China Faces OBOR Criticism Following The Belt & Road Forum

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CDE Op-Ed Commentary

There has been some fall-out following China’s Belt-Road Forum last week, with concerns being made both by various institutional bodies and political media over a number of issues concerning China’s intentions. While the Chinese state media have naturally talked the forum up, comments from other sources have not been so kind. Concerns are broadly split into two categories; either suggesting the OBOR plans are neo-colonialist, or promote corruption.

The negative feedback, while disappointing to Beijing, will not come as a surprise. In fact the Forum itself was largely intended to act as a barometer to how far the global community would accept China’s intentions to take a lead in global development issues.

Some of the more considered critical pieces are listed below:

 

The criticism of neo-colonialism attitudes by China is going to go hand in hand with schemes such as this and is to be expected when the OBOR project covers such a huge amount of territory and involves over 60 different nations. However, Beijing is also using the OBOR Forum as a domestic political tool to demonstrate to its own citizens that China is a great world power and that other foreign leaders will come and listen to what it has to say. It is the very nature of One Party States to be insecure when it comes to their public appearance, criticism of the ruling party when there is no alternative can be damaging. Part of the role of the OBOR Forum was specifically to illustrate what a great job the CCP has done in elevating China to the position of global power.

However, there remain concerns over China’s behaviour in certain aspects of OBOR development. Part of this is opportunism, such as the selling of de-commissioned and highly polluting cement plants to Tajikistan. While that is not colonialism, it does suggest that China needs to put more attention to detail in the types of projects it is exporting. Upsetting local residents of other countries, making them critical of their own Government and developing anti-Chinese views can undo years of diplomatic effort. China needs to exercise some levels of self-QC work when it comes to offloading factories and machinery onto poorer developing nations. The debacle in Myanmar over the cancellation of the Irrawaddy River Dam is another example that could have been avoided given a more sensitive approach by Beijing.

What is apparent however is that Beijing prefers to favor dealing with Governments that operate on similar principles to its own, and when it cannot, such as with large democracies, tends to make demands that circumnavigate the need for public scrutiny. An example here is Indonesia, where OBOR project development loans made to it by China must filter down to Indonesia’s State-Owned Companies.

That these conditions exclude the Indonesian private sector is interesting, and reveal characteristics in the Chinese mindset. First, insisting that Chinese loans are only given to other State Owned Enterprises means that an operational and management marriage between Chinese and Indonesian SOEs is more likely to be a success, the mentalities will be similar. Secondly, tying Chinese loans to other Government SOE’s ensure that the contract to do so is more politically secure. Third, it manages to obscure Chinese involvement in deals that may other transgress WTO guidelines. Finally, it provides an opportunity to hide transactional details; Governments are past masters at hiding transactions that may otherwise provoke national interest and even criticism, and they are far easier to cover over from audit inspections. Private sector companies are subject to greater scrutiny, with accounts to be filed and made publically available. To avoid this, China’s preference to provide finance, but preferring to deal with other nations SOEs rather than the Private sector is telling. Beijing is all about G2G, and doesn’t feel entirely comfortable when having to negotiate with companies that are duty bound to provide transparency.

That scenario of course means that corruption in deal-making is more easy to insert and cover up. China may or may not be corrupt in the deals it does, but it certainly won’t see wanton corruption as a deal breaker should the other party want a slice of the action. This applies to Port development deals in Sri Lanka, where the then President Rajapaksa’s Government negotiated a loan from China at a higher repayment rate than China had actually asked for. This was accommodated; with the national level bank originally earmarked for providing the capital at 2% interest moved out of the way, to be replaced by a more obscure Provincial level bank who provided the loan instead at 6%. One can imagine where the 4% balance ended up. The corruption was on the Sri Lankan end, however China didn’t view that as an obstacle to getting the deal signed.

Accordingly China needs to pay attention to the criticism it receives. It is almost inevitable that when projects such as the vast OBOR initiative is introduced, officials and businessmen
alike will start rubbing their hands at how much money can be made, and how. The issue for China is how far it is prepared to go to insert transparency into the process, while at the same time wishing to reward individuals for arranging the deals that China wants.

It’s an old story. In 1900’s Hong Kong, foreign owned trading companies regularly employed “compradors” to smooth the path and get things done. The average rate was about 20%, no questions asked. The irony is that this worked for Hong Kong, which became extraordinarily successful as a result and is today one of the world’s leading financial centers. Just how far todays international business community going to be prepared to accept a “20%, no questions asked” slice of the deal to be set aside for OBOR projects is going to be interesting to see. Proponents of the Foreign Corrupt Practices Act probably need not apply.

 

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Silk Road Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, India, Indonesia, Russia & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Asian and Eurasian region. We maintain offices throughout China, South-East Asia, India and Russia. For assistance with OBOR issues or investments into any of the featured countries, please contact us at silkroad@dezshira.com or visit us at www.dezshira.com

 

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