China’s One Belt, One Road initiative
The potential future gains (both economic and political) from the OBOR project stand to benefit China and the nations of the Middle East. But the project is not without risks. Sarah Hsu explains
China’s One Belt, One Road (OBOR) programme has been welcomed in the Middle East. OBOR’s land-based and maritime silk roads cross both over and through the region. The land-based road passes through Istanbul and Tehran, as well as through Gwadar, while the maritime road goes through the Mediterranean and Red Seas and into the Gulf of Aden.
While China is an unlikely ally to Saudi Arabia, Iran and Syria – they are often in political and ideological disagreement – China’s secret strategy is neutrality and, more importantly, money. Chinese money and resources are making a difference across the region: in Iran, in which China is constructing the Tehran-Isfahan high-speed railway; in Turkey, which is the middle corridor of the OBOR project and in which China is constructing the Baku-Tblisi-Kars railroad; as well as in Egypt, with the Suez Economic and Trade Cooperation Zone; in Oman, in the construction of Duqm; and in the potential reconstruction of Syria. It is hoped that the large influx of Chinese foreign direct investment will spur economic growth through enhanced industrial production and trade.
China’s aims for OBOR are so ambitious that it has sought to integrate the programme with other countries’ medium-term development plans. For example, OBOR is considered an important part of Saudi Arabia’s Vision 2030 and Jordan’s Vision 2025. Saudi Arabia’s plan is poised to diversify its economy away from oil. Jordan’s Vision 2025 is more complex, encompassing over 400 policies and including lofty aims such as strengthening institutions and sustainability. Both plans underscore the aims of boosting both GDP and human capital.
Chinese foreign direct investment welcome
In a region that often struggles ideologically against the influence of the United States, China’s promise of non-interference and funding for important development projects is very attractive. Despite the concerns of states like Saudi Arabia that are opposed to China’s strengthening of Iran through the OBOR programme, the region, which is attempting to build up infrastructure, appears mostly glad to receive Chinese capital. In countries like Oman, Chinese investment may amount to more than half of all foreign direct investment (FDI); in the region, China accounts for almost a third of FDI.
A period of low oil prices has led to slower growth in the oil-producing economies of the area, and, as a result, such nations experienced increasing budget and trade deficits. For countries like Algeria, which derives 90 per cent of its income from oil exports, lower oil prices translate directly into much leaner times. What is more, countries that do not produce oil often export labour to oil-producing nations, so the knock-on effects spread lower growth to the rest of the country. Unemployment is a big issue in the region. Additional funds, especially for projects that can help the Middle East gain a wider base for economic growth, can help the region resist oil price volatility. This is another major reason that China’s investment from OBOR is so welcome.
China gains from the investment as well
In exchange for its participation in building up infrastructure in the Middle East, China obtains valuable outlets for employment of its construction firms with a potential for a long-run return on investment, with the hope of building up new export markets. This is particularly beneficial to Chinese firms since the Asian nation is seeing an overall slowdown in economic growth that has led to lower rates of fixed asset investment (read: infrastructure). As real estate and fixed asset investment in China have wound down, obtaining new sources of growth has been a key focus for the Chinese government. President Xi appears to have two major policy aims in this regard – building up domestic consumption and promoting the OBOR plan.
China also gains the ability to enhance security through economic development in the volatile region. The region is essential to Chinese investment in energy and infrastructure, and is viewed as an important crossroads between Asia and Europe. The security of this region can help to stabilise Xinjiang, home to Uyghur separatists that China views as a threat to security and an important node on China’s belt and road. To the extent that China can reduce the potential for terrorist training of the Uyghurs in Syria and Iraq, it can boast some success. China is also using the Shanghai Cooperation Organisation (SCO) to increase military and counterterrorism cooperation in the Middle East, linking with the observer states of Afghanistan and Iran and dialogue partner Turkey. Economic involvement through OBOR, coupled with intergovernmental cooperation established through the SCO, work to combat terrorism in the area.
Still, risks exist
The beneficial nature of the OBOR project doesn’t imply that China’s plans for infrastructure development in the Middle East are without risk. According to the Economist Intelligence Unit, security risks in the Middle East are highest in Egypt, while most Middle Eastern countries present a higher credit risk than the average OBOR country, with Syria at the top of the list. Currency risk is also high in many Middle Eastern nations. In addition, China lacks any strong policy orientation in the region, as China remains wary of taking sides.
As a result, success is not guaranteed. China will have to regularly assess its risks and re-evaluate its position in OBOR projects. I have written elsewhere about China’s general lack of due diligence in determining the viability of projects. Returns are expected to be paid out over the long term, and some of these returns may end up being negative. The projects themselves may not generate sufficient profit, or security risks could forestall their success. Who absorbs the losses depends on who is holding the debt or equity in each project. In some cases, Chinese state-owned banks hold policy bonds, and if these experience losses, the Chinese financial system will take a hit. If foreign investors hold the debt or equity, they will stand to lose.
Indeed, the IMF’s Managing Director Christine Lagarde has warned that OBOR projects should be carefully selected, as there is a risk of driving up debt. The main concern is that the large scale funding that goes into infrastructure investment will leave developing countries in a poor financial situation, possibly with little to show for it. To prevent this, China must guard against encouraging overspending in invested countries.
For the Middle East region, OBOR could certainly provide a boost. If risks halt construction, they are unlikely to have the intended effect, and will present yet another obstacle that the region has to endure. Truly, the project is ambitious in scope, and a realistic assessment of the overall gains from its diverse manifestations in each invested country won’t be possible until five or ten years down the line. Although at present, the project appears to promise a win-win situation for both the Middle East and for China, whether OBOR will be the most successful undertaking in history or the biggest failure has yet to be seen.
Sara Hsu is Associate Professor of Economics at the State University of New York at New Paltz. She has published over six books, including one on the topic of Chinese informal finance entitled Informal Finance in China and a Chinese-language book on Chinese shadow banking, in addition to fifteen journal articles on the Chinese economy and financial sector. She also writes about current events in the Chinese economy in Forbes, The Diplomat, the Nikkei Asian Review, East Asia Forum, China Brief and China World
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This article appears in the China and the Middle East issue of The Middle East in London.
Hsu, Sara. ‘China’s One Belt, One Road initiative’ The Middle East in London 14, no. 4 (June–July 2018); 5-6.