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The Development of China’s Maritime Silk Road Initiativein South Asia & Its Implications for Business & Government

By Jean-Marc F. Blanchard

AuthorJean-Marc F. Blanchard

An Overview of China’s Maritime Silk Road
Initiative (MSRI)
China’s MSRI was proposed by Chinese President Xi Jinping in2013 in Indonesia. At that time, China provided very few details
about which countries would be involved in the scheme, which was asister to its Silk Road Economic Belt project and part of its larger Beltand Road Initiative (BRI) (Map 1), and which projects would be
included in it. Even today we have no official list of MSRI participants
or projects. Wild sums of money, often without any reasonable basis
in fact, were attributed to the scheme with some analysts, firms, andjournalists speculating that China would provide several trillion US
dollars in funding to support the BRI. The initial reaction to the
MSRI and larger BRI entailed quite a bit of hyperbole withcommentators forecasting it would produce dramatic political andeconomic sectoral (e.g. resources), regional, and global
consequences.
As I noted in single-authored and co-authored publications inGeopolitics in 2017, it is clear, despite the vagueness of official
Memorandums of Understanding (MoUs), reports, and statementsthat China envisions it to include massive amounts of hard
infrastructure. Hard infrastructure means airports, bridges, port

infrastructure, railways, roads, and warehouses. It also entails dams,
electrical transmission lines, pipelines, mines, and power plants.
Furthermore, it encompasses industrial parks and special economic
zones (SEZs). Also relevant is soft infrastructure such as customs
clearance and phytosanitary accords, bilateral investment treaties(BITs), MoUs for educational exchange and training, dispute
resolution courts, and trade agreements to facilitate greater flows ofgoods, peoples, moneys, and services.
The economic goals motivating China to support the scheme
include enhancing its export channels (critical at a time when China
has excess capacity in many areas), creating new foreign direct
investment (FDI) and contracting opportunities for its multinational
corporations, bolstering its access to oil and minerals, advancing theinternationalization of the renminbi, and accelerating thedevelopment of subnational actors like Chinese provinces. There ismuch debate, laudatory as well as critical, about the politicalobjectives behind China’s MSRI. Posited goals include a Chinesequest for regional hegemony, an effort to promote peaceful relations
within and between MSRI participants, a move to boost China’s soft
power, a desire to fill, as economist Long Ke has argued, a global
leadership vacuum, and a wish to limit local government
parochialism in China.

Economic Limits to the MSRI — theSouth Asia Setting

MAP 1

Map showing China’s BRI

Rotterdam

VeniceRUSSIA

Moscow

NETH.

Silk Road
Economic Belt

ITALY GREECE

AthensKAZAKHSTANUZBEK.

TURKMEN.

IRAN

KYRG.
TAJIK.
Dushanbe

Beijing

CHINA

Xian
Fuzhou

EGYPT

Kolkata

PACIFIC
OCEAN

INDIA

Colombo
KENYA
Nairobi

INDIANOCEAN

INDONESIA

Jakarta

21st-Century
Maritime Silk Road

Source: American Chamber of Commerce Shanghai

https://www.jef.or.jp/journal/

South Asia is a vital MSRI region because of
the volume of trade and energy shipments
passing through the Indian Ocean and the factthat the world’s sixth-largest economy innominal GDP terms (India) is situated there.
According to Alice G. Wells, US acting assistantsecretary for South and Central Asian affairs
and acting special representative for
Afghanistan and Pakistan, who was speaking at
the Indian Ocean Conference in Colombo in
September 2017, the Indian Ocean “is thefulcrum of global trade and commerce withnearly half the world’s 90,000 commercial
vessels and two-thirds of the global oil travelingthrough its sea lanes.” Moreover, a quick lookat the Eastern Hemisphere map (Map 2) shows
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MAP 2

Map of Eastern Hemisphere

impede the full achievement of the MSRI. To
illustrate, Amitendu Palit’s chapter in the
aforementioned book shows that South Asia is
not well integrated economically. The poor stateof integration is due to political factors, nationalcustoms and trade policies, poor logistics
facilities, insufficient transportation systems(e.g. roads and rails) within MSRI countries,
and a lack of connectivity among countries.
Certainly, MSRI-related infrastructure aims torectify some of these problems, but its
contribution will be less dramatic than if it was
already building upon an established base ofrailways, roads, and power systems.

Economic Limits to the MSRI —China

Source: Mapswire

quite clearly that the Indian Ocean is an essential passageway for any
plans that connect China to Europe and Africa because, at somepoint, the goods on existing and planned railways from Pakistan,
Myanmar, and Thailand, ships coming via the Malacca Strait, andplanes from various starting points have to transit the Indian Ocean
Region (IOR).
It remains unclear, though, if South Asia offers fertile economic
soil for the MSRI to take root and blossom, an issue that was
brought into stark relief when, in 2017, Sri Lanka had to turn over a
majority equity stake in its massive Hambantota port development
project to a Chinese company because of its inability to repay its
loans from China. Separate essays by Xinmin Sui, Jabin T. Jacob,
David J. Karl, and Srikanth Kondapalli in the edited book China’s
Maritime Silk Road Initiative and South Asia (2017) already showedat that time that key South Asia MSRI participants like the Maldives,
Pakistan, and Sri Lanka faced numerous daunting economic
challenges such as their ability to repay the debts they incurred tobuild MSRI-related infrastructure, challenges in boosting exports,
weak rule of law, problematic civil institutions, and slow economic
growth. On top of this, a number of South Asian MSRI participants
have corruption problems, fiscal deficits, balance of payment
problems, poor educational systems, and excessive government
bureaucracy and red tape.
There also are economic issues at the regional level that may
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China has numerous financial institutions
that can marshal hundreds of billions of dollars
in trade financing (letters of credit), investment,
loans, purchasing credits, and political risk insurance to support
MSRI trade, investment, and infrastructure even though this may not
be their main mission. These institutions include the China
Development Bank (CDB), the Export-Import Bank of China (Ex-Im
Bank China), the Asian Infrastructure Investment Bank (AIIB), theBRICS New Development Bank, the China Investment Corporation,
the Silk Road Fund, and Sinosure. Chinese financial institutions suchas the Industrial and Commercial Bank of China, Chinese stateowned enterprises (SOEs) such as China Three Georges, andChinese private firms represent additional sources of moneys to back
MSRI activities and projects.
It has long been unclear exactly how much of the MSRI’s capital
Beijing intended to provide itself, though it was known that it did notplan to provide all of the moneys itself and also intended for private
capital, multilateral institutions such as the Asian Development Bank,and other governments to partner with the AIIB, CDB, and Ex-Im
Bank of China. Of late, though, there have been increasing doubts
about China’s willingness to open the taps to fund MSRI projects.
One cause is the restraints, whose impact is shown in the Chart, that
China puts on outward capital flows, starting in 2016, in order toprotect its then plummeting currency reserves. A second cause is
China’s increasing caution about extending loans in the face oftrouble or rising debt loads encountered in African, Latin American,
and South Asian countries such as Kenya, Venezuela, and Sri Lanka.

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CHART

Chinese limits on capital outflows
restrain outward FDI
China’s overseas direct investment (ODI) flows to BRI countries
Total ODI ($ bil.); left scale
ODI in BRI countries ($ bil.); left scale
ODI in BRI countries as a charge of total (%); right scale
70.0

21.0

60.0

18.0

50.0

15.0

40.0

12.0

30.0

9.0

20.0

6.0

10.0

3.0

0.0

Q1
2016

Q2

Q3

Q4

Q1
2017

Q2

Q3

Q4

0.0

Source: Economic Intelligence Unit

A third is China’s slowing growth.
While the MSRI is a major Chinese foreign policy endeavor andone of Xi’s signature initiatives, there are many issues inside Chinathat compete for time and money which will limit the amount of
resources that Beijing can devote to the MSRI. These include theproblem of resolving overindebted and zombie SOEs, the need torestructure China’s growth model to one placing less emphasis on
infrastructure and real estate, and the ongoing campaign to eradicate
poverty.

Political Challenges Facing the MSRI — the South
Asia Setting
Not only are there many questions about the international anddomestic (in MSRI participants and China) economic context
surrounding the development of the MSRI, there also are many
political ones. A huge political issue is the stance of India towards
the MSRI, an issue highlighted frequently in the aforementionededited book. For diverse reasons, India’s relationship with China has
improved of late as shown by, for instance, interactions between
Indian Prime Minister Narendra Modi and Xi in April 2018 (Photo).
However, for reasons of history, identity, prestige, status, anddomestic politics, India is anxious about Chinese inroads into the
IOR and thus the MSRI which, if fully realized, incontrovertibly would
broaden and deepen China’s presence in India’s neighborhood and in
the IOR. On top of this, India fears Chinese economic competition,

has a long-standing and contentious territorial dispute with China,
and is quite concerned about China’s much strengthened relations
with neighboring countries like Bangladesh, Pakistan (India’s archenemy), the Maldives, Sri Lanka, and so on — all of which, with the
exception of Pakistan, used to be only in India’s orbit. These factors
not only have prevented India from participating in China’s scheme,
but also have spurred New Delhi to use diplomacy, economic deals,
and military and security cooperation to try to counter it.
Domestic politics presents another challenge to the MSRI’s
progress in South Asia. In Sri Lanka, the MSRI has become
politicized domestically because of its environmental and social
impact and indeed China’s surging presence in Sri Lanka was one of
the factors that led to the ouster of the Mahinda Rajapksa regime in2015. Moreover, elites and local citizens are worried about thesovereignty implications of the equity-for-debt swaps that the
government embraced to reduce the country’s crushing debt
burdens. In the Maldives, the MSRI also is a hot-button politicalissue as we have seen in the recent election where the victory of the
opposition was attributed partly to voter concerns about the larger
implications of the country’s participation in China’s program. The
MSRI has even become a political issue in Pakistan, a long-time
Chinese ally, for various economic and political reasons.

Political Challenges Facing the MSRI — theBroader Context
Due to the importance of the IOR, the progress of the MSRI in
South Asia has drawn attention in Canberra, Tokyo, and Washington.

Photo: Prime Minister of India Narendra Modi Twitter Page

Indian Prime Minister Narendra Modi and Chinese President Xi Jinping at their informal
summit in Wuhan, China

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Indeed, Japan, which has not signed on to Beijing’s program or
become a member of the AIIB, has been using diplomacy, aid,
lending, FDI, and trade programs to structure alternatives to theMSRI. Specific examples include infrastructure projects in India and
Sri Lanka, cooperation with India on the launch of an Asianconnectivity vision dubbed the Asia-Africa Growth Corridor,
intensified economic cooperation with Vietnam, increases in official
development assistance for Japan’s “Free and Open Indo-PacificStrategy”, and Japan’s $110 billion Partnership for Quality
Infrastructure Initiative. Germane, too, is increased collaboration
between India and Japanese businesses in places like Bangladesh
and Sri Lanka.
It is important not to exaggerate the intensity of Japaneseinitiatives even though they are a reality that can affect the shape ofthe MSRI and the reactions of MSRI participants. Moreover, sincesummer last year, Prime Minister Shinzo Abe, potentially because of
a desire to profit from the economic opportunities offered by the
BRI, Japanese business lobbying, and hopes that China will
reciprocate politically, has been voicing a willingness to consider
Japanese participation in the BRI and AIIB. Indeed, this fall, Chineseand Japanese representatives are expected to discuss joint
Japanese-Sino private sector MSRI projects. Yet, here too, one must
be careful not to exaggerate Japan’s “embrace” because Abe has
stressed it is conditional:First of all, it is critical for infrastructure to be open to use by
all, and to be developed through procurement that is transparent
and fair. I furthermore consider it essential for projects to beeconomically viable and to be financed by debt that can be
repaid, and not to harm the soundness of the debtor nation’s
finances. I would expect that the “One Belt, One Road” initiative
will fully incorporate such a common frame of thinking, andcome into harmony with the free and fair Trans-Pacific economic
zone, and contribute to the peace and prosperity of the region
and the world.

These conditions certainly are not easy for China to fulfill!
For its part, the United States has been following two tracks todeal with the rise of the MSRI in South Asia as well as the rise of
China more generally. First, it has been working to strengthen
relations with India. This has included more leader meetings, thecreation of a 2+2 dialogue involving US and Indian defense andforeign ministry officials, raising the status of India and the region in
US security planning, enhanced military and intelligence cooperation,and support for a “Free and Open Indo-Pacific”.
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Second, it has been working to incorporate India into multilateral
initiatives such as the Quadrilateral Dialogue, a soft military grouping
involving Australia, India, Japan, and the US that conducts joint
military exercises. A recent multilateral initiative of note is a joint
investment and project development initiative involving the US
Overseas Private Investment Corporation (OPIC) which has struck
partnership deals with Australia and Japan. Regardless, it remains
open to debate how closely New Delhi will follow the US lead in
responding to the MSRI even though it, too, has concerns about the
MSRI as discussed. This is because it has political and economic
reasons to work with China, disagreements with Washington about
Iran and its military and political relations with other BRICS countries
like Russia, and does not necessarily want to be caught up in theharder elements of US hedging against China.
The multinational South China Sea territorial and maritime dispute,which involves, in different ways and extents, Brunei, Indonesia, thePhilippines, Malaysia, Taiwan, and Vietnam, is another extra-regional
issue with potential ramifications for the development of the MSRI in
South Asia. If the dispute escalated dramatically, then it would
disrupt commerce and investment from South Asia to Southeast Asiaand vice versa. In addition, India maintains close ties with a numberof countries in Southeast Asia pursuant to its Act East policy. Given
this, a blow-up of the South China Sea controversy could affectrelations between India and China with subsequent spillover into theway that India perceives and responds to the MSRI.

Risks for Business & Governments
A successful MSRI has a number of potential adverse implications
for non-Chinese businesses. To date, China has used the lure of aid,
FDI, and loans (sometimes offering preferential terms such as lower
interest rates or longer repayment terms) to win deals to build and/or
operate power generation and distribution facilities, transportation
infrastructure such as high-speed rail, and industrial parks (studies
have shown that China rarely gives foreign firms opportunities toparticipate in such projects), to secure supply arrangements thatfavor Chinese companies, and to improve China’s position in setting
the technical standards that structure economic interactions.
Moreover, the connectivity, business networks, and relationships
resulting from China’s MSRI have the potential to create a better
future situation for Chinese business, to reconfigure natural resource
flows, and to improve China’s soft power which, in turn, can improve
the receptivity of local decision-makers and the local populace toChinese investment and contractors.
The MSRI’s risks for governments are noteworthy, as well.

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Obviously, if the MSRI substantially deepens participant country
economic bonds with China, then these countries become
susceptible to Chinese influence, though their actual pliability will
depend upon a multitude of variables such as their domestic politicalsituation, their economic condition, and the availability of regionaland global alternatives to China and Chinese moneys. Furthermore,countries such as the US and Japan could experience waning powerand status in the IOR if China’s scheme is fully realized. Beyond this,to the extent that the MSRI ensconces networks favoring China,countries that rely on IOR ports, transportation systems, or natural
resource flows could experience a loss of independence and become
more subject to Chinese control and sanction.
The issues above deserve serious consideration, but there is much
hyperbole about them, too. The political and economic factors
discussed earlier, which relate to MSRI participants, China, and theactions of extra-regional players, will block, slow, or modify the
implementation of the MSRI and thus the risks that it might raise forbusiness and governments inside and outside the region. Moreover,
it is conceivable that China or other relevant Chinese actors such as
SOEs may create problems for the realization of that MSRI in South
Asia because of their poor corporate social responsibility practices, apossibility suggested by previous episodes in Ethiopia, Peru, andMyanmar where environmental externalities, the mistreatment ofworkers, or insufficient attention to local communities produced abacklash against Chinese projects.

Opportunities for Business & Governments
The implementation of the MSRI in South Asia may pose certain
downsides for non-Chinese businesses, but it offers a number ofpotential gains, too. For instance, if it boosts economic growth inparticipant countries then it will expand opportunities for companies
to sell goods and services. Furthermore, the exploitation of MSRIparticipant natural resources, the building of industrial parks andSEZs, the expansion of transportation systems, the development of
power systems, and reduction of barriers to commerce should
facilitate existing operations, increase the return on investment,
generate new trade opportunities, open new opportunities to provide
financial services, and provide a base for greater tourism. Of course,many of these benefits depend upon China accomplishing the
MSRI and it is not clear that it will be accomplished in full given thechallenges enumerated previously.
Intriguingly, the clouds facing the MSRI in South Asia generally
and in the Maldives, Pakistan, and Sri Lanka specifically may have asilver lining for foreign businesses. To elaborate, MSRI-participant

countries now seemed focused on diversifying their sources offinancing and investment which is leading them to seek to work witha wider range of banks, firms, and multilateral investors. It also
seems to have served as a spur for China to welcome wider foreign
participation in the MSRI as a way to diversify risk as well as deflect
criticism.
While many governments seem to be focused on the negative
political aspects of the MSRI, it is wrong to assume the MSRI only
will produce negative political externalities. Although the linkage isfar from guaranteed, economic growth has the potential to enhance
the political stability of MSRI participants. It further can diminish thepotential for terrorism by, in theory, reducing the crushing poverty
that provides a breeding ground for recruits. As for the
aforementioned economic interdependencies, which many fear will
fuel Chinese dominance, it is important to point out that they will notjust bond countries to China, but also link countries to one anotherand thus produce more pacific relations. Finally, Chinese analysts
have argued that the MSRI shifts China’s foreign policy direction
westward and therefore should minimize the potential for conflict
between it and others like the US.

Conclusion
This article has put the spotlight on China’s MSRI with a focus on
South Asia, a region that will play a critical role in the evolution of theMSRI. I have highlighted a number of features of the scheme as wellas its objectives, but also identified a number of political andeconomic challenges that will affect its full realization. These
challenges include economic problems in host countries, anxieties inIndia, and counterbalancing activities, albeit to different degrees, byAustralia, Japan, and the US. As I have shown, the MSRI has
potential upsides and downsides for businesses and governments,
some more likely if the MSRI succeeds and others more likely if the
MSRI is troubled. Given the contingent nature of the MSRI’s successand its impact, it is wise neither to be a blind optimist nor a blindpessimist about the initiative. Instead, businesses and governments
need to contemplate multiple possible scenarios as well as to reflectdispassionately about the ways they can shape the costs andbenefits of these various scenarios.

Jean-Marc F. Blanchard, Ph.D. is executive director of the Mr. & Mrs. S. H.
Wong Center for the Study of Multinational Corporations (USA) anddistinguished professor at the School of Advanced International and Area
Studies, East China Normal University (China).

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