China’s Infrastructure Development in the Indo-Pacific Region: Challenges & Opportunities

By Shino Watanabe —

President Xi Jinping of China hosting the Belt and Road Forum on International Cooperation during May 2017 in Beijing, China. Source: Wikimedia, used under a creative commons license.

Dr. Shino Watanabe is a professor in the Faculty of Global Studies at Sophia University, Tokyo, Japan. In 2019, Dr. Eto was a Visiting Scholar with the Japan Chair at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Dr. Watanbe’s essay is part of CSIS’s Strategic Japan Working Paper Series featuring Japanese scholars addressing pressing issues in Japanese foreign policy. Read her full paper here.

More than five years have passed since Chinese president Xi Jinping first announced the “One Belt One Road Initiative (OBOR),” subsequently renamed the “Belt and Road Initiative (BRI),” in the fall of 2013. Yet the initial optimism about BRI has already turned into growing concern among neighboring countries in Asia and beyond because BRI has created more challenges than solutions for development in the region in what has been called “debt trap” diplomacy. China has contributed to developing hard and soft infrastructure in BRI countries, enhanced its connectivity with and within the region, and boosted trade and investment between China and BRI countries. China’s increasingly active engagement in infrastructure development, however, posed new challenges to the Indo-Pacific region.

As I write for Strategic Japan, developing countries are now suffering from a ballooning amount of debt owed to Beijing, and their growing dependence on Chinese infrastructure financing raises concerns among policymakers. Now is the time for major countries such as the United States and Japan to take the initiative in adopting preventive measures and avoiding unintended and unnecessary consequences. The Free and Open Indo-Pacific (FOIP) vision, a potential framework for enhancing cooperation among like-minded countries in the region, can play a significant role in this respect.

The origins of this situation come from a genuine need for infrastructure in the region, and in 2009, a joint study conducted by the Asian Development Bank (ADB) and Asian Development Bank Institute concluded that from 2010 to 2020 approximately $8 trillion was needed to meet the infrastructure gap in Asia. In 2017 ADB released a new estimate that the region will require infrastructure investment worth $26.2 trillion from 2016 to 2030, or $1.7 trillion annually. According to ADB, each subregion requires the following amount of investment: $565 billion for Central Asia, $16.1 trillion for East Asia, $6.3 trillion for South Asia, $3.1 trillion for Southeast Asia, and $46 billion for the Pacific. The study estimated that the amount of infrastructure investment in Asia is currently $881 billion; thus, the region still lacks almost half of the needed infrastructure investment.

Such growing infrastructure needs have not been adequately addressed by traditional multilateral development banks (MDBs), neither in terms of volume of financing nor their business practices. Moreover, the Indo-Pacific region received only around 30 percent of IBRD loans on a commitment basis from fiscal year 2014 to fiscal year 2017. Further, MDBs have placed less emphasis on infrastructure financing. Developing countries have also criticized the business practices of MDBs. MDBs impose considerable costs and burdens on borrowers, causing some of them to look for alternative financing sources. MDB loans are not necessarily attractive to developing countries for several reasons. First, the project approval review process is very lengthy and cumbersome. Moreover, borrower governments must go through a procurement process after a project is approved by the board. Furthermore, stringent environmental and social safeguards of MDBs further delay the time for operational delivery.

Against this backdrop, Chinese leadership has recognized the lengthy procedures of the World Bank and regional MDBs as significant weaknesses and succeeded in attracting developing countries with seemingly “borrower-friendly” loans to address the infrastructure gap. In December 2014, China established the Silk Road Fund for BRI infrastructure projects with initial capital of $40 billion. This purely Chinese fund had invested in 15 projects worth around 6 billion by the end of March 2017. China then established a new MDB, the Asian Infrastructure Investment Bank (AIIB), in December 2015. Together with the BRICS countries (Brazil, Russia, India, China, and South Africa), China also helped establish the New Development Bank (NDB) in July 2015 and started operations, headquartered in Shanghai, in February 2016.

China has undoubtedly contributed to infrastructure development in the Indo-Pacific region with funding from its policy banks and newly established financial institutions. An examination of these various projects indicates that initiatives under multilateral institutions led by China tend to reflect general development funding principles such as economic viability. In contrast, infrastructure projects financed by China unilaterally, through Chinese banks such as China Development Bank (CDB) and China Exim Bank, more often provide funding for the construction of strategic facilities outside China that can be used as collateral if recipient countries default on their loans. Thus, the source of funding is one useful criterion for assessing China’s intentions.

In my research, I discovered that banks such as CDB and China Exim Bank appear to fund the development of strategic facilities such as ports outside China. In other words, China invests in strategic facilities unilaterally, rather than using its MDBs like the AIIB. This affords them opportunities to seize the projects as collateral if and when a borrowing government falls into default.  In fact, Chinese loans have accumulated to the extent that some developing countries began to review their contracts with China. For example, China’s takeover of Hambantota port in Sri Lanka in December 2017 was a wake-up call for developing countries that have borrowed extensively from China. Former Sri Lankan president Mahinda Rajapaksa built the port in his home district using Chinese money. When Sri Lanka was not able to repay the Chinese loans worth $1.1 billion, a Chinese state-owned enterprise, China Merchants Group, gained the right to manage the port on a 99-year lease. This case illustrates how China can take control of strategic infrastructure in other countries and potentially use them for military purposes.

The BRI strategy certainly has strategic implications for the Indo-Pacific region. The FOIP vision initially sought to address concerns related to maritime security, and such measures are necessary to maintain the rule-based international order in the region and beyond. At the same time, China’s infrastructure development in the Indo-Pacific has also generated concerns about economic security, and raised the question of whether this dimension of China’s strategy should also be addressed by Japan and its allies under FOIP.  China’s infrastructure financing, if unmonitored and inconsistent with established development financing principles, could pose a severe threat to the stability of the international financial order. Now is the time for the United States, Japan, and other countries to formulate a common approach to infrastructure development in the region. Such an approach will likely feature both elements of cooperation and competition with China and balancing the two will prove critical to maintaining economic security in the Indo-Pacific region.

Dr. Shino Watanabe is a professor in the Faculty of Global Studies at Sophia University, Tokyo, Japan. She expresses her sincere appreciation to the Strategic Japan Program of CSIS for providing the opportunity to conduct research for this project in Washington D.C.

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