China's Belt and Road: What to expect from Japan

April 29, 2019 16:25
Taking note of criticism in relation to Belt and Road projects, Xi Jinping said last week that China should proceed in ‘a transparent way’. Photo: Reuters

China did a rare thing at the Belt and Road Forum in Beijing last week: it admitted that it had made mistakes and pledged to do better in future.

Agreed, there was no open admission of wrongdoing by President Xi Jinping. That would be too much to hope for from the Communist government.

But Xi's assertion in his keynote address that things should be done in “a transparent way” with “zero tolerance for corruption” was a clear response to widespread criticism of the way the Belt and Road Initiative has been operating. The BRI is a global trade and development program under which China finances infrastructural projects. Recently, there have been charges of "debt traps" with debtor nations unable to make repayments.

The prime case was Sri Lanka, where China had built the Hambantota Port at a cost of about US$1.4 billion, 85 percent of which was funded by Exim Bank of China. The port has now been taken over by China for 99 years.

Japan historically was a major source of development aid for Sri Lanka but it wasn’t involved in the port venture. Feasibility studies had warned against the project.

Malaysia, too, couldn’t repay billions in debts incurred over construction of the East Coast Rail Link. Prime Minister Mahathir Mohamad asked to cancel the US$14 billion project. After new negotiations, China cut a third of the original cost.

Mahathir complained about “lopsided deals” that involve “giving contracts to China, borrowing huge sums of money from China", and in which "China contractors prefer to use their own workers from China, use everything imported from China.”

Significantly, the joint communiqué released Saturday called for “diversified and sustainable financial support.” It also emphasized debt sustainability and fighting corruption.

As to how the BRI would operate differently, Chinese Finance Minister Liu Kun, speaking at the forum, said China will establish an analysis framework on debt sustainability to “prevent and resolve debt risks.”

The problem is that there are too many potential infrastructure projects chasing too little money. According to the Asian Development Bank, infrastructure needs in developing Asia and the Pacific alone reach US$1.5 trillion a year. China saw an opportunity to make use of its economic overcapacity, develop foreign markets and expand trade relations by responding to this need.

In response to China, Washington last year created the US International Development Finance Corporation, with US$60 billion in funding. However, that is a drop in the bucket.

The BRI forum was attended by 37 foreign leaders and Xi clearly wants more next time. “All interested countries are welcome to join us,” he said. One country he would very much like to join is Japan.

When Japanese leader Shinzo Abe visited China in October, he was broached on working with China on infrastructure projects. Abe said Japan was bound by international rules such as open bidding and fiscal sustainability.

While international attention has focused on China, we should bear in mind that Japan had played a leading role in providing financing for infrastructure for decades. Japanese aid in the 1980s and 1990s helped create much needed infrastructure in China, including airports in Beijing, Shanghai, Lanzhou, Wuhan and Xian as well as railway lines, roads, ports and power stations.

The success of the BRI is largely due to Chinese willingness to grant loans where institutions such as the Asian Development Bank or the World Bank would balk.

BRI’s success stirred Japanese corporate interest in co-investments with China. This was reflected in Abe's visit to China last year when agreement was reached on 50 cooperation projects.

However, Japan’s strategic community is looking at BRI differently. The initiative is seen resulting in a hugely enhanced global role for China at a cost to Japan and its ally, the United States.

In a real sense, Japan is torn between its two most important relationships: China, its most important trading partner, and the United States, on whom it relies for its security.

So, where infrastructural financing is concerned, economically Japan will cooperate with China in joint investments where there is a profit to be made and, strategically, Japan will stand with the United States for a free and open Indo-Pacific, along with Australia and India.

Not entirely coincidentally, these countries are also exploring ways to cooperate in providing financing of infrastructure in Asia. From the standpoint of countries in desperate need of such infrastructure, it must be a relief to have more potential funders willing to consider their needs. Thanks, of course, to China and its Belt and Road Initiative.

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Frank Ching opened The Wall Street Journal’s Bureau in China in 1979. He is now a Hong Kong-based writer on Chinese affairs.