Chinese

contribution - $10 billion)4 in July, 2014.

Analysis

The NSR is a set of bilateral Chinese foreign assistance deals with involved countries through direct provision

by or joint ventures with Chinese State-Owned Enterprises (SOEs), and financial assistance through grants,

interest-free loans and concessional loans for the construction of transportation and energy infrastructure to

aid trade flows and promote economic growth. In form and possible outcomes, it has been compared to the

Marshall Plan5 with which the US assisted European reconstruction post World War-II and earned the

collective goodwill of the European countries.

The Chinese government has utilized infrastructural incentives to influence other countries ever since its rise

as an economic power, and this strategy is also used by other aid providers like Japan. However, the Silk Road

is a grand plan for bilateral infrastructural provision, envisioning a world order innovated by China and based

on ‘win-win cooperation’.6

China’s ‘Economic Statecraft’

Chinese official sources7 stress that a ‘multipolar system’ is emerging, implying a decrease in the relative

power of the United States and the rise of Chinese influence. Foreign policy commentators attribute the NSR

strategy to China’s frustration at being denied decision-making power proportional to its size at the Bretton

Woods institutions.8 They further point to the exclusion of China from the most significant free-trade area

currently in negotiations – the Trans-Pacific Partnership (TPP).9 Hence, the NSR and the AIIB, which focus

on South-South cooperation or cooperation between developing countries, are viewed as an alternative to the

US-led initiatives. The power struggle between the US and China became evident with the AIIB’s launch in

November 2014 when the US successfully lobbied and prevented Australia and South Korea from joining the

bank.10 However, Chinese official sources have repeatedly denied that the NSR and AIIB aim to replace

existing institutions or create a ‘sphere of influence’.11

From 2010-2012, the largest proportion of Chinese foreign assistance went to infrastructure (44.8%),

amounting to 6.46 billion USD.12 This is double the US’s contribution of 3.67 billion USD or 5.1% of its total

foreign assistance in the same period.13 Japan spent 4.35 billion USD or 41% of its foreign assistance on

economic infrastructure in 2012 alone.14 Hence, it was the largest infrastructural aid provider. This will

change as Chinese infrastructural aid increases massively in the present and coming years due to the

disbursing of the Silk Road fund of 40 billion USD.

Figure 2: Composition of Chinese foreign assistance (2010-2012)

Source: Information Office of the State Council of the People's Republic of China, 2010. China’s Foreign Aid

(2014) (Xinhua) [online] Available at: <http://news.xinhuanet.com/english/china/2014-

07/10/c_133474011.htm>

[Accessed 19 January 2015].

Figure 3

Source: Foreign Assistance Sectors. ForeignAssistance.gov. [online] Available at:

<http://www.foreignassistance.gov/web/ObjectiveView.aspx> [Accessed 19 January 2015].

These infrastructural projects appear to export China’s investment-driven growth story, thereby acting as a

projection of its soft power. Receiver countries favour infrastructural aid that induces direct, tangible

economic benefits over social infrastructure and humanitarian projects, which have no immediate gains

(unless the country is in a humanitarian crisis). Chinese external infrastructural projects are compared to

‘carrots’ and its policy of using its economic clout to extend or withdraw infrastructural aid to manipulate

other countries’ foreign policies to China’s benefit is termed ‘economic statecraft’ 15 . For example,

Philippines has been excluded from the MSR (despite Manila being a vital entrepôt of the ancient maritime

route) because it approached the Permanent Court of Arbitration on the South China Sea dispute, against

China’s wishes.16

Notably, China has included Russia [Moscow] and Iran [Tehran] as focal points of the SREB and pledged to

assist in the expansion of the Suez Canal with Egypt17, which is governed by a military dictatorship

condemned by the West. In its White Paper on China’s foreign aid, 2014, Beijing stresses that its foreign

policy entails “the principles of not imposing any political conditions”, and “fully respecting their (countries’)

right to independently choose their own paths and models of development”18. Hence, it develops close

relations with those countries either shunned or ignored by the OECD by extending ‘carrots’ to gather support.

Geopolitics

The NSR runs through three contentious regions of major geopolitical significance to China- Central Asia, the

Indian Ocean, and the South China Sea. Central Asia contains huge oil and gas reserves needed to feed

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US- Foreign aid for Infrastructure by year

China’s growing energy appetite and poses security risks due to its proximity to the conflict-ridden Xinjiang

province and former Taliban strongholds. In Central Asia, high infrastructural investment from China

extended as part of the Silk Road Economic Belt, by the construction of oil and gas pipelines and a China-

Europe railway, has been successful in developing closer relations between the republics and China. This has

been assisted by the economic collapse of Russia, the main contending power, following the slump in oil

prices and Western sanctions.

In the Indian Ocean, China is developing the Hambantota and Colombo ($1.4 billion)19 ports in Sri Lanka, and

funding an international airport and bridge in Male, Maldives, as part of the Maritime Silk Route. It has

established exemplary relations with the Indian Ocean countries, strengthening its stronghold in what is

usually seen as India’s backwaters. India views increasing Chinese influence in the Indian Ocean as a security

threat, enforced by the theory of ‘String of Pearls’ or Chinese naval bases metaphorically choking the country.

For example, in October and November 2014, Chinese submarines docked twice at the Colombo port, with the

permission of the Sri Lankan government, despite repeated warnings from New Delhi.20

The MSR may face challenges in Sri Lanka due to the election of Maithripala Sirisena, who alleged during his

campaign that Chinese foreign investment was catering to the rich, would indebt Sri Lankans, and "our

country would again become a colony and we would be slaves."21 New Delhi is hopeful that Sirisena’s

election will result in closer ties with India. However, it is uncertain whether Sirisena will actually implement

measures to reduce Chinese investment. The Sri Lankan government approved the Colombo port city project

without a promised environmental impact assessment to purportedly avoid a “misunderstanding” with the

Chinese government, in February 2015. Similar policy challenges arise in Thailand and Burma due to

resistance to Chinese immigrant construction workers, who locals believe deny them job opportunities, and

citizens in Sri Lanka and Mexico are suspicious of graft in awarding projects to Chinese investors. These

could fuel the agenda of opposition parties and people’s movements, creating pressures on governments or

enforcing regime change as in Zambia (September, 2011)22, both resulting in counterproductive outcomes of

the NSR initiatives for China.

The China-Pakistan Economic Corridor between Kashgar [Xinjiang] and Gwadar [Balochistan] was launched

in December 2014 to reduce the distance travelled by oil imports to China from the Strait of Hormuz.23 The

China-Pakistan Economic Corridor will reduce China’s dependence on fuel imports through the Strait of

Malacca, improving its energy security, because it harbors fears of the US blocking the Strait of Malacca to

cripple its economy. China also signed deals to invest 45.6 billion USD24 in energy and infrastructure over the

next six years in Pakistan, further enhancing their strong relationship as ‘all-weather’ friends. India is wary of

the corridor’s path through Pakistan-occupied-Kashmir and a strong Pakistan-China alliance.

In the ASEAN region, China is beginning to build the Kunming-Singapore highway in Vietnam, Laos and

Myanmar25, though its worsening relations with Myanmar have stalled the project in the country. It has

pledged infrastructural aid for Indonesian President Joko Widodo’s plan to make Indonesia the ‘world’s

maritime axis’ by the construction of “sea highways along the shores of Java…. deep seaports and logistical

networks as well as developing the shipping industry and maritime tourism”.26 It is investing up to $2 billion

in Malaysia’s Kuantan port27, and has signed a memorandum with Thailand to modernize its national rail

network28. Due to strained relations, Vietnam and Philippines have not been included in the MSR so far,

though Chinese officials refute this claim.29

In the South China Sea, China has advocated a ‘dual track’ approach, in which territorial issues are only

negotiated through bilateral talks between China and the concerned countries. By extending large amounts of

infrastructural aid to build the MSR, China hopes to disincentivize the ASEAN countries from enforcing their

claims forcefully against China through goodwill by gratitude and threatening withdrawal of aid (or ‘carrots’).

The MSR has evoked direct competition for influence from Japan and India. The Indian Ministry of Culture

launched ‘Project Mausam’, which ‘aims to re-connect and re-establish communications between countries of

the Indian Ocean world, which would lead to an enhanced understanding of cultural values and concerns;

while at the micro level, the focus is on understanding national cultures in their regional maritime milieu’30 in

September 2014. However, Project Mausam does not translate into economic or strategic outcomes and

remains a cultural project. Hence, it is not a major contender to the Maritime Silk Route.

Following China’s ‘carrots’ to countries on the NSR, Japan has increased its infrastructural aid to ASEAN

countries (with an aim to triple Japanese infrastructural imports by 260 billion USD), Sri Lanka (Abe was the

first Japanese PM to visit Sri Lanka in 24 years and pledged a $330 million Japanese development loan for a

passenger terminal at the Colombo airport31), India (Japan provided 52% [1.47 billion USD] of India’s total

aid in 201332 and pledged to invest 34 billion USD in summit talks with Modi33), Bangladesh (5.7 billion

USD for infrastructure projects, followed by Bangladesh’s support for a Japanese seat at the UN Security

Council)34 to prevent cession of influence and power to China. Japan’s interest is to maintain free shipping

lines for trade and fuel imports, due to fears of Chinese control in the geopolitically vital Indian Ocean and

South China Sea.35 India increased its aid allocation to Sri Lanka from Rs. 2.9 billion to Rs. 5 billion in 2013-

14, and also to neighbouring countries such as Afghanistan, Nepal, Bhutan and Bangladesh36 (however, India

does not provide Pakistan any aid). Chinese aid flows have hence fuelled competition between China, Japan

and India, to the benefit of the receivers and global infrastructure.

An oft-cited Asian Development Bank study estimates Asia’s infrastructural requirements at $80 trillion.37

Developing country governments do not possess sufficient capital or technology/expertise for infrastructure

provision. Yet, infrastructural aid is sidelined by poverty-oriented Western aid providers, despite its multiplier

effect on economic growth. The Chinese government can therefore gain foreign policy benefits and de facto

global economic leadership by providing infrastructural aid for the NSR.

Improvements in global infrastructure will cut export/import times and costs, boosting trade flows and the

sluggish global economy, hence promoting Chinese exports. Further, infrastructural aid utilizes excess

capacity in the Chinese construction sector created by a RMB 4 trillion stimulus package during the 2008

recession.38 The SREB route diverts goods traffic away from the overcrowded shipping ports of the east, and

cuts travel times, crucial for premium priced products, for consumer electronics goods produced in the new

production houses of central and western China travelling to Europe and America.

Challenges to the NSR

However, China, a developing country, faces opportunity costs in spending billions of dollars in

infrastructural aid. The Chinese government’s ‘new normal theory of growth’ aims for qualitative

improvements in the country’s growth, such that it is less dependent on state-financed infrastructure provision

and exports, and more on growth of domestic consumption.39 The NSR works against this objective, fuelling

state-financed infrastructure flows, and worsening the state deficit. Further, state-planned infrastructure

projects risk becoming ‘White elephants’ when infrastructure is not utilized sufficiently as to recover costs,

since they are not driven by market forces.

Chinese infrastructural provision or assistance to host countries is provided by Chinese State-Owned

Enterprises (SOEs). Therefore, foreign assistance also acts as government purchase of SOE services, boosting

their growth and revenues. However, since Chinese SOEs are inefficient firms (See Figure 4), and acceptance

of Chinese aid renders an obligation to contract SOEs, more efficient private and state investors are denied

opportunities, disrupting the free-market scenario.

Figure 4

Source: Fixing China Inc, The Economist [online] Available at:<

http://www.economist.com/news/china/21614240-reform-state-companies-back-agenda-fixing-china-inc>

[Accessed 19 January 2015].

Finally, geopolitics poses significant risks to the project if implemented as on paper. The NSR passes through

conflict-ridden, politically unstable regions such as Iraq, Syria, and Myanmar’s Kachin region, which could

stall its construction and/or frighten businesses from utilizing the route. Domestically, the NSR passes through

the province of Xinjiang, where Uighur and other Turkic groups’ resentment to infrastructural projects due to

perceived unfairness in its skewed benefits to the majority Han Chinese may be exacerbated by the SREB’s

aims to exploit the energy and transport potentiality of Xinjiang with China’s ‘Go West’ policy.

Conclusion

Xi’s assertive foreign policy aiming for the ‘renewal of the Chinese nation’ follows three complementary

strategies. First, the President implements a neighbourhood policy40 by holding regular talks/summits with

neighbouring countries, and by leading and establishing regional organizations. Second, Xi’s New Silk Road,

promises infrastructural aid for regional development, peace and prosperity. The New Silk Road is the most

comprehensive vision of a Chinese world order as envisioned by its government. Chinese leadership of the

NSR is ensured by solely bilateral provision of aid from China to concerned countries, with no multilateral

forums for decision-making. Third, China leads the Asian Infrastructure Investment Bank and is founding

member of the New Development Bank to enable infrastructure provision to developing countries on their

own terms.

With the NSR, China expands its regional influence by infrastructural aid provision to countries bypassed by

Western donors, gaining foreign policy benefits, while stimulating exports, resource imports and the economy.

However, the NSR faces political hurdles and economic risks such as great-power rivalry, political instability,

and domestic economic pressures.

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