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BRI Deal Won't Bring a Windfall
Chinese president Xi Jinping arranges his papers at the closing session of the National People's Congress, which included a vote on a new draft security bill for Hong Kong, at the Great Hall of the People on May 28, 2020 in Beijing, China.
Photo by Kevin Frayer/Getty Images

BRI Deal Won't Bring a Windfall

John Lee

Chinese President Secretary Xi Jinping openly refers to the BRI as the primary blueprint to herald the arrival of a Sino-centric strategic and economic order in the Indo-Pacific and Eurasia. One of its main objectives is to nurture what Beijing refers to as strategic support states and entities. This itself should indicate to Victorian Premier Daniel Andrews that he is reaching beyond his station.

The Premier is defiant. His primary defence is that the BRI will bring economic benefits to Victoria that would not otherwise be available had he not signed on. Others argue it is advancing Victoria’s economic objectives even if it does not serve the country’s ¬national interest. But assessed ¬according to its own light, this Victorian argument for economic pragmatism is unconvincing.

BRI spruikers tell us that signing on will allow Victoria access to deep reservoirs of dormant capital waiting to be allocated, such as the multi-billion-dollar Silk Road Fund.

Read the fine print. About 87 per cent of Chinese funding for the BRI comes from state-owned policy and commercial banks, which are already the most overleveraged financial institutions of any major economy. Of the remaining 13 per cent, about 9 per cent comes from Chinese firms with only 2 per cent from the Asian Infrastructure Investment Bank and Silk Road Fund respectfully. Even then, about one-fifth of the capital held by the Silk Road Fund comes from the country’s indebted banks. The fund is not in a position to flippantly allocate capital to projects around the world.

What about Chinese firms? The pressure on them to invest in viable projects is intense given most of the capital poured into BRI signatory countries is likely to generate negative, or at best, no returns. This includes tens of billions of dollars in countries such as Pakistan, Nigeria, Russia, Laos, Iran and Kazakhstan that were made for strategic rather than commercial reasons.

The point is that Chinese firms can no longer afford to throw substantial amounts at poor investments and are desperate to find commercially attractive projects regardless of whether one’s government has signed on to the BRI or is apart from it.

This largely explains why the volume of Chinese outward investment in non-BRI countries has increased more rapidly than in BRI countries over the past few years. Greatest interest now is in well governed and advanced economies such as Australia. The intent to direct capital into advanced economies that have not signed up to the BRI is as strong as to those economies that are signatories.

For Beijing, national strategic plans apart from the BRI such as Made in China 2025 depend on having a strong presence in, and access to, the world’s most sophisticated economies. As far as Chinese firms are concerned, investments in these countries will help them own and develop world-class assets and make a decent return on capital.

This speaks to the folly of Andrews’ rebellion. In addition to parking capital by buying Australian real estate, which is seen as a secure haven, Chinese entities have targeted high-performing Australian sectors such as resources, energy, agriculture and health¬care regardless of which state they are located.

When broken down by state, NSW has attracted the lion’s share of Chinese investment. Victoria is a distant second, but its growing share of Chinese investment is also skewed by the giant $3.5bn sale of Coal & Allied to China’s Yancoal in 2017. The former is owned by Rio Tinto, which is headquartered in Victoria, but the assets sold are in NSW. There is no credible evidence that Andrews’ pro-BRI stance has led to any meaningful economic windfall for Victoria.

What about Victoria’s Big Build plan? To be sure, signing onto the BRI has led to increases in Chinese infrastructure and construction investment in countries such as Pakistan, Sri Lanka, Cambodia, Malaysia, Italy and Greece.

But Chinese firms have expected and received the inside running for contracts in these countries as part of special BRI-related deals. The terms have been closely guarded and, when eventually leaked, heavily favour Chinese entities. The degree of buyer’s remorse in these countries initially seduced by special infrastructure-focused agreements is acute.

That is the danger of Andrews promising to increase the participation of Chinese firms under the BRI framework that will be drawn to the more attractive build projects. As far as Beijing is concerned, the decision of Victoria to sign onto the BRI is opening the door for Chinese firms to bypass normal competitive tendering processes that are a hallmark of well-governed democratic political economies.

These processes protect the legal and financial rights of stakeholders, preserve standards and ensure appropriate benefits flow to the local economy.

If such processes are circumvented or weakened, that can hardly be a good outcome for a state that ought to be able to ¬attract ample funding from multiple sources. If there is no bypassing of the normal processes because pre-existing Victorian or national rules kick into place, Andrews will have offended both China and Canberra for little gain.

Either way, the Victorian government is being reckless, foolish or both. Better to join the ranks of the federal and other state governments that have been the more principled and pragmatic.

Read in The Australian

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