Key Points

China is active in South Asia and perceives the region as vital in its quest towards achieving the status of a global power.

It has a well-crafted strategy which it uses to achieve its objectives whereas India appears to be merely reactive.

India cannot hope to match or contain Chinese influence in the region unless its economic development becomes a model for other countries to follow.

Summary

China has been interested in South Asia for quite some time now. Initially, that interest was seemingly predicated on its “string of pearls”, a necklace around India that aimed to contain, if not harm, Indian strategic and security interests. While those “pearls” caused unease in India, it soon became obvious that South Asia is not the only region in which China is proactive. In fact, China’s footprint is growing in every part of the globe. The overarching Chinese objective is not limited to strategically constraining India. Rather, it aims to achieve the broader objective of global power status and to have that status acknowledged by the United States, which it sees as the only remaining superpower.

Analysis

China seems to have a well-crafted strategy for its global ambitions. While Deng Xiaoping was responsible for the country’s initial economic transformation, in 2013, to give the slowing Chinese economy a major boost, President Xi Jinping launched a new strategy called the “One Belt One Road” (OBOR) initiative, also known as the Belt-Road Initiative that aimed to increase the connectivity of Asia with Europe and Africa via overland and maritime networks. Trade between China and Belt and Road countries exceeded US$600 billion in the first eight months of 2016. This was 26 per cent of China’s total foreign trade volume during this period. Moreover, Chinese exports to this region are increasing every year. As trade between countries and regions grows, investment often becomes necessary to generate further growth. It is hardly surprising, therefore, that investment and the financing of infrastructural projects is a cornerstone of the Belt-Road Initiative. From January to August 2016, China invested nearly US$10 billion in countries along the Belt and Road through financial institutions, including the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund. China is currently working to promote OBOR. To further that objective, Xi Jinping has visited a number of countries along the Belt-Road routes. China is propagating the notion that the Belt-Road Initiative will lead to increased employment and decreased poverty. It also says that the project will ultimately be integrated into the global economy in the future. China is selling the idea that countries along the route can connect their domestic development plans to the Belt and Road in a bid to bolster growth and explore further opportunities. For instance, it wants Bangladesh to align its seventh Five Year Plan with China’s thirteenth Five Year Plan.

A number of the economic corridors that China has launched are actually part of OBOR. The most prominent are the China-Pakistan Economic Corridor (CPEC), the China-Mongolia-Russia economic corridor, the new Eurasia land bridge economic corridor and the Bangladesh-China-India-Myanmar (BCIM) economic corridor.

CPEC is regarded as a primary chapter of the Belt and Road initiative. China has described it as a “one-plus-four co-operative structure”, meaning that it has four components: Gwadar port, transport infrastructure, energy and industrial co-operation. Gwadar port, moreover, has recently become operational.

Now, China is trying to get the BCIM corridor moving. To achieve this objective, Beijing has granted a US$24 billion credit line to Bangladesh. It is the largest credit line that Bangladesh has received from any country and leaves India’s credit line of US$2 billion far behind. Bangladeshi and Chinese firms have also signed trade and investment deals worth US$13.6 billion.

Bangladesh has been a strong supporter of the BCIM economic corridor, which was earlier known as the Kunming Initiative. Bangladesh has also actively participated in the Trans-Himalayan Development Forum, an initiative launched by China last year. Bangladesh sees Chinese funding of projects as a way to break free from the clutches of the low-level equilibrium trap. China is engaged in similar economic activities in Sri Lanka, Nepal and the Maldives, all of which have endorsed OBOR.

To fund projects under OBOR, China is moving in a very systematic way. It is developing institutions like the AIIB and the Silk Road Fund. The AIIB was established by 21 countries under China’s leadership with a registered capital of US$100 billion in October last year for the funding of Asian energy, transport and infrastructure projects. In November 2014, China announced the creation of the US$40 billion Silk Road Fund.

At a rate of between two and four per cent, the funding is not cheap. Despite the high interest rates, however, China has managed to persuade other countries to accept such loans for various projects. OBOR has been called the “Marshall Plan of China”. China tells the partnering countries that the projects are in their interests but, in fact, the various projects help China to invest its surplus foreign exchange reserves and to secure contracts for Chinese companies that face the problem of surplus capacity in a slowing domestic market.

There is no doubt that the increasing Chinese economic activity in South Asia would lead to greater influence in the region for Beijing. But then, should India, itself a country with an infrastructure deficit, get into similar projects in those countries? Should India enter into a potentially debilitating competition with China?

As far as China is concerned, it is acting according to a well-crafted strategy. China is looking to park its funds for profit and is mostly funding those projects that are part of OBOR.

India, on the other hand, is mostly reacting and is funding projects that are of no special significance to it. Moreover, despite India carrying out some projects in other South Asian countries, it still cannot stop them from accessing Chinese funds. Often, it has been suggested that Indian investments in some of the South Asian countries have created goodwill for India. Goodwill of that kind, however, generally proves to be fleeting. China is using the AIIB to serve its objectives. On the other hand, a number of member countries – including some Western countries – are no longer on clear why they signed up to it. Initially, they no doubt thought that their companies would win projects if they joined the AIIB. It appears quite unlikely, however, that they will win many contracts when competing with Chinese companies and the advantages that those enjoy.

It is thus much better for India to focus on its own infrastructure development rather than waste scarce resources in counterbalancing China. Unless India overcomes its own infrastructural deficit and emerges as a major economic power by introducing suitable economic reforms, its influence over the South Asian countries would be limited. India’s efforts – for the time being – should be limited to persuading its neighbours not to give projects to China that might imperil the security of the region. Today, the voice of the (relatively) economically weakened United States is ignored by countries like the Philippines that find greater advantage in aligning with China, despite Beijing having embarked on an assertive policy in the South China Sea that appears to run counter to Manila’s own interests. In South Asia, countries such as Bangladesh, Sri Lanka and the Maldives, which claim better human development indicators and look towards China for “development finance”, may not attach the desired weight to Indian perspectives unless India itself develops as China has remarkably done over the last two decades.