China’s Maritime Silk Road and the Middle East: Tacking Against the Wind

Under President Xi Jinping, the Communist Party of China’s (CPC) collective leadership has been reduced to a single individual and presidential term limits have been abolished. “Xi Jinping Thought” has been formally incorporated into the CPC Constitution. So, too, has the Belt and Road Initiative (BRI) — the most ambitious infrastructure development plan ever conceived, which bears Xi’s personal imprint and stands as striking evidence of the decisive shift in Chinese foreign policy from Deng Xiaoping’s “bide and hide” to today’s “striving for achievements.”[1]

It is telling that the targeted date for the completion of the BRI is 2049, the centenary anniversary of the founding of the People’s Republic of China, for the BRI is at its core a political project, whatever the economic considerations and justifications given for it. As such, the BRI should be viewed as a long-term global undertaking to bolster the Party’s legitimacy and cement Xi’s personal power and legacy. It is for this reason that China’s external engagement strategy is likely to remain BRI-centric and the Chinese party-state to remain firmly and fully committed to its implementation for the foreseeable future.

The fact that the Belt and Road has been accorded legal sanctity and Xi’s term as president has been extended indefinitely provides some assurance of the BRI’s centrality and longevity — but does not guarantee a linear path of progress, much less the fulfillment of the expectations set for it. Indeed, the momentum of the BRI has lately slackened due to a variety of setbacks and disruptions. Until now, China has made headway in executing BRI-related projects in the Middle East despite such problems. Plummeting oil prices coupled with the onset of the worldwide public health and economic crises triggered by the covid-19 pandemic could result in scaled back plans and delayed implementation of BRI projects in the region. But China is not about to abandon the effort to extend the Maritime Silk Road to the Middle East — nor are its most avid regional partners.

China’s “Project of the Century”: Counter-Currents

As of the end of January 2020, China had signed 200 BRI cooperation documents with 138 countries and 30 international organizations.[2] This warm reception reflects the widespread view by participating countries that the BRI presents an opportunity to accelerate their economic development by improving their competitiveness, attracting much-needed foreign investment, diversifying their economies, and upgrading their physical infrastructure. Nevertheless, almost from the very date of the Belt and Road’s official launch in 2013 — initially as the “Silk Road Economic Belt” and the “Maritime Silk Road” — it was met with varying degrees of skepticism.[3] Since 2017, criticism of and resistance to the BRI has increased due to its uneven track record.[4] These adverse reactions reflect a wide range of concerns.

One such concern relates to the BRI’s environmental impacts. As some reports have pointed out, environmental and social impact assessments (ESIAs) often have been incomplete, conducted in a haphazard manner, falsified, or bypassed entirely, especially in countries where government enforcement of standards is lax.[5] As the China Global Energy Finance database reveals, coal power projects have accounted for over half of Chinese overseas energy investment,[6] prompting charges that this building spree will “lock China’s partners into high-emissions development” and may irreparably damage local and global climate security.[7] In countries considering BRI power plant construction options, coal power generation has been shown to be at odds with citizen preferences for clean energy.[8]

A second problem area is the lack of project transparency, as reflected in the absence of standardized contracts, open tenders, and anti-corruption safeguards.[9] In fact, Chinese companies are among the least transparent of the multinationals operating in emerging markets.[10] Not until 2019 had the National Development and Reform Commission (NDRC) compiled an official list of participating BRI nations and approved projects. Data on public procurement as well as on the terms and size of debt financing are lacking, while contractor participation is dominated by Chinese contractors — raising concerns about the risks of misappropriation of funds and of elite capture.[11]

Another criticism levelled at China is that BRI financing has raised the risk of debt distress for some borrower countries. The concerns are that China’s lending practices will leave countries with debt “overhangs” that will hamper sound public investment, create an unhealthy degree of dependency on China as a creditor, exacerbate domestic tensions, and generate potential cross-border spillover effects in the event of a sovereign default.[12] The most widely reported — though also the only known — case to date of outright asset seizure is that of Sri Lanka’s Hambantota port,[13] which has become something of a cautionary tale for countries seeking to fund BRI projects.[14]

Criticism of the BRI has also focused on project oversight and coordination. Instances of poor management associated with BRI projects have been attributed to a variety of factors, ranging from Chinese officials’ “laissez faire” (i.e., informal regulatory) approach, chronic neglect of due diligence, and project managers’ evasion of responsibility, to the broader problem of muddled organization involving a welter of state-owned companies, local and regional actors that Beijing often has to step in to fix.[15] [16]

The mounting criticism of the Belt and Road Initiative not only inflicted reputational damage on China but altered the dynamic between China and BRI partner countries. As the implications of debt-strapped Sri Lanka’s formal handover of the Hambantota port to China in December 2017[17] rippled across the BRI landscape, participating countries began to scale back, suspend, and even scrap projects.[18] Malaysia’s widely reported cancellation of two Belt and Road projects in August 2018[19] prompted speculation of a cascade of others.[20] Two months later, Sierra Leone became the first African country to announce the withdrawal from a BRI project.[21]

However, far from having spelled the end of the Belt and Road Initiative, these problems and setbacks instead set in motion a process of recalibration and adjustment. Although Beijing’s initial tack was to vigorously defend the BRI against international criticism and domestic dissent, the tenor of the official Chinese narrative shifted from hitting back against critics to trying to win them over.[22] By mid-2017, growing pressure for China to overhaul its approach to Belt and Road projects had already resulted in the issuance of an array of national guidelines intended to better regulate the conduct of state-owned and private Chinese enterprises engaged overseas[23] and to shape foreign perceptions of the BRI in a more favorable manner by urging the promotion and support of projects that accommodate local needs and align with the participating countries’ development strategies.[24]

On the eve of the convening of the Second Belt and Road Forum (BRF) in Beijing in April 2019, construction resumed on the previously cancelled high-speed East Coast Rail Link, based on a renegotiated deal with Malaysia which had reduced the original cost by two-thirds[25] [26] — a sign that the BRI was very much alive. During the Forum, President Xi signaled that his government would tighten oversight[27] and promote “high-quality development.”[28] China’s financial regulators subsequently began to clamp down on lending.[29] Chinese companies appeared increasingly receptive to bringing in external expertise and feedback to help them improve the professional management and long-term commercial viability of their projects.[30] Meanwhile, Beijing pressed ahead with efforts to recruit new BRI partners, with an emphasis on making deeper inroads in the West. Entering 2020, endorsement of the Belt and Road by Italy and Switzerland and other new deals led some to conclude that the BRI “has come roaring back.”[31]

Yet, even as China has sought to revamp and press forward with the BRI, it has faced headwinds. First, its efforts have become entangled with an amped up US-China rivalry. Senior Trump administration officials’ barely concealed expressions of disdain for the Belt and Road have been punctuated by the admonition that countries considering participation in the BRI be “wary of risks.”[32] Backed by strong bipartisan Congressional support, the Trump administration created the International Development Finance Corporation (IDFC)[33] and, together with Australia and Japan, launched the Blue Dot Network (BDN) — both initiatives aimed at mobilizing private sector investment in the same markets targeted by the BRI program and thus at curbing China’s growing influence.[34] [35]

Second, Beijing has had to confront its own limitations. An estimated $1.9 trillion of annual investment is still needed to fund BRI projects.[36] However, China is no longer as flush with cash as it had been.[37] The Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) (formerly the BRICS Development Bank) have between them $200 billion — a fraction of what is needed to fund the BRI on the scale currently contemplated. Meanwhile, China’s own transition from the world’s largest manufacturing hub to a consumption and services-led economy has been neither simple nor smooth. Beijing has opted to defer the necessary and painful adjustments, but piecemeal reforms have not worked.[38] It is therefore not surprising that BRI outlays, mainly to state-owned enterprises (SOEs) lately have cooled.[39] China’s outbound direct investment declined 8.2% year-on-year in 2019.[40] Chinese construction around the world contracted in 2019 as well.[41]

Third, the covid-19 pandemic has badly damaged the global economy,[42] and by extension has already had a detrimental impact on BRI activities. Projects in numerous BRI recipient countries[43] have been delayed or have come to a standstill.[44] China’s initial mishandling of the pandemic has tarnished its image and reputation, and undermined its effort to be viewed as a trustworthy and reliable partner. In addition, by exposing global supply chains to risk, the coronavirus has spurred interest among foreign firms in relocating manufacturing out of China. American tech giants Google, Microsoft, and Apple are reportedly expediting plans to shift production from China to Southeast Asia in the wake of supply chain disruptions caused by the virus outbreak. Meanwhile, more than $2 billion of Japan’s economic stimulus package has been earmarked to help companies move production out of China.[45] But such moves to restructure global supply chains in order to reduce dependence on China are unlikely to leave Beijing or participating countries with stakes and high hopes in the success of the Belt and Road marooned.

The Maritime Silk Road in the Middle East: Sailing to Windward

The Middle East sits at the crossroads of Europe, Africa, and Asia — which the Belt and Road is intended to link together — and lies at the center of the “oil roads” that feed China’s growing energy needs.[46] Accordingly, Middle Eastern countries have emerged as target markets for Chinese contractors as well as potential Belt and Road gateways to destination markets in Europe and Africa.

Of the two branches of the BRI — the Silk Road Economic Belt (SRB) and the Maritime Silk Road (MSR) — the latter route accounts for half of global trade between China/East Asia and Europe and is served by the world’s largest container ports (i.e., Shanghai, Singapore, Shenzhen, Ningbo-Zhoushan, Busan, and Hong Kong). The Gulf sub-region is particularly well-positioned to take advantage of the MSR, as it has already established itself as an important intersection for global trade, logistics, travel, and finance.[47]

Yet, one must take care to avoid exaggerating the level of priority that Beijing attaches to the MENA region as a whole, and to the Gulf in particular, in advancing the Belt and Road. For one thing, it is difficult to separate BRI-specific activities from the “normal” business China has been conducting in the region, especially as some infrastructure projects had been undertaken before the initiative was officially launched.[48] For another, the claim that China-Middle East economic ties have increased “exponentially” must be weighed against the fact that China’s trade and investment flows are still skewed toward its nearby neighbors[49] and that most projects involving Chinese contractors are located in Asian markets such as Indonesia, Pakistan, and Laos. It also should be noted that the energy sector remains the bedrock of China’s relations with the MENA countries,[50] accounting for over 56% of Beijing’s investments in the MENA region from 2013 to 2019 and amounting to $75.3 billion in value of projects awarded to Chinese contractors in the region (from stage of announcement to execution).[51] Finally, there is little evidence that MENA countries’ growing ties with China, including their engagement in the BRI, are intended or will necessarily lead to an attenuation of their commercial and strategic relationships with the West.

Nevertheless, there is no denying Beijing’s growing ambition to integrate the Middle East into the Maritime Silk Road, as illustrated by its push to develop a series of joint port-industrial park complexes linking China to the Gulf, the Arabian Sea, the Red Sea, and the Mediterranean Basin.[52] [53] China has found ready partners among the Gulf States, which have incorporated the buildup of logistics facilities into their respective “national visions.” Oman, Saudi Arabia, and the United Arab Emirates (UAE) have been early and active participants in the BRI through the development of a chain of port-industrial park complexes aimed at linking markets across the MENA region.[54] It is therefore not surprising that three of the five leading destinations for Chinese investment in the region are Saudi Arabia, the UAE, and Egypt, while the others (Iraq and Algeria) have large domestic markets, hydrocarbon resources, and maritime access.[55]

What is striking is that efforts to extend the Maritime Silk Road to the Middle East have made headway amid the problems that the Belt and Road has encountered elsewhere and despite the persistence of conflict in and rivalries dividing the region. The UAE is leading the pack. Khalifa Port’s CSP Abu Dhabi Terminal, a joint venture between Cosco Shipping Ports and Abu Dhabi Ports, has been operational for a year.[56] The KIZAD Logistics Park is nearing completion.[57] It has attracted more than 20 Chinese companies.[58] The first phase of Abu Dhabi Port’s project to provide residential accommodation for 5,000 management and operational employees as part of its 50-year agreement with China’s Jiangsu Provincial Overseas Co-operation Investment Company (JOCIC) is underway.[59] [60]

This progress is at least partly attributable to the expansive commercial and strategic agendas of the Gulf States, particularly those of Saudi Arabia and the UAE, both of which appear to perceive the Maritime Silk Road as a vehicle for securing their foothold and increasing their influence in East Africa. Equally striking is that progress on this front has not been hobbled by some of the problems that have surfaced in the course of Belt and Road project implementation in other regions. Of those BRI participants recently identified as potentially in debt distress, none are MENA countries.[61] To date, there have been no reported angry public outbursts over elite corruption or the adverse environmental impact of Chinese-funded projects that have fueled anti-Chinese sentiment in other regions. Nor has there been a public backlash in the Gulf States arising from complaints that Chinese employees are saturating local labor markets, perhaps because they have long hosted large numbers of expatriate workers. In fact, with the exception of Turkey, Middle Eastern publics seem favorably disposed toward China.[62] At the governmental level, the Chinese state capitalism model and the “de facto ‘oligarchic’ pact”[63] between Gulf ruling families and business elites appear well-suited to each other and both are strongly committed to make the MSR serve their respective interests.

The covid-19 pandemic has thus far proved to be as much an opportunity for China and its MENA partners to demonstrate solidarity as a test of the resilience of their relationships. Early on, Saudi, Emirati, and Qatari officials and others leavened their expressions of concern for the well-being of Chinese citizens and their confidence in Beijing’s ability to tackle the virus[64] with donated shipments of medical supplies to help China combat the virus.[65] Later, as infections spread across the Middle East, China reciprocated this goodwill by dispatching medics and/or cargoes of medical equipment throughout the region.[66]

As the covid-19 virus sweeps through and across emerging markets, marked slowdowns or outright contractions in economic activity can be expected, though their severity and duration will depend critically on how quickly the pandemic fades, thereby allowing containment efforts to be scaled back such that consumer and investor confidence are restored. In the recently released World Economic Outlook 2020, the IMF has forecasted that every MENA economy, with the exception of Egypt, will shrink this year.[67] The more affluent Gulf States could face a multi-quarter u-shaped recovery, in spite of deploying robust stimulus packages, especially if International Energy Agency (IEA) projections of weakening oil demand prove correct.[68]

On April 15, China joined the other members of the G20 in suspending official debt service payments for the world’s least-developed countries through the end of the year.[69] However, as the global economy contracts, China is likely to face pressure to renegotiate debts simultaneously with a significant number of BRI partner states whose economies come under severe strain.[70] Additionally, these circumstances are likely to reduce China’s appetite for outbound lending, especially to poor countries. In the MENA region, this could mean that Beijing might not splurge on new domestic “vision” or Maritime Silk Road projects. China had not rushed to incorporate Lebanon or Syria into the Maritime Silk Road before the current crisis; presumably, there is even less enthusiasm for doing so now.

Whether, and if so, when all existing pledges will be honored and plans materialize is uncertain. It is unclear, for example, whether the progress that had been made in securing Chinese companies’ participation in the UAE’s KIZAD free industrial zone prior to the covid-19 outbreak can be sustained.[71] Also unclear is when phase two construction of the Sino-Oman Industrial City will begin. In fact, the outlook regarding the payoff for China and its Middle Eastern partners from these regional connectivity projects will largely depend on how well the Gulf States grapple with the severe fiscal strain imposed by plunging oil prices and the fallout from the pandemic, and on how quickly European and African destination markets recover. Meanwhile, though, China could seek to leverage its early recovery from the virus to secure first-mover advantage in both digital and health care infrastructure.

Conclusion

In the face of the coronavirus pandemic and the impending global economic downturn, China will have little choice but to recalibrate its BRI ambitions. This reassessment is likely to lead to more selective and limited outbound investments in new large-scale Belt and Road projects in the short term. However, protecting its equities in the Middle East requires that China project itself as a dependable partner. While China and its regional partners might have to adjust their expectations and their targets, both sides have expended too much financial and political capital to forsake the Maritime Silk Road.