HKUST Business School Magazine

Biz@HKUST Biz@HKUST 26 27 // Cover // Insight China’s Belt and Road Initiative Confronts Deglobalization Evidence-based studies reveal why China and most Belt and Road countries remain committed to pursuing greater economic integration even with the forces of deglobalization in the form of the US-China trade war and ongoing geopolitical tussles. By Chair Professor Albert PARK Head, Department of Economics at HKUST Business School China’s Belt and Road Initiative (BRI) provides a broad framework for increasing China’s engagement and integration with the global economy. Announced in 2013, a major feature of the Initiative is Chinese support for large-scale infrastructure and investment projects in participating countries. However, just as momentum was building, the Initiative was confronted with powerful forces of deglobalization in the form of the US-China trade war and questions about supply chain dependence on China raised by the COVID-19 pandemic. How successful was the BRI before the recent turbulence, how has it been affected by the recent turn toward deglobalization, and can the Initiative help combat or reverse rising protectionist instincts? These are all important questions in considering the future direction of the global economy. Unfortunately, debates about China’s Belt and Road Initiative have been highly polarized, rich in ideological rhetoric but typically devoid of evidence. Many in the West are highly critical, arguing that China seeks to exploit poorer countries and trap them in debt. China presents the Initiative as benevolent, supporting the development of countries around the world. Caught in between are the participating countries themselves, whose leaders often see an opportunity to finance needed infrastructure and attract foreign direct investment, but who also remain wary of excessive dependence on China and the need to balance international and domestic political interests that oppose closer ties with China. More investment in BRI countries In order to better inform our understanding of the implementation of the BRI based on evidence rather than rhetoric, I recently led research teams to complete two major projects on the BRI—one on “Trade and Investment Under the Belt and Road and Implications for Hong Kong” supported by Hong Kong’s Strategic Public Policy Research Scheme, and another on “The Belt and Road Initiative in ASEAN”, a collaboration between HKUST’s Institute for Emerging Market Studies and United Overseas Bank. These projects and related research have produced quantitative and qualitative findings that inform the questions just posed. Quantitative analysis utilizes micro- data on Chinese outbound FDI and construction projects in all countries from 2010 to 2019. First, analysis of the project-level data finds that the BRI significantly increased Chinese investments in BRI countries (defined as the originally targeted 67 countries). Both FDI and construction projects increased by more than 50% in BRI countries after the Initiative began compared to changes in non-BRI countries. When we analyze the determinants of the flow of Chinese FDI to different countries before and after the Initiative began, we find that compared to the years before the BRI (2010-2013), since the BRI began the importance of economic fundamentals (such as GDP growth rates) has declined, while the importance of the countries’ governance quality (including measures of political stability, corruption, rule of law, regulatory quality, and government effectiveness) has increased. These findings suggest that outbound FDI flows are less profit-motivated under the BRI, raising concerns about their economic viability. At the same time, the greater importance of governance factors contradicts the narrative that China is seeking to exploit corrupt, poorly governed countries. Encouraged to make investments in BRI countries, many Chinese companies apparently seek to avoid countries with high governance risk. We find that this is true for investments by both state- owned firms and private firms. What has been the impact of the BRI on international trade? A recent paper by Amber Yao LI, Associate Professor in the Department of Economics, and co-authors finds that the BRI significantly increases bilateral trade flows between BRI countries. The Initiative also increases the total trade volume of BRI countries, especially imports. With respect to trade with China, China’s imports from BRI countries increases after the Initiative, while exports from China to BRI countries do not change appreciably. These findings are consistent with China using FDI in BRI countries to secure access to resources (e.g., energy, minerals) or to outsource production of goods sold in China. The finding of positive trade impacts is important for two reasons. First, much research in economics has found a strong link between trade and growth. Second, if the BRI expands trade with member countries, it may have the potential to counter the trend towards deglobalization. Diplomatic and economic objectives Since China’s objectives for the BRI are diplomatic as well as economic, it is of interest to ask whether the Initiative has increased China’s soft power. To shed light on this question, in an ongoing project with coauthors, I examine how sentiment towards China in different countries has been affected by the Initiative. Machine learning methods are used to analyze the positive or negative sentiment found in over one million media articles about China published globally from 2013 to 2019. We find that in most parts of the world, sentiment towards China has become increasingly negative in recent years. This is even true in countries receiving the most FDI from China under the BRI (Indonesia, Pakistan, Russia). Further analysis finds that sentiment towards China is inversely related to the amount of FDI or construction projects received from China. This negative correlation is more apparent when the FDI projects are in the resource sector, and when they are made by state- owned enterprises. Thus, China does not appear to be increasing its soft power through the BRI and may even be harming it. Why would more Chinese investment in a country increase negative sentiment towards China even though there is evidence that the investments are having positive development impacts? Qualitative research in countries in Southeast Asia as well as other parts of the world finds that some Chinese projects are very unpopular locally because they harm the environment or have poor labor relations (for example, fail to obey local labor regulations or customary practices, or hire Chinese rather than local workers, etc.). Even one bad project in a country can attract considerable