The Role of China for the Socio-economic Progress in South Asia

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by Dr. Salehuddin Ahmed     16 January 2022

China is a growing influence on other developing economies through trade, investment, and ideas. Since opening up to foreign trade and investment and implementing wide-ranging reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018. China’s economic and political footprint has been expanding quickly across the globe, with South Asia being no exception to that. Around the beginning of this century, Beijing’s relations with South Asia began to expand and deepen rapidly.

Though China is a relatively new entrant to South Asia and is yet to clearly understand the institutions and organizational cultures of the focus countries, both sides are acutely aware of what they mean to each other, and keen to learn to work in the interest of the broader relationship. China is a growing influence on other developing economies through trade, investment, and ideas. 

China rises

In 1960 GDP per capita of China was US$89.52. Until about the mid-1990s, China was a low-income country, with a per capita income of US$317 in 1990. Throughout these three decades, China’s per capita income was not much different from the three major South Asian countries – Bangladesh, India and Pakistan. As can be seen from Figure 1, China’s growth trajectory broke away from the rest since 1995. Its per capita income in 2020 was around US$10,500, compared to that of Bangladesh (US$1,968), India (US$1,900) and Pakistan (US$1,193).

 

During this period of rapid growth, China lifted millions of people out of poverty (Figure 2), In 1990, there were more than 750 million people – about two-thirds of the population – living below the international poverty line (US1.90 a day) in China. By 2012, that number had fallen to fewer than 90 million, and by 2016 – the most recent year for which World Bank figures are available – it had fallen to 7.2 million people (0.5% of the population), suggesting that roughly 745 million fewer people were living in extreme poverty in China compared to 30 years ago.

Figure 2: Extreme poverty (people living below US$1.90) falls dramatically in China

China has formally overtaken Japan in 2010 as the world’s second largest economy, accounting for about 25% of global GDP or output. In 2001, when China joined the World Trade Organization (WTO), it accounted for 4% of the world’s exports, and by 2017, that had risen to 13%. China’s foreign exchange reserves, the largest in the world, rose to US$3.22 trillion in May 2021.

Having grown in such a staggering fashion, unprecedented in recent history of the world, China’s economy is facing structural headwinds given adverse demographics, tepid productivity growth, and the legacies of excessive borrowing and environmental pollution. These challenges require attention, with short-term macroeconomic policies and structural reforms aimed at reinvigorating the shift to more balanced high-quality growth.

The government recently highlighted achieving common prosperity as a key economic objective, reinforcing signals of a possible shift in policy priorities towards tackling income inequality. The Chinese government has made innovation a top priority in its economic planning through a number of high-profile initiatives, such as “Made in China 2025,” a plan announced in 2015 to upgrade and modernise China’s manufacturing in 10 key sectors in order to make China a major global player in these sectors.

Salient features of China’s role

Since as early as 1950, China has been leveraging its strong history of domestic achievements in development to support other ‘developing’ countries through its South-South cooperation and in the 70 years since, has grown into a preeminent provider of financing for global development. According to the Chinese government’s 2021 White Paper, ‘China’s International Development Cooperation in the New Era’, China spent RMB270.2 billion (US$42.0 billion) on its international cooperation efforts in total between 2013 and 2018 (approximately RMB45 billion or US$7.0 billion annually); however, this represents only a fraction of China’s overall engagement in low- and middle-income countries and does not account for its significant non-financial contributions to development.

Despite its increasingly important role in financing global development, the Chinese government has made it clear that its development cooperation is categorically different than that of Organisation for Economic Co-operation and Development (OECD) donors. The government considers China to be “the largest developing country in the world” and, as such, views its development cooperation efforts as “a form of mutual assistance between developing countries”. China considers its “South-South cooperation” to be “essentially different from North-South cooperation”.

China also characterises its activities as “international development cooperation”. The introduction of this language marks a relatively recent “shift in China’s self-perception of its international development role”. This distancing from the language of “foreign aid” (as reflected in the title of the 2014 White Paper titled ‘China’s Foreign Aid’) was initiated by President Xi Jinping, in power since 2013, who envisions a greater role for China in the international order and is committed to elevating China’s “vision and contributing its strength to resolving global development issues and implementing the United Nations (UN) 2030 Agenda for Sustainable Development”.

The 2021 White Paper, titled ‘China’s International Development Cooperation in the New Era’, finalises China’s discursive shift toward development cooperation. It explains that “China has been upgrading its foreign assistance to a model of international development cooperation” (although it continues to refer to “foreign aid” and “foreign aid projects” in some cases). It defines international development cooperation as “China’s bilateral and multilateral efforts, within the framework of South-South cooperation, to promote economic and social development through foreign aid, humanitarian assistance, and other means”.

According to the 2021 White Paper, between 2013 and 2018 China allocated RMB270.2 billion (US$42 billion) to foreign assistance. The White Paper only provides an aggregate figure for these six years, but if divided equally, this amounts to an average of RMB45.0 billion (US$7.0 billion) annually (see Table 1). Just over half of these funds took the form of interest-free loans and grants, while 49% were concessional loans, meaning loans subsidised by the Chinese government with a preferential interest rate of 2-3% with 15-20 years maturity and a grace period of five years. Also 4% of loans was interest-free loans, usually, with a 0% interest rate, 20 years maturity, and 10 years grace period. The other 47% of China’s foreign assistance during this period was given as grants.

Table 1: China average annual foreign assistance by recipient region in US$ billions

Regions 2010-2012 2013-2018
Europe 0.09 0.21
Oceania 0.18 0.28
International organizations 0.00 0.28
Latin America and the Caribbean 0.37 0.49
Asia 1.43 2.59
Africa 2.39 3.15
Total 4.60 7.00

(Sources: Sun, Y. 2014. Africa in China’s new foreign aid white paper. Brookings; Information Office of the State Council. 2021. ‘China’s International Cooperation in the New Era’. People’s Republic of China)

A comparison of the 2014 and 2021 White Papers also reveals a shift in the concessionality of China’s foreign assistance. In relative terms, China has increased its use of grants from 36% of foreign assistance in 2010-2012, to 47% in 2013-2018. These different financing mechanisms are used by China for different types of projects; both White Papers explain that grants are mainly used to fund projects related to social welfare, human resource development, technical cooperation, material assistance, emergency humanitarian assistance, while concessional loans are used for larger industrial and infrastructural projects and goods and materials, and interest-free loans are used mainly for the construction of public facilities.

Chinese development cooperation is grounded in the long-standing principles of “mutual respect for sovereignty and territorial integrity, mutual non-aggression, non-interference in each other’s internal affairs, equality and mutual benefit, and peaceful coexistence”, as first articulated by the Chinese government in 1954 in the ‘Five Principles of Peaceful Coexistence’.

Another fundamental principle of Chinese development cooperation is the idea that “projects should be proposed, agreed and led by recipient countries”. This has been instrumental in shaping how China thinks about resource allocation. This has also impacted the type of projects China funds; for example, China’s historical emphasis on funding infrastructure projects rather than social welfare initiatives is, in part, also the result of the demand from recipient countries that prioritise China’s support for much-needed infrastructure investments.

China’s BRI has two main components and five pillars. The components are an overland Silk Road and Economic Belt connecting China with Europe, the Middle East, and Central and Southeast Asia and a Maritime Silk Road including the construction or improvement of ports along the South China Sea, Indian Ocean, and South Pacific. The pillars include infrastructure, trade, financial connectivity, policy, and people-to-people exchanges. The BRI spans 65 countries that, according to a 2018 analysis by Morgan Stanley, accounted for 30% of global nominal GDP, 40% of global GDP growth, and 44% of the world’s population. This analysis also suggests that China’s overall spending on the BRI could reach US$1.2 to US$1.3 trillion by 2027. The total announced investment is as high as US$8 trillion.

Climate change response is mentioned throughout the White Paper including a section on environmental protection; however, there is no reference to the Paris Agreement or indications that China plans to mainstream climate objectives within its development programming. Rather, it mentions the BRI South-South Cooperation Initiative on Climate Change, its support for low-income countries trying to mitigate the effects of climate change, the establishment of a South-South Climate Cooperation Fund (SSCCF), initiatives to support low-and middle-income countries making the transition toward renewable energy, and environmental management and sustainable development training programmes.

China has emphasised health in its development programme for decades and has grown into a major player in this sector. Since the start of the COVID-19 pandemic, in particular, China has been promoting the health aspect of its BRI, what has been called the ‘Health Silk Road’ or China’s efforts to build a “community of common health for mankind”. COVID-19 is mentioned often in the 2021 White Paper, both as a rallying cry for the importance of global development and cooperation and as an example of China’s commitment to the global response through the provision of equipment and medical teams, investment in health infrastructure, support for multilateral initiatives, and debt relief. The document also outlines China’s commitment to making COVID-19 vaccines “available as a global public good once they have been developed and applied in China”. Although not mentioned in the White Paper, China also joined COVAX, the vaccines pillar of the Access to COVID-19 Tools (ACT) Accelerator. In early 2021, China committed 10 million doses to COVAX.

Recent role in South Asia

China has embarked on a grand journey West. Officials in Beijing are driven by aspirations of leadership across their home continent of Asia, feelings of being hemmed in on their Eastern flank by US alliances, and their perception that opportunities await across Eurasia and the Indian Ocean. Along the way, their first stop is South Asia, comprising eight countries—Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka—along with the Indian Ocean (particularly the eastern portions but with implications for its entirety). China’s ties to the region are long-standing and date back well before the founding of the People’s Republic in 1949.

China’s main asset is its economic levers of influence, and Chinese actors are proactive in wielding these. China is helping to construct mega infrastructure projects in almost every country in South Asia; in most cases with money that it has lent them. Its loans to Sri Lanka were at US$4.6 billion in 2020, and the overall figure for Maldives is believed to be between US$1.1 billion and US$1.4 billion. According to the IMF, Chinese loans to Pakistan stood at US$24.7 billion by April 2021. Figures from the Ministry of Finance show that the total outstanding Chinese loan to Bangladesh was around US$2.6 billion in fiscal year 2019-2020.

“Debt-Trap Diplomacy”, is a widely used narrative against China, by the Western and Indian media, suggesting that China really has a “Machiavellian strategy”. However, in-depth independent studies found no “debt trap” in the four countries namely Bangladesh, Maldives, Nepal and Sri Lanka. Sri Lanka, most often cited as an example of debt-trap diplomacy, has an overall debt management problem. Studies in 2020 put Sri Lanka’s external debt to China at about 6% of its GDP. Other countries like Nepal and Bangladesh have been prudent in choosing their funders and methods of financing, often choosing traditional multilateral institutions or other bilateral lenders as partners.

India is still a more significant strategic player than China. India continues to be the State with the most influence on the choices, interests, and conduct of the countries especially in South Asia. Due to India’s historical, political, and social connections with these countries, there seem to be limits to how deeply entrenched China can become. However, the balance is gradually shifting toward China, for the role it can play as a developmental partner as well as a balancing factor against the regional power, India. Moreover, India’s close presence in the social, political, and economic lives in these countries also leaves it open to heightened levels of criticism, including allegations of meddling.

In recent years, the most powerful sources of Chinese influence in the four South Asian countries – Bangladesh, Maldives, Nepal and Sri Lanka – have been commercial and financial. This is reflected in high-value project finance and operations partnerships, not least for the Hambantota and Colombo port projects in Sri Lanka and the Padma Multipurpose Bridge Project in Bangladesh. Without exception, the governments of the four countries have described China as a crucial development partner, either as a funder or in providing technological and logistical support. Additionally, it is the biggest trading partner in goods for Bangladesh and Sri Lanka, and the second-largest for Nepal and Maldives. Chinese investors have been the largest source of FDI pledges to Nepal for six consecutive years till 2020–2021, with more than half of the country’s total FDI in the 2018–2019 fiscal year. However, the economic element is increasingly intertwined with political, government, and people-to-people aspects of these relationships.

Educational partnerships have expanded too. Several Confucius Institutes have opened in Bangladesh in quick succession. In Nepal, multiple schools have made Chinese-language courses compulsory after the Chinese government offered to cover the salaries of the teachers involved. In Bangladesh, journalists have been awarded one-year, all-expenses-paid fellowships to Chinese institutions, and multiple newspapers have worked with the Chinese embassy to coordinate roundtables on the benefits of the BRI for the country.

The pandemic has created opportunities for China to work directly with the four countries in new ways—on the provision of medical equipment, biomedical expertise, and capital for coronavirus-related needs. In April 2021, Foreign Ministers of China, Afghanistan, Pakistan, Nepal, Sri Lanka and Bangladesh agreed to deepen cooperation as South Asian countries are facing a new wave of the COVID-19 pandemic. 

Changing Geo-politics and Bangladesh

There is no denying that the United States remains the top global power. However, the nation is in a relative decline. This is largely due to the rise of China and a number of other emerging economies including India. The global economy’s shifting centre of economic gravity towards Asia is making China and India two powerful economic engines as well as geo-political rivals.

Geo-political rivalry between the two Asian giants means smaller South Asia countries, including Bangladesh, could face mounting challenges in managing a balanced relation with them in years ahead. Nevertheless, it is critical for these countries to maintain balanced ties with India and China, preserving their national interests. Too much alignment with a single power risks the country becoming a vassal state.

Historically, China has been well-connected with its immediate neighbours as well as Europe, Middle East and Africa through the Silk Road for centuries. Beijing intends to re-establish this historical connection, creating a vast network of railway, energy pipelines, highways and modernizing border points.

Beijing is also developing new institutions and channelling funds, such as the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund, to support the largest undertaking since America’s Marshall Plan, implemented after World War II.

The BCIM Economic Corridor, involving Bangladesh, China, India and Myanmar, is also a part of OBOR. However, the progress of BCIM has been less than satisfactory, although its origin dates back to the 1990s, as China and India’s strategic rivalry has slowed down the pace of BCIM.

Dhaka needs to employ its diplomatic apparatus to integrate with China and other Southeast Asian countries, taking the institutional advantages of OBOR in general and BCIM in particular. Dhaka and Beijing should work closely to find ways for Bangladesh to access the most dynamic region of the world, i.e., East Asia, through Myanmar, taking advantage of China’s leverage over the country.

China’s plan to revive the Maritime Silk Route (MSR) and development of economic belts offer immense opportunities for Bangladesh. The plan of the 21st century MSR coincides with Bangladesh’s demarcation of its maritime boundary with two of its Bay of Bengal neighbours – India and Myanmar. This gives the country an opportunity to build a blue economy in the world’s largest Bay.

It is expected that both Dhaka and Beijing will forge greater cooperation involving blue economy. According to the Sino-Bangladeshi Joint Statement, the two countries will also commence feasibility studies on the establishment of the China-Bangladesh Free Trade Area and China will continue to support Chinese enterprises in the construction of special economic and industrial zones in Bangladesh.

The two parties also affirmed that, in addition to Chinese domestic banks, the AIIB will be an important financial source for Bangladesh’s economic development needs, as witnessed by the fact that one of the first four AIIB loans was for a Bangladeshi power distribution system upgrade and expansion project.

China already has FTAs with a handful of countries, including Pakistan, as well as with ASEAN. China’s FTA practice is evolving, and its existing agreements provide a reliable indicator of the extent of trade and investment facilitation and liberalization we can expect under the future China-Bangladesh FTA.

Conclusion

China has always believed in mutual respect and treating each other as equals, and advocated mutual accommodation and dialogue among civilizations. Despite their differences in national condition, development stage and cultural background, all participants of Belt and Road are equally important partners. All the Belt and Road projects must be open and transparent, and should be aligned with the development strategy and long-term plan of the participating countries. Flexibility to and fully accommodate the reasonable concerns of all parties in the spirit of seeking common ground, respecting differences and pursuing common prosperity are essential.

The partners must be transparent and corruption free, which is also beneficial for China. As long as China is not tone-deaf and is able to take effective steps to correct the problems, it will have a good chance to succeed. China, for example, may set up a mechanism to review current and future projects, which will enable it to continually refine its policies and practices so as to bring greater transparency, open competition, inclusive growth and wider acceptance overseas. Going forward, China’s door will open even wider, for this serves our own interests as well as those of others.

References

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 This paper was presented at the Webinar series held in the commemoration of the 58th Anniversary of Moulana Bhashani’s historic China visit. The Webinar was organised by the Moulana Bhashani Parishad, SydneyAustralia.