After years of exporting to the world, China’s now struggling to keep her economy moving amid a slowing global economy.
The alternative could be political unrest among a populace choking on pollution that’s increasingly rendering hollow President Xi Jinping’s ‘Chinese Dream.’
Overseas infrastructure, therefore, represents a key pump-priming relief valve for the Chinese economy.
Understanding China’s deep need for overseas infrastructure export projects t can significantly strengthen the negotiating power of AIIB borrowers. That’s because China needs employment-generating overseas outward investment as much as AIIB borrowers need infrastructure make overs.
Faced with a slowing domestic economy already choking on wasteful infrastructure investment, China must ‘keep pedaling’ (ie to maintain momentum in its infrastructure industry) or fall off (suffer politically-destabilizing rising domestic unemployment in key infrastructure industries).
China’s leaders knows this. It’s economic orthodoxy at this point that China must reorient her economy away from excess investment increasing wasteful domestic infrastructure and toward domestic consumption. But that transition won’t happen overnight. Building overseas infrastructure buys time.
This levels the power relationship.
Using the bicycle analogy, the AIIB is the legs and China’s infrastructure state champions like State Grid Corp. of China and China National Overseas Oil Company (CNOOC) are the wheels. Viewed this way, the AIIB is a domestic Chinese macroeconomic management tool, not a benevolent diplomatic gift to the world — as China likes to portray.
Appreciating this fact can help AIIB borrowers get a better deal.
Consider the Philippines: in 2008, the country awarded a 25-year contract to State Grid to upgrade and operate the ramshackle Philippine electricity grid, which is vital national infrastructure.
The deal was symbiotic. State Grid got a key overseas demonstration project. The Philippines got to engage in overseas infrastructure investment where other global infrastructure companies were hesitant to tread.
By all accounts, the agreement has gone well. More lights now stay on for longer in the Philippines. Meanwhile, State Grid has used the contract as a showcase to win subsequent investments in South Australia, Italy, Brazil and elsewhere.
Happily, legitimate worries about State Grid being used as a stalking horse for progressive political Chinese domination of the Philippines have proved unfounded. Two things show this.
First, the Philippines has continued to be vocal in opposing Chinese encroachment in disputed areas the South China Sea. The Philippines is still pursuing a UN tribunal judgement over China’s Nine-Dotted Line — a decision which is expected in coming months.
Separately, the Philippines last year sent home State Grid technicians and replaced them with Philippine workers. This after largely unsubstantiated concerns were aired of a security virus in the Philippine grid of unstated, but clearly inferential, origin.
Instead of responding with strident, threatening language, State Grid quietly accepted the expulsions with little more than a call for ‘procedural fairness.’
This indicates that as State Grid and other Chinese infrastructure companies realize that as they expand internationally, they no longer occupy the home turf where capricious actions are the unchallengeable privilege of the home team.
Therefore, the devil’s bargain for China of gaining a solution to its ‘bicycle problem’ of maintaining domestic employment through export infrastructure may be a realization in China that it must play by other countries’ rules as part of its ‘Going Out’ export strategy.
Given this, AIIB borrowers may now enjoy being able to apply a few pages from China’s own successful playbook.
These can include limiting Chinese companies like State Grid and CNOOC to minority stakes with majority owner domestic joint venture partners, requiring transfer of leading edge intellectual property and requiring local staffing.
All of these are common features of Build-Operate-Transfer infrastructure projects, which already are staples of Chinese domestic projects that have involved foreign partners.
In coming years, China can be a infrastructure engine for a greening global economy using capital China is now ideally-suited to provide through the AIIB.
Done right, it can be a rising tide that lifts all ships. It can bind China into a positive web of mutually beneficial, trusting relationships.
The place to start down this path would be through funding such Chinese ‘near abroad’ infrastructure projects such as the Trans-ASEAN Gas Pipeline (TAGP) and Trans-ASEAN Electricity Grid (TAEG). Both of these fit well into China’s concepts of a One Belt, One Road concept linking China to the world.
They also fit with other energy infastructure concepts for Asia such as the Japan’s Masayoshi Son’s proposed East Asian Super Grid connecting northeast Asia and southeast Asia and Grenatec’s Pan-Asian Energy Infrastructure stretching from Australia to South Korea with gas pipelines, high voltage power lines and fiber optic cables.
This in turn could reduce the risk of territorial war in the South China Sea through creating a deepening web of cooperative ventures focused on energy security. This in turn would be best served through creating Joint Development Areas in the South China Sea protected by multilateral patrols.
This in turn would meet all the criteria of Chinese President Xi Jinping’s ‘Three No’s:’
1. No interference in the internal affairs of other nations
2. Does not seek to increase the so called “sphere of influence”
3. Does not strive for hegemony or dominance
Ultimately, the AIIB can be a great force for political stability, economic growth and a greening economy in Asia. The key is recognizing that China needs to make outward investment as much as her neighbors need inward investment. Doing things right will solve a host of problems simultaneously.
This article was published at Grenatec.com