The focus on high-speed rail also illustrates Beijing’s goal of gaining acceptance of Chinese standards. If countries across the region accept Chinese high-speed railway technology as their national standard, it could become the de facto standard across a vast geographical area. This means Chinese manufacturers and suppliers would enjoy a strong, first-mover advantage over other competitors, especially Japanese producers of high-speed rail.
In a policy document released by the MIIT on the development of the transport industry, the high-speed rail sector is expected to play a leading role in encouraging high-end Chinese industrial exports. It estimates the market for transport equipment to be around $263 billion by 2018. Chinese planners believe significant demand will come from regions covered by OBOR such as Southeast Asia, South Asia, Central Asia, and West Asia.
The Jakarta–Bandung High-Speed Railway project is a good example of how Beijing intends to use OBOR to promote the high-tech sector as well as Chinese technical and engineering standards. Beijing secured the right to build the 142 kilometre high-speed rail line connecting the Indonesian capital and Bandung in West Java after an intense bidding war with the Japanese. Beijing won the bid by offering to finance the project itself. In order to win over Indonesian President Joko Widodo, Xi Jinping even dispatched the Chairman of the National Development and Reform Commission, Xu Shaoshi, as a special envoy to Jakarta.
The most significant part of the deal for Beijing is the Indonesian Government’s decision to adopt Chinese high-speed railway technology. Xinhua, the Chinese Government official news agency, has reported that the project will adopt “Chinese standards, Chinese technology and Chinese equipment” and that a Chinese engineering company will be involved in every aspect of construction, from the initial survey to the management of the railway once the project is completed. For Beijing, this deal might be a loss-making venture, but it is a major breakthrough in persuading a foreign country to accept Chinese standards and technology.
Apart from the high-speed rail sector, the Chinese Government is also using OBOR to push for Chinese standards in other sectors such as energy and telecommunications. Ru Quan Lu, Director of Strategic Development at Petro China, argues that China should use its extensive investment in oil and gas projects in Central Asian states to promote Chinese petroleum industry standards:
“Based on the experience of American and European energy majors, controlling standards means having an upper hand in negotiation, more bargaining chips and better profitability. To control standards is more important than anything else.”
Telecommunications is another important sector in terms of gaining acceptance of Chinese standards. China boasts two world-class telecommunication equipment makers: Huawei and ZTE. The former derives 70 per cent of its sales revenue from outside of China and is particularly successful in Asia, Africa, and Latin America.
Huawei, ZTE, and China Mobile are closely involved in developing 5G technology, which includes setting and designing international technical standards. These companies are becoming active participants in many international telecommunication industry bodies and associations such as the International Telecommunications Union, the 3rd Generation Partnership Project, and the Institute of Electrical and Electronics Engineers. Beijing sees the telecommunications industry as central to its Made in China 2025 strategy.
It is no coincidence, therefore, that the Chinese Government envisages building telecommunication networks as a key part of OBOR. Hu Huaibang, Chairman of the China Development Bank, one of the world’s largest banks, specifically named the telecommunications sector as one of the key industries that his bank wants to support as part of OBOR, noting: “This will have an enormously positive impact on upgrading China’s industrial structure.”
Dealing with excess capacity
During the global financial crisis, the Chinese Government delivered one of the largest stimulus packages in recent economic history. It saved China (and arguably a host of other countries, including Australia) from recession by sending commodity prices sky-high. Though the stimulus program was effective, one of its lasting side effects was the creation of massive excess capacity in many industrial sectors from steel to cement. In the steel industry, for example, China’s annual steel production surged from 512 million tonnes in 2008 to 803 million tonnes in 2015. To put that into perspective, the extra 300 million tonnes is larger than the combined production of the United States and the European Union.
Dealing with the country’s excess capacity has become one of the top economic priorities for the Chinese Government. Beijing has described this issue as the sword of Damocles hanging over its head. Excess capacity will squeeze corporate profits, increase debt levels, and make the country’s financial system more vulnerable.
Many state-owned firms in sectors with excess capacity borrowed heavily during the financial crisis. The slowing economy, sluggish international demands, and the supply glut have reduced their profits. Many are struggling to keep their heads above water. These bad loans have put the Chinese banking system under a great deal of stress.
The Chinese Government has announced a number of policy measures to address the issue of excess capacity. This has included laying off 1.8 million workers from the steel and coal mining industries. The authorities are also trying to shut down polluting steel mills and blast furnaces.
OBOR is another way for Chinee policymakers to address the excess capacity problem, although not in the way that some observers believe. When Xi Jinping announced OBOR, a number of observers labelled it as an effort by China to export excess industrial products to neighbouring countries. The Financial Times reported in 2015 that the grand vision for a new Silk Road began its life modestly in the bowels of China’s commerce ministry as an export initiative.
In terms of addressing the excess capacity problem, OBOR is less about boosting exports of products such as steel and more about moving the excess production capacity out of China. OBOR projects are currently too small to absorb China’s vast glut of steel and other products. Instead, Beijing wants to use OBOR to migrate whole production facilities. Chinese premier Li Keqiang made the point clear in his address to leaders of ASEAN countries in 2014 at Nay Pyi Taw, Myanmar:
“We have a lot of surplus equipment for making steel, cement and pleat glass for the Chinese market. This equipment is of good quality. We want companies to move this excess production capacity through direct foreign investment to ASEAN countries who need to build their infrastructure. These goods should be produced locally where they are needed.”
Hu Huaibang, Chairman of the China Development Bank and the most influential financier of OBOR projects, says one of the most important objectives of OBOR is to help China undergo economic structural reform and upgrade its industries, moving away from the cheap mass manufacturing model:
“On the one hand, we should gradually migrate our low-end manufacturing to other countries and take pressure off industries that suffer from an excess capacity problem. At the same time, we should support competitive industries such as construction engineering, high-speed rail, electricity generation, machinery building and telecommunications moving abroad.”
Moving factories with excess capacity to OBOR countries helps China reduce the supply glut at home while helping less developed countries to build up their industrial bases. In essence, domestic economic liabilities become foreign economic and diplomatic assets. Jin Qi, the Chairman of the Silk Road Fund, a sovereign wealth fund set up in 2014 specifically to provide seed capital for OBOR projects, made this clear during one of her rare public speeches on OBOR.
Jin said China currently sits in the middle of the global production chain and it can help countries at an early stage of development to industrialise: “China possesses high-quality industrial production capacity, equipment, technology, ample supply of funds and 30 years of development experience.” She also noted that Chinese capital can “help facilitate international production cooperation, and reorganise global production chain. For China, it means helping the country to export high-quality production capacity, equipment, technical know-how and developmental experience.”
Part of this thinking is informed by China’s own experience of industrialisation in the 1980s and 1990s. One senior provincial economic planning official said China imported second-hand production lines from Germany, Taiwan, and Japan in the 1980s; essentially unwanted surplus industrial capacity. Beijing thinks China’s experience could be replicated in neighbouring, less-developed countries.
One clear example of this is the plan to migrate part of Hebei province’s massive surplus steel production facilities. The province, China’s largest producer of steel, wants to relocate 20 million tonnes of production capacity abroad by 2023. The plan calls for companies to move their excess steel (but also cement and pleat glass production) facilities to Southeast Asia, Africa, and West Asia. For example, Delong Steel from Xintai is building a steel mill in Thailand that is capable of producing 600 000 tonnes of hot rolled coil a year in partnership with a local Thai operator, Permsin Steel Works.
Some Chinese researchers and officials are sceptical of how successful this aspect of OBOR is likely to be. It is questionable whether OBOR countries can actually absorb China’s vast surplus production line. More importantly, will it be politically palatable for other countries to simply accept China’s unwanted industrial capacity?
Analysis from Anbang Research has noted that many OBOR countries are not enthusiastic about accepting China’s excess capacity. In fact, some countries are hostile to the idea because in several industrial sectors, they are competing directly with China.
“In the foreseeable future, Belt and Road countries are unlikely to experience the same rapid pace of urbanisation China had enjoyed in the last decade. The current problem of excess capacity is of a global nature; the Belt and Road Initiative is unlikely to solve it.”
One of China’s most senior policy advisers, Zheng Xin Li, a former deputy head of the Policy Research Office of the Chinese Communist Party Central Committee, has expressed his concerns about the massive migration of Chinese manufacturing to Southeast Asia and South Asia.
“There are still 240 million farmers (in China) who need to find manufacturing jobs. If most of the country’s labour-intensive industry moves abroad, all these surplus farm labours will be stuck in the countryside.”