Stratfor: China builds a new Silk Road for the 21st century

Summary: As we watch the candidates babble in the Campaign2016 circus, we can look across the Pacific to see a rational geopolitical strategy, something America has not had for decades. Here’s a note about China rebuilding its fabled Silk Road — revised for the 21st century.

Stratfor

The Grand Design of China’s New Trade Routes
Stratfor, 24 June 2015.

Forecast

  • Over the next several years, China will devote significant resources to the construction of Eurasian trade routes under its Belt and Road Initiative.
  • As transit routes come online, the proportion of Chinese maritime trade passing through South China Sea chokepoints will shrink.
  • The new infrastructure built as part of the Belt and Road Initiative will support China’s economic rebalancing by opening new markets, generating demand for higher value-added Chinese goods and helping China build globally competitive industries.
  • Improving transit routes will lead to new security and political risks, and China’s efforts to mitigate these threats could create frictions in the very areas where Beijing is trying to diversify its trade routes.

Analysis

In 2013, China’s President Xi Jinping proposed a plan to stimulate development in Eurasia by constructing what he called the Silk Road Economic Belt and the 21st Century Maritime Silk Road — revivals of the overland and maritime trade routes that once connected China and Europe. Since then, the “Belt and Road Initiative” has become a fixture in official Chinese discussions on both foreign and domestic policy. Nonetheless, the initiative is still loosely defined. Beijing claims there are about 60 Belt and Road countries, but there is no public listing of these countries.

China builds a bridge in Pakistan
China builds a bridge near Muzaffarabad in Kashmir. SAJJAD QAYYUM/AFP/Getty Images.

Although the initiative clearly centers on infrastructure investment, Chinese media coverage offers no straightforward definition of what projects count as part of the program. A pledge to install signs and information kiosks in Armenia is said to be under the banner of the Belt and Road Initiative, as is a $46 billion infrastructure investment package that Xi promised to Pakistan in April.

This lack of clarity makes it difficult to see what is special about the Belt and Road Initiative. After all, China has long been involved in infrastructure construction across Eurasia. However, with the Belt and Road Initiative, China has for the first time explicitly unified all of its infrastructure investments in Eurasia under a single coordinated plan. The initiative should not be understood as merely as the sum of its infrastructure projects. Rather, it should be seen as a strategy with a clear set of ends, ways and means, to be evaluated on its ability to support China’s geopolitical objectives.

The strategy behind the Belt and Road Initiative is to diversify transit lines, thereby mitigating China’s vulnerability to external economic disruption and reinvigorating China’s slowing economy. China’s ideal would be to link its inland cities to global markets with a diversified network of transit routes and energy pipelines, many of which would take inland routes and serve as alternatives to existing sea-lanes. The name of the initiative, “One Belt and One Road,” is slightly misleading; this will not be a single overland road coupled with a single maritime route. The initiative envisions six corridors across Eurasia, many of which will mix land and maritime components.

Every project built along these corridors under the Belt and Road Initiative will serve both strategic and economic purposes, though some will prioritize one set of goals over the other. However, the overall orientation of the Belt and Road Initiative will be toward strategic objectives.

Strategic Logic

China’s economy is dependent on foreign trade, 90% of which travels by sea. China’s near seas — the Yellow Sea, the East China Sea and the South China Sea — are bounded by what Chinese strategists call the “First Island Chain,” a series of islands (many of which are controlled by U.S. allies) that stretches from Japan to the Philippines to Indonesia. To reach ports on China’s eastern coast, seaborne trade from the west must pass through maritime chokepoints such as the Strait of Malacca (through which 82% of China’s crude oil imports passed in 2013). Passage through these maritime chokepoints is secured by another country: the United States, the world’s dominant naval power.

Maritime trade routes for China

The geographic enclosure of China’s near seas would make it relatively easy for an adversary to disrupt or interdict Chinese trade. China faces many challenges in developing the ability to project sufficient naval power to safeguard seaborne trade as it passes through distant chokepoints. Instead, China must rely on the United States to provide security of the sea-lanes. Although maritime security is ostensibly a public good, China worries that, as a potential peer competitor to the United States, it will not always be able to rely on the United States to protect its shipping.

U.S. war planners have certainly not ignored China’s geographic vulnerability. A 2015 Department of Defense report to Congress on China mapped out chokepoints for Chinese energy imports, a move unlikely to have gone unnoticed in Beijing. In the case of a war between the United States and China, many U.S. strategists favor imposing a distant blockade of Chinese waters. Although the U.S. Navy has unchallenged supremacy over the open ocean, resource constraints — and the risks posed by China’s anti-ship capabilities in its near seas — suggest that U.S. forces would concentrate on blocking the chokepoints.

The Belt and Road Initiative aims to mitigate the risk of maritime interdiction by constructing transit routes along six economic corridors…

  1. The China-Mongolia-Russia corridor, anchored by the Trans-Siberian railway.
  2. The New Eurasian Land Bridge, anchored by a set of railways running from central China (Wuhan, Chongqing and Chengdu) to Europe via Kazakhstan, Russia and Belarus.
  3. The China-Central Asia-Western Asia Corridor, speculated to follow the overland Silk Road Economic Belt as depicted in maps released last year by the state-owned Xinhua News Agency, passing through Central Asia, Iran and Turkey to reach Europe.
  4. The China-Pakistan Corridor, which would extend the Karakoram Highway, which already crosses the mountains between China and Pakistan, and build highway and rail links all the way through Pakistan to the port of Gwadar.
  5. The Indochina Peninsula Corridor.
  6. The Bangladesh-China-India-Myanmar Corridor.

China's 6 economic corridors

In these corridors, China will enhance existing transportation networks, construct new roadways and build intermodal transport hubs and energy pipelines. Alongside these projects will come investment in attendant infrastructure, including power plants and communications technology such as fiber-optic cables. China will not be starting from scratch — it has already built up a patchwork of infrastructure across Eurasia, and much of the Belt and Road work will simply link existing segments of road and railway.

Two of these corridors, the China-Mongolia-Russia corridor and the New Eurasian Land Bridge, will be entirely overland. They center on existing transcontinental rail lines and mainly focus on delivering relatively high value-added goods, such as electronics, which are sensitive to rapid changes in demand. China will shift a small fraction of its total trade to these routes, providing an outlet for industries in China’s interior and giving the country a measure of insurance against naval interdiction.

Recognizing that it can only shift a small amount to inland trade routes, China will continue investing in port infrastructure along other corridors in the Belt and Road Initiative, particularly in the Indian Ocean region. However, China will find ways to link land and maritime routes, aiming to bypass the South China Sea chokepoints and minimize the distance of any single maritime leg of Chinese shipping. For example, the China-Pakistan Corridor could allow some Chinese goods to travel overland to Pakistan before embarking for Europe at the Chinese-constructed port at Gwadar.

The Belt and Road investments will also serve to build political support for China. Many countries along the proposed transportation corridors face huge budget shortfalls in the area of infrastructure development, together totaling trillions of dollars between 2010 and 2020. With its large financial resources, China is well poised to fill some of these gaps.

In fact, some of the planned infrastructure projects will have no obvious connection to the development of transit routes. For example, China signed an agreement with Georgia in May to construct 30 greenhouses as well as provide additional agricultural assistance. However, China will be happy to meet these seemingly unrelated demands, both to bring in business for its construction industries and to secure the political support necessary to ensure the safe conduct of Chinese commerce through neighboring countries.

Economic Logic

The strategic value of these corridors will be realized in the long term as the routes become fully linked. Aside from its long-term value as a contingency plan for Chinese trade, the Belt and Road strategy serves China’s goal of alleviating its economic slowdown and correcting its internal geographic disparities. By official figures, China’s economy is expected to grow at about 7% a year, though in reality, growth is likely to become substantially slower. To handle the slowdown, China aims to shift its industry away from the coast to the relatively underdeveloped inland provinces. Meanwhile, it seeks to produce higher value-added goods in coastal regions and expand coastal consumer bases to absorb manufactured goods from the newly industrialized interior.

The Belt and Road Initiative will aid in this process by constructing physical links between China’s inland industry and new markets. Belt and Road infrastructure projects may give China a way to offload some of its growing surpluses in construction materials and rural labor. Although it may not be economically or politically feasible to tap into these surpluses for every project, overall the initiative will help alleviate some of China’s overcapacity problems.

In addition to building up the “hardware” of infrastructure, China will try to streamline trade by pushing for new customs agreements and unified technical standards. These trade facilitation measures will complement the development of special economic zones and industrial parks along the Belt and Road corridors. Improved transit infrastructure and the elimination of trade barriers could make it cost-effective for China’s inland industry to access new markets.

The construction of new roads may stimulate foreign demand for higher value Chinese manufactured goods, such as locomotives and train cars. As China builds up its construction companies, Belt and Road projects will create opportunities for them to gain more international exposure and experience. A higher international profile will enable Chinese industry to build proficiency and compete globally in sectors traditionally dominated by competitors such as Japan’s Kawasaki Heavy Industries, South Korea’s Samsung Heavy Industries and Germany’s Siemens.

Carrying Out the Initiative

The tools China is using to implement Belt and Road expose the political objectives at the very heart of the program. To carry out this vast construction initiative, Beijing is relying on its panoply of state-owned enterprises, which reflects the Belt and Road strategy’s orientation toward strategic, rather than solely financial, gain. Although state-owned entities sometimes sacrifice efficiency, they will enable Beijing to exert tighter central control over its projects.

These state-owned enterprises will receive financial backing either directly from Chinese policy banks, such as China Development Bank (which has pledged $890 billion for Belt and Road projects, most likely over the course of several years) and the Export-Import Bank of China, or from infrastructure investment funds such as the Silk Road Fund, which holds $40 billion. Additional money for these investment funds will come from China’s foreign exchange reserves and China’s sovereign wealth fund, which have $3.7 trillion and $220 billion available respectively.

In addition, China will enlist other countries to finance these efforts through multilateral banks such as the Asia Infrastructure Investment Bank, which is scheduled to come online later this year with an initial capital base of $100 billion. China will not be able to devote all of this money to the Belt and Road strategy because of multiple competing demands, but the relative abundance of its financial assets suggests that China can afford to be generous. More Belt and Road-related deals in the $20 billion to $50 billion range will not be unusual or unduly taxing of Chinese resources.

Risks and Challenges Ahead

Although China has ample resources for building up infrastructure in the Belt and Road corridors, serious security and political challenges are likely to arise. Many of the Belt and Road projects, by their very nature of expanding transport links into underdeveloped or conflict-ridden regions, will generate additional security concerns. Construction teams and the infrastructure itself will need protection.

To safeguard its interests, China will negotiate for improved host nation security for its projects. For example, Beijing and Islamabad appear to have secured an agreement under which Pakistan will allocate an army division composed of 10,000 troops specifically to protect Chinese workers, many of whom will be working on infrastructure projects in the restive province of Balochistan.

Improved transit links would provide new routes for the illicit movement of goods and people into China itself. China is especially sensitive to these transnational threats because of longstanding problems with separatist militants in its westernmost territory, Xinjiang, a critical node that is also where three of the six Belt and Road corridors exit China.

To combat these transnational risks, China will provide assistance for domestic security organizations in countries along the Belt and Road networks. An indication of China’s plans is Politburo member and chief of Chinese security Meng Jianzhu’s prominent role in promoting law enforcement exchanges under the rubric of the Belt and Road. These exchanges most likely will include enhanced intelligence sharing and could lead to China conducting more joint law enforcement training with its Belt and Road partners.

However, powerful regional stakeholders may worry that the expansion in Chinese security cooperation will come at the expense of their interests, especially in Central Asia, where Russia is wary of attempts to challenge its dominant role in regional security. China will need to engage in very active diplomacy to allay fears of displacement, but this will most likely be an uphill battle.

In addition to security hazards, considerable political risks could create difficulties for China’s construction projects. Chinese aid could become politicized and draw criticism domestically. In Sri Lanka, Chinese construction on Colombo Port City, a $1.4 billion artificial island, was suspended in January after the election of President Maithripala Sirisena, who accused his predecessor of offering too many concessions to China. Chinese firms involved on the project lost $380,000 per day, and construction was only cleared to resume three months later. Similar localized headaches are likely to occur frequently. More seriously, regional tensions in areas such as Central Asia’s Fergana Valley, which crosses the borders of countries that line the China-Central Asia-Western Asia corridor, and political instability within countries like Kazakhstan could present long-term perils for Chinese efforts to implement the Belt and Road strategy.

Ultimately, the geographic scale of the Belt and Road strategy and the complex geopolitics involved mean that China’s success in building the six Belt and Road corridors will be highly uneven. Yet, although the Belt and Road strategy will be expensive and face formidable hurdles, the mitigation of trade insecurity will make the project well worth the cost in the eyes of China’s leaders. As the transit routes come online, this network will provide several alternatives to the vulnerable sea-lanes through the South China Sea, giving China’s economy some insurance against any single point of failure.

In an instance of war, the Belt and Road infrastructure would greatly complicate potential U.S. plans to impose a distant blockade. Inland transit routes would naturally be insulated against naval interdiction, and the proliferation of short maritime transit legs would force the U.S. Navy to spread its assets over a large expanse rather than concentrate on a small number of chokepoints. In peacetime, these options would enhance China’s political leverage by preventing any individual country from threatening to disrupt China’s economic lifelines.

Lead Analyst is Thomas Vien with additional research by Kevin Yan; production editor is Robin Blackburn.

The Grand Design of China’s New Trade Routes
is republished with permission of Stratfor.

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7 thoughts on “Stratfor: China builds a new Silk Road for the 21st century

  1. As to ‘China’s economy is dependent on foreign trade’? No, it isn’t and has never been. That’s a Western media meme. China is less dependent on foreign trade than Canada and 50% less dependent on foreign trade than Germany and China’s economy is becoming less dependent on exports every day. By design.

    And as to ‘In the case of a war between the United States and China, many U.S. strategists favor imposing a distant blockade of Chinese waters. Although the U.S. Navy has unchallenged supremacy over the open ocean’? Again, no.

    China already has the capability to sink every USN asset in the Western Pacific within 45 minutes of the commencement of hostilities. Those anticipating a re-run of Jutland or the Coral Sea battles will be disappointed. Surface vessels (especially those with large deck areas) are an expensive liability, not an asset, when ranged against a continental power armed with 30m. accuracy, 2,300-mile range, anti-ship ballistic missiles and an unmatched capacity to manufacture them in vast quantities at low cost. Let’s begin with a volley of 300 of these motherfuckers, descending vertically at 4x the speed of sound, on the Pacific Fleet.. $300 million dollars buys a $30 billion humiliation, the worst since Port Arthur and the end of American hegemony in Asia.

    Don’t be fooled by China’s pablum. There’s nothing they or, indeed, Asia, would enjoy more than sending the Sixth Fleet to the bottom of the Pacific Ocean knowing that the West had no comeback other than nuclear escalation for which, of course, China is well prepared.

    P.S. China’s current president, Xi Jinping, is the son of a distinguished field commander and began his career after graduating from university as assistant to China’s Secretary of Defense. Sink the Pacific Fleet? He’d love nothing more.

    Like

    1. Godfree,

      (1) Good catch, pointing out that China’s dependent on exports (~22% of GDP in 2015) is less than the world average of ~28%. It was true for a brief time, as exports went from 20% of GDP in 2000 to ~40% in 2006. As usual, people extrapolated that into the China’s exports will eat the world story.

      There is a dot of truth in the dependency story, in that China — like many nations — is dependent on imports of key raw materials, most especially energy. China is a major producer of coal and oil, but also their largest importer.

      (2) Speculation about war between China and the US is imo a war of fanboys, like fantasy football. I suggest skepticism about the claims by both sides of easy victory. In fact we don’t know. History shows the difficulty of predicting outcomes from war. Remember the confident claims that Saddam’s massive army would give the US a bloody nose?

      More importantly, its odds are microscopic. Nuclear powers don’t go to war with one another, for a very obvious reason (“It’s good to be king.”)
      (2)

      Like

  2. According to this article China, along with Russia, is attempting to redefine globalization in a “physical way” as opposed to the Western ” financialized way.”

    ‘Xi’s G20’ and a World on the Brink of Radical Change” by Alastair Crooke (Wikipedia bio), Conflicts Forum, 13 Sept 2016. It states:

    “In short, as conventional monetary measures (such as “quantitative easing” or QE) and unconventional measures such bond purchases by Central Banks have proved so ineffective in stimulating growth (as noted explicitly by China’s deputy Finance Minister), and since growth drivers from previous rounds of technical progress have faded too, then China’s recipe of creating physical connectivity through the OBOR (One Belt, One Road) initiative would seem to be the more promising way to re-ignite global growth, Xi proposed.

    This, together with new trade rules, and reform of the financial order (currently aligned to American and E.U. interests), might make “change without upheaval” possible — i.e. this was the best prospect for change without financial collapse and economic shock (China and Russia hope). Left unsaid is the corollary that without such policy realignments, both states foresee the inevitability of a further “shock,” similar to that of 2008.

    Just to be clear – although softly said, both China and Russia are deprecating to the point of dire warnings of imminent crisis, the West’s mismanagement of the financial system, and of its over-reliance on further debt-driven financialized responses.

    China is looking to physical investment, innovation and connectivity (maritime, rail, pipeline and electronic) to become the future drivers of growth, rather than more NIRP (negative interest rate policy), QE and bond purchasing. The West may not wholly disagree with Xi’s adverse diagnosis, but the latter has painted itself into a corner from which there is no obvious exit that does not risk triggering the very crisis that the West is seeking to kick further along the road. It sees “no alternative” (called “TINA” for “there is no alternative”).”

    Like

    1. Duncan,

      This is an interesting article, from an interesting source (but not an esp well-informed source). Also, I added a full citation (linking to the original source of the article, with its real title).

      He makes two points. First, that the long-predicted alliance against the US is re-forming. The first was the alliance led by the USSR (with China as a junior partner). Now it reforms with China as the senior partner and Russia the junior. Rival powers usually ally against a hegemon.

      Second, he says some absurd stuff about the West relying on finance vs China relying on physical infrastructure. Quite an astonishing statement about China, the world’s King of Debt, with its complex government-led economy — while the West (esp the US) builds the technology of the 21st century (e.g., communications, computer, genetic engineering, nanotechnology, energy systems).

      He reports without note this quite mad statement (does he believe it?) by President Xi: “US economy is collapsing.” Not even remotely true.

      Like

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