The deadly coronavirus outbreak is prompting delays and disruptions to China’s construction and investment plans overseas, risking years of planning and hundreds of billions of dollars in economic diplomacy.
Although it is a little early to say how the COVID-19 pandemic will change the broad contours of Chinese foreign policy, it has already highlighted some of the frailties of the Belt and Road Initiative (BRI) — Chinese President Xi Jinping’s multitrillion-dollar program to expand Chinese trade and infrastructure around the world.
Projects that have been affected since the virus emerged in December include $62 billion China Pakistan Economic Corridor (CPEC) which has often been cited as a clear indicator of ‘Debt Trap Diplomacy’, $6 billion high-speed rail line and $1.6 billion hydropower project in Indonesia, and $4.2 billion Sihanoukville Special Economic Zone in Cambodia. There’s also a separate $10.4 billion railway initiative in neighboring Malaysia and $1.4 billion construction projects in Sri Lanka. Bangladesh has also announced delays to several infrastructure projects, including commissioning of the $1.6 billion Payra coal power plant, which was supposed to begin commercial operations in early February, while many new projects across Myanmar have been stuck in holding patterns.
As most BRI infrastructure contracts are given to Chinese companies, it has created significant foreign dependencies upon China. These projects rely overwhelmingly on Chinese labour and supplies, as well as depend on the availability of massive amounts of cheap credit from Chinese banks.
Shattered supply chains
As cities across China shut down and factories sit idle, hampering China’s manufacturing supply chains, the BRI projects that are predominantly reliant on Chinese, rather than local materials and supplies are experiencing a knee-jerk impact, major projects have been delayed because they simply can’t get the supplies they need out of China. The Jakarta to Bandung high-speed railway in Indonesia, for example, depends on China for half of their construction materials, which are not going to be delivered anytime soon.
China’s shuttered factories not only need workers to be released from quarantines to resume normal output, but also need restored supplies of raw materials, adequate stores of protective gear for workers, and active truckers and shipping ports to deliver their goods abroad.
The biggest impact on the Belt and Road has been the fact that thousands of Chinese workers have been stuck in China, unable to return to work after they went home for Spring Festival. Quarantine measures are preventing Chinese workers from making it to foreign building sites, and therefore domestic firms supplying overseas projects face acute labour shortages with fears mounting that workers will inadvertently spread the virus to new locales.
Construction of the Jakarta-Bandung high-speed railway and the building of a 510-megawatt dam in the Batang Toru rainforest in Indonesia have ground to a halt as their Chinese workers have been unable to get around a ban on flights from China. While the nickel and cobalt projects of Tsingshan Holding Group, GEM Co Ltd and Zhejiang Huayou Cobalt—worth a combined $11 billion—have been disrupted due to the coronavirus outbreak.
It is now feared that the Batang Toru dam could miss its scheduled completion date while the high-speed railway is expected to miss construction targets because about 300 Chinese workers are absent and some materials have not been shipped. Bank Indonesia predicted that Covid-19 could shave 0.1% off Indonesia’s GDP this year.
Chandra, Managing Director of PT Kereta Api Cepat Indonesia China (KCIC), the consortium building the railway, said project directors, managers, engineers and consultants were among the absent Chinese workers. The project employs 14,000 people, including 2,000 Chinese nationals. In addition, nearly 50 percent of materials used in the project including pipes, waterproofing materials and signaling equipment are made in China, and some manufacturers have not resumed production.
“Concrete, steel and some other materials are available here, but if there are no supporting materials, construction will be disrupted,” Dwiputra said.
In neighbouring Malaysia, a dozen of the roughly 200 Chinese workers building the $10.4 billion East Coast Rail Link hail from Wuhan, the city at the center of the outbreak. They’re not allowed back to the Southeast Asian nation, while other workers can return after a 14-day quarantine process.
In Pakistan, which hosts numerous BRI projects spanning power and construction, two companies — Engro Polymer & Chemicals Ltd and Pakistan Oxygen Ltd — have said their projects face slowdowns because their Chinese contractors alerted them to delays stemming from hampered mainland facilities.
Though analysts in Pakistan believe it is optimistic to argue that there will be no impact of the outbreak on the CPEC project, given the fact that a large number of Chinese workers who had left Pakistan are unlikely to return. Since February 2020, a number of reports have been predicting that the CPEC project is likely to be impacted significantly.
In Sri Lanka, too, there has been widespread disruption to efforts; Chinese investment is building the massive Port City Colombo, an expansion of the capital city via land reclamation.
The Ceylon Chamber of Commerce recently reported that about half of 100 firms surveyed said that business was affected by the coronavirus outbreak. Government road and apartment construction projects involving Chinese contractors have slowed down, said Nissanka Wijeratne, secretary general of the Chamber of Construction Industry of Sri Lanka.
Over 2,000 Chinese workers work on the Payra coal power plant in Bangladesh, and some 40 percent of them went home for the Lunar New Year holiday, twenty were allowed to be back to work after 14 days in quarantine, local media reported.
Meanwhile, the offices of Chinese senior managers stand empty at the Cambodia Sihanoukville Special Economic Zone, which describes itself as a “landmark project” on the Belt and Road initiative and is home to more than 160 businesses and over 20,000 workers. Employees from Chinese-run factories at the SEZ told media that most of the workers there were local, but that the greater challenge was their dependence on supplies from China.
Similarly, in the case of other countries, there are likely to be significant problems with regard to the fact that Chinese workers cannot travel. Besides, the underlying fact is that Beijing is not likely to send workers for BRI projects; in the aftermath of the coronavirus, countries will themselves not be in a position to focus on BRI related projects at least for some time.
China’s top regulator of state-run companies said that the outbreak has caused “difficulties” on some overseas projects and investments.
The country “has already communicated with overseas companies, overseas owners, and governments as early as possible to gain support and understanding,” said Peng Qinghua, Secretary General of the State-owned Assets Supervision and Administration Commission.
China’s overseas investments were already beginning to tail off and consolidate before the virus brought the country’s industry to a standstill.
The American Enterprise Institute and the Heritage Foundation, which have tracked 3,600 major Chinese overseas transactions since 2005, found that outbound investment last year totaled just $68.4 billion. That’s a 41% plunge from 2018 and the lowest in a decade. The figure is far less than the Chinese Ministry of Commerce’s official tally of $124.3 billion in total overseas investment last year.
Going forward, analysts say, China could concentrate its BRI programs in fewer countries, working to avoid criticism by making its outbound investment less aggressive and one-sided.
Slower growth forecast
Due to contractions in both industrial and services production, it is estimated that China’s GDP shrunk by 13 per cent during January and February this year. This was made clear in economic figures released in March 16 by China’s National Bureau of Statistics, which showed that the world’s second-largest economy was bucking a decades-long trend of growth to shift into reverse. All major readings plunged in the January to February period, as economic activity in much of the country came to a halt following the government’s extraordinary measures, including the lockdowns of many cities, to contain the spread of the pandemic. Value-added industrial production plunged 13.5 per cent in the two months, compared with a 6.9 per cent increase in December last year. Fixed asset investment plummeted by 24.5 per cent in the same period, compared with an 11.8 per cent increase in December while private sector investment fell 26.4 per cent and manufacturing investment dived 31.5 per cent. Retail sales shrank 20.5 per cent, while auto sales contracted by 42 per cent in volume terms and 37 per cent in value terms.
The figures raise the possibility not only that China will record its slowest growth in GDP for the first quarter, but also that it might post its first quarterly economic contraction since records began when data for the January to March period is released in mid-April.
To help mitigate the effects to an extent, China’s State Council on March 10 announced it will set up a coordinating mechanism for ministries to help businesses overcome supply chain bottlenecks, alongside other government support.
For China, more than anywhere else, there is a sting in the tail of this pandemic. When the virus first hit, the supply side of China’s economy took a massive hit as things like factories were shut down. But now, just as China appears to be recovering from the worst of the health impacts, the spread of the virus to the rest of the world means the demand side of its economy will take a hit. Simply put, even if the factories open back up, they will have far fewer customers to buy their goods.
China’s debt has reached a high of more than three times its GDP, a level that has caused problems for many economies in the past. And because this time the shock is on both the demand and supply sides, the government’s conventional approach of stimulating demand by relaxing credit and injecting liquidity into the economy might well not work.
Overreliance increase risk
For China’s trade partners, the pandemic has exposed the downside of overreliance on Chinese supplies. Many companies have come to realise the risks of depending on a single country. Manufacturers worldwide have become more reliant on China’s factories for many intermediate products, given the country’s increasing role in this regard, with a 32 per cent share of the global total. Industries that rely on China’s supply of intermediates – including hi-tech products, consumer electronics and smartphones – have been hardest hit.
No doubt, at issue is China’s growing role in the supply chain. The country became the world’s largest merchandise exporter in 2009, overtaking Germany and Japan. China accounted for a third of global trade in 2018, up from 1.2 per cent in 2000, according to World Bank data. Now the world would not survive without Chinese supplies, nor would China be able to endure without a global market.
2020 and beyond
COVID-19’s broader economic reverberations may themselves constrain BRI, but the Chinese government is clearly working to the full extent possible to offset them. Meanwhile, China continues on its mission to rebrand itself internationally from source of the new coronavirus to a friendly helper.
China is providing material aid to BRI countries afflicted by the pandemic, as well as to Italy where the country has sent a group of 300 doctors, as well as coronavirus testing kits and ventilators, in response to a request for assistance from the Italian government. On March 15, China’s Foreign Minister Wang Yi spoke with Spanish counterpart Arancha Gonzalez Laya on the phone and made a similar pledge of medical support to the country in its fight against the virus. Well, if you look the other way round, this is how China is widening its coronavirus diplomacy in Europe.
One of Asia’s richest man and Founder of Ali Baba, Jack Ma has also taken the lead in providing assistance to countries in need. Soon after announcing that he will donate 5,00,000 coronavirus testing kits and a million masks to the United States, Ma pledged to donate more than a million kits to Africa. On March 21, the Chinese Billionaire said in a tweet that he would be donating emergency supplies to a number of South Asian and South East Asian countries — Afghanistan, Bangladesh, Cambodia, Laos, Maldives, Mongolia, Myanmar, Nepal, Pakistan, and Sri Lanka. The emergency supplies include, 1.8 million masks, 2,10,000 test kits, 36,000 protective suits, and ventilators and thermometers.
Therefore, what China is managing to do successfully, is clearly trying to bolster its own global governance role by establishing itself as a counter-COVID leader. On top of it, CCP officials are trying to leverage the opportunity of maneuvering for international leadership as the US falters in constraining the impact of the virus.
China, for the time being, is likely to focus on helping signatories of the BRI to send out a positive message, that the country is just not bothered only about its economic gains. Additionally, with becoming a source of eventual pandemic support will surely elevate the overall approach BRI countries adopt in working closely with and relying on China.
Nonetheless, if BRI projects were based on a different model of governance, centered on locally sourcing workers, suppliers, and manufacturers, engaging international infrastructure-building experts, and focussing on building local capacity—these shocks would almost certainly be differently felt.
At present, about 60 per cent of China’s small and medium-size companies have resumed operations. But the pace at which BRI projects and their supply chains come back online will only depend on the effectiveness of the BRI partner countries’ containment of the virus and as well as the speed of China’s broader economic recovery. What remains to be seen, is the degree to which BRI is affected, and how developing countries which have put high stakes on BRI related projects respond.
Although it is highly unlikely that BRI will be the same initiative by this time next year.
(With inputs from cfr.org; forbes.com; and moderndiplomacy.eu)