The Challenges and Implications of China’s Economic Diplomacy on Asia

Economic diplomacy includes building international coalitions to help countries recover from financial crises. Chinese economic diplomacy employs diverse sectors such as trade, investment, finance, energy, transport, and communications, and Belt and Road Initiative is the vehicle by which the “China Dream” of growth, power, and prestige seems to connect with other countries. The BRI has also been criticized for being opaque, non-transparent, and not always conforming to international standards. These challenges have led to growing skepticism and resistance from some countries in the region as well. Nevertheless, China’s economic diplomacy is likely to remain a critical feature of Asia’s political and economic landscape in the coming decade. As China continues to grow and assert itself on the global stage, its economic engagement with the region will have significant implications for both regional and global politics, trade, and security. The paper will discuss an insight into China’s economic diplomacy keeping in view the challenges and implications on Asia in Post BRI Era.

Chinese economic diplomacy employs diverse sectors such as trade, investment, finance, energy, transport, and communications, and Belt and Road Initiative is the vehicle by which the “China Dream” of growth, power, and prestige seems to connect with other countries. It’s the vehicle for China to show leadership; to provide a public good and to fill the infrastructure development gap, which is very real. There are some people in some countries who view BRI positively, as a kind of 21st-century Silk Road uniting the Eurasian Continent in a productive network of trade and energy routes. Many others see a heavy-handed strategic play for hegemony reminiscent of the old Imperial Chinese tributary system of vassal states. There’s its stated goal of infrastructure development, but beyond that is the well-documented Chinese need to export surplus capacity in steel, cement, and construction. BRI serves also as a vehicle for dealing with the remote, underdeveloped western provinces that missed out on the Chinese economic miracle and to stem the threat of terrorism and extremism spreading from the Central Asian countries on its unstable western borders. The leadership also adopted a“new normal” mode, aimed at stabilizing domestic economic growth and improving its quality. By way of establishing and expanding free trade zones, China demonstrates its commitment to liberalization. At the same time, other Chinese economic diplomacy initiatives have yet to win broad-based support. Nevertheless, in its totality, China is not seeking to rewrite established rules of world economic governance. In this chapter, we will discuss the history of China’s economic diplomacy along with its relation with the Asian region before and during BRI Era.

 

Historical Evolution of China’s Economic Diplomacy

China’s Statecraft and Tiananmen Square Incident:

China has often used economic statecraft in its foreign policy, not least during the Cold War. Writers often cite China’s use of economic inducements to peel away Japanese and European support for sanctions after the 1989 Tiananmen Square incident, as well as China’s aid toward countries such as North Korea, Mongolia, and Albania during the Cold War, although the latter comes under criticism for pursuing geopolitics at the expense of the country’s own economic development and citizen wellbeing.

Four main stages in the Evolution of China’s economic diplomacy:

Li and Sun identify four main stages in the evolution of China’s economic diplomacy;

• First, the era of reform and opening up in the 1970s and 1980s marked China’s initial “engagement,” building links with the international economic system and its fundamental principles.
• Next, China entered an “integration” phase in the 1990s, establishing economic cooperation with Japan, European nations, and eventually the United States as a means to counter international sanctions after the Tiananmen incident. China also became part of international and regional dialogues.
• Subsequently, China began its “participatory” economic diplomacy, actively promoting global economic governance as well as free trade zones at the regional level.
• Finally, since the 2008 financial crisis and after China became the world’s second-largest economy in 2010, it has launched its “leadership” economic diplomacy, pushing its own economic initiatives, taking leadership roles in international organizations, and setting forth new principles.

 

China’s Economic Diplomacy towards Asian Region

The rise of China has been regarded as one of the most phenomenal events of the 21^st century. For the longest, no nation has seen such a rise as China has shown the world. The rise of China hasn’t just been within its own territories but is also characterized by the growing socio-political and economic clout of China over its neighboring regions. Economic diplomacy here plays a central role in establishing its clout. Economic diplomacy is described by the two tangents i.e. using diplomacy in order to secure economic interests and initiatives and secondly by using economic means to pursue political agendas. China has made several economic deals with countries in South Asia, the Middle East, and Central Asia via investments, aid, and developmental projects (Wong, 2021).

The following section explores how China used economic diplomacy to develop relationships with Asian states in the pre-BRI era. It outlines what were the major investments that were made by China in the regions.

South Asia:

Via its economic diplomacy, China has assured a soft power rise in South Asia. South Asia serves as a very important region for China as it is in between the other major regions, serves as a bigger market, and is a difficult region to administer considering the flashpoint between Pakistan and India. Thereby Chinese diplomacy has always been careful and considerate to have an involvement in the region.

Despite contending Sino-India relations, the Chinese foreign policy has still focused on developing good economic relations i.e. recognizing the potential of the Indian market. History has shown efforts of establishing economic relations marked by the set of economic cooperation between the two in 2004 that identified potential sectors for mutual trade; the trade interaction between the two increased to US $40.6 billion in 2009. Similarly, China has great socio-political and economic relations with Pakistan. Trade between the two countries reached $7 billion in 2008; at the same time, China Mobile made investments worth US$500 million in Pakistan Telecom. Additionally, China Mobile made another investment worth US$1.7 billion. Pakistan has also had close ties with China in regard to infrastructure. Under the PAK-CHINA joint 5 years economic and trade cooperation, China increased its investment in Pakistan by 50%. The Pakistan railways had also been supported by the Dong Fang Electric supply in 2007.

China also maintains good relations with Bangladesh. Its achievements since independence have had it considered a successful state. China is the state’s 3^rd largest trading partner with trade accounting for US$3.2 billion in 2006. Both states signed the Asia Pacific Free Trade Agreement in  1975 under which the communist state removed tariffs from 84 key commodities trading from Bangladesh. China before BRI also expressed its willingness in funding developmental projects in Bangladesh worth $1 billion including 28 projects in telecommunication, infrastructure, and health. Beijing also donated $1 million to Bangladesh after the destruction caused by cyclone Sidr.

China also maintains close economic relations with Sri Lanka. The trade between the two states accounted for US$1.7 billion in 2008. China over the years had made many significant investments in Sri Lanka that account worth millions of US dollars. Among these investments is the Colombo South Container Terminal; the China Merchants Port Holdings signed a deal in 2011 worth $500 million (AIDDATA, 2017). The Lakvijaya Coal Power Plant was among the initial economic cooperation between the states as the project was initially proposed in 1995 until the construction began in 2007 (ANI, 2023). the MattalaRajapaksa (formerly known as the Hambantota) International Airport is also reflective of Sri Lanka China relations. It is the second international airport in Sri Lanka and was funded by the China Harbour Engineering Company (CHEC) with a $7m investment (Karampela, 2017).

Similarly economic diplomacy has played into impressive results with the Maldives. Both states’ trade accounted for US$18 million in 2008; later economic ties got better when the two signed a preferential zero tariff agreement in February 2009. China was also responsive and volunteered for reconstruction after the state was hit by natural disasters. (palit , 2010)

Middle East:

The Chinese communist party at the start of the 21^st century adopted the ‘going oy’ policy, in which they recognized that for sustained economic growth in China, the state has to look for economic opportunities beyond its borders. The Middle East at the time with its unexploited markets and immense oil reserves attracted China. China too has to secure its growing energy needs thereby China’s interest in the region grew as it found it probable for worthwhile investments.

From 2005-09 the trade between the middle eastern region (MER) and China increased by 87% to $100 billion and ME’s exports sent to China also increased by 25%. Chinese investment in 2005 in the region grew from $1 billion to $11 billion. In 2010 the Saudis too helped Chinese companies with the construction of Mecca monorail project for the accommodation of Hajj pilgrims. China also helped Egypt in the construction of the Al Galala City and the Sue Economic Zone. In Iraq, the Chinese have struck major deals to revive the country in post-deash times. The Iraqi govt had also involved the chinses in contracts to develop the state’s past neglected oil fields. China also committed to involving Iraq in a railway line project that connects the state to China through the CAS (Chen, 2011). China has also aided Iran in times of crisis and has traded and invested in the state despite the US sanctions. From 2009 onwards, China increased its investment from less than 1% to 6.5% while Iran also participated in Chinese oil markets by making up to 8% of the crude oil exports. ( Talebi , 2017)

Central Asia:

Centra Asia serves as the heart land of Eurasian continent and connects eastern Europe with the Asian region and the middle east. China has been active in the region and increased in presence over taking the influence of Russia. China has been investing in the region for the fulfillment of its strategic interests specifically by energy agreements that will sustain the rapidly growing Chinese market for decades to come. At the same time China also ensures that its economic investment prevents any instability in the region as well as containing the threat of terrorism.

With the Central Asian region, China has paid more emphasis on investments in Kazakhstan; the state is China’s largest trading partner of the region. trade between the two accounted for $13.9 billion in 2007. China has also allowed Kazakhstan to trade form the ocean port of Lianyungang. In the energy sector, the KazMunaiGascompany of Kazakhstan in 2011 was able to secure loas from Chinese Export-Import Bank worth $1.13 billion- to be returned in 13.5 years. The project also includes building a new facility at Atyrau(Reuters Staff, 2012) . China also made investment in the pipeline known as the Atasu-Alashankou oil pipeline in accordance to the framework agreement between the two states (KCP, n.d.). Other Central Asian States (CAS) have also seen generous Chinese investments. These include bilateral trade agreements with Turkmenistan in 2006 that include 30 billion cubic meters of natural gas exports for each year till 2039. Uzbekistan too has been in the agreement with China to provide gas with 30 billion. As per a deal signed with China National Petroleum Company (CNPC) that agreed to pay $600 million, CNPC has also bought 23 smaller oil fields in Bukhara. As for Tajikistan’s relations with China, both’s trade was worth $158 million in 2005. The state has also received up to $900 million after becoming a part of SCO.

China also reflects its interest in the region by the formation of the Shanghai Five Corporation set up in 1996. Under the cooperation, China was administering to help the CAS with terrorism, separatism, extremism, and preventing events of regional crises/ instability. The overall motive of the Chinese involvement in the region is that development projects are fostered for better cooperation for trade. (Business Reference Service, 2022)

 

China’s Economic Relations with Asian Regions in the BRI Era

China’s Belt and Road Initiative (BRI) has been a major development in China’s economic diplomacy in the Asian region. The initiative, launched in 2013, aims to promote economic development and connectivity between China and participating countries in Asia, Europe, and Africa. The BRI has been instrumental in transforming China’s economic relations with the Asian region, enhancing connectivity, and promoting economic development. This essay will explore China’s economic relations with the Asian region in the BRI era (2013-2023) and how the initiative has impacted economic diplomacy in South Asia, East Asia, Central Asia, and the Middle East.

South Asia

China’s economic relations with South Asia have been significant in the BRI era. The BRI has facilitated the development of infrastructure and connectivity between China and participating countries in South Asia, promoting economic development and enhancing China’s regional influence. The China-Pakistan Economic Corridor (CPEC) is a significant project in the BRI that aims to improve connectivity and promote economic development in Pakistan. The CPEC involves the construction of several infrastructure projects, including highways, railways, and energy projects, such as the Gwadar Port and several coal-fired power plants.

China’s economic relations with Sri Lanka have also been significant in the BRI era. China has invested in several infrastructure projects in Sri Lanka, such as the Hambantota Port and the Colombo Port City project. These projects aim to improve connectivity between China and Sri Lanka and promote economic development. However, these projects have faced criticisms and concerns over debt sustainability and geopolitical tensions.

China’s economic relations with Bangladesh have also been significant in the BRI era. China has invested in several infrastructure projects in Bangladesh, such as the Padma Bridge project and the Dhaka-Chittagong Expressway. These projects aim to improve connectivity between China and Bangladesh and promote economic development.

Middle East

China’s economic relations with the Middle East have been significant in the BRI era. The BRI has facilitated the development of infrastructure and connectivity between China and participating countries in the Middle East, promoting economic development and enhancing China’s regional influence. The BRI has also strengthened China’s economic relations with the Gulf Cooperation Council (GCC) countries, with a focus on energy cooperation and infrastructure development.

China’s economic relations with Saudi Arabia have been particularly significant in the BRI era. China has invested in several infrastructure projects in Saudi Arabia, such as the Yanbu Aramco Sinopec Refining Company project and the Jazan Economic City project. These projects aim to improve connectivity between China and Saudi Arabia and promote economic development.

China’s economic relations with Iran have also been significant in the BRI era. China has invested in several infrastructure projects in Iran, such as the Tehran-Mashhad high-speed railway project and the Chabahar Port project. These projects aim to improve connectivity between China and Iran and promote economic development. However, these projects have faced criticisms and concerns over geopolitical tensions and sanctions.

 

Impact of BRI on China’s Economic Diplomacy

The BRI has had a significant impact on China’s economic diplomacy in the Asian region. The initiative has allowed China to enhance connectivity and promote economic development with participating countries, strengthening China’s regional influence and promoting economic diplomacy.

One of the key impacts of the BRI on China’s economic diplomacy has been the strengthening of economic relations with neighboring countries. The BRI has facilitated the development of infrastructure and connectivity between China and participating countries, promoting economic development and enhancing economic diplomacy.

The BRI has also allowed China to expand its economic influence in the Asian region, particularly in Central Asia and the Middle East. Through the initiative, China has been able to invest in several infrastructure projects and promote economic development in participating countries, enhancing China’s regional influence and promoting economic diplomacy.

However, the BRI has also faced criticisms and concerns over debt sustainability and geopolitical tensions. Some participating countries have expressed concerns over the large amount of debt incurred through BRI projects and the potential for China to use economic influence to further its geopolitical interests. These concerns have prompted some participating countries to re-evaluate their participation in the BRI.

China’s economic relations with the Asian region have been significantly impacted by the BRI initiative. The initiative has allowed China to enhance connectivity and promote economic development with participating countries, strengthening China’s regional influence and promoting economic diplomacy. While the BRI has faced criticisms and concerns, it has also provided opportunities for participating countries to benefit from China’s economic development and regional influence. Overall, the BRI has transformed China’s economic relations with the Asian region and will continue to shape economic diplomacy in the years to come.

Challenges to China’s Economic Diplomacy

1. Sino Russian Competition

The resurgence of Russia is a threat to the Chinese economic imperatives in the region. In order to counter the US influence and strategic interests in Central Asia, China, and Russia form an alliance however, it is often called the “axis of convenience”. Both the states exert their own influence over the region thus leading to a volatile situation. This power asymmetry also has implications for the economic asymmetry over the region. Russia aims to dominate the region but China’s economic diplomacy based on projects such as BRI overshadows Russia’s efforts. countermeasures adopted by Putin such as “The Greater Eurasian Partnership” in 2016 pose a challenge to China’s economic development in Central Asia. Moreover, both Russia and China have diverging economic interests in the region challenging its peace and stability. (Zhang, 2022).

 

2. Adverse Perceptions of the Indigenous

Particularly in Central Asia, the locals perceive Chinese economic ambitions in the region as unfavorable and have extremely negative cliches about China. Moreover, in the post-pandemic world, there are several conspiracy theories about the spread of the virus being associated with China. There have been several sinophobic protests against Chinese companies in Kazakhstan while Tajikistan fears debt trap diplomacy behind the economic diplomacy of China in the region. Russia also uses the media to create a false image of China to counter its economic rise (Zhang, 2022).

3. Civilizational difference

The background of civilizations and the language barrier is another challenge to Chinese influence over the Asian region particularly in South Asia, the middle east, and Central Asia. China adopted the approach toward educational diplomacy to meet the end of economic diplomacy and reduce the language barrier however it has not been proven very successful. The reason for little success in his regard is the major difference between the Turkic, Slavic, and Sanskrit backgrounds that have the least resemblance with Chinese (ibid).

4. Afghanistan is a bone of contention

There is staunch ambiguity about whether it falls under the South Asian or the Central Asian region. However, China plays its economic diplomacy in both the regions thus, instability in Afghanistan has repercussions for Chinese investment. It poses a security challenge to China when it aimed in investing in the state by extracting natural resources through the MesAynak copper mines in the year 2008. However, this mission was halted by the instability in the state. Further, the Chinese National Petroleum Corporation was allowed the extraction of oil from the Amu Drya however, this investment was also a failure due to the emergence of local militias in Afghanistan. China also planned to extend the CPEC to Afghanistan however, the situation of infrastructure is very tense. The Ring Road was constructed but was again destructed by the Taliban takeover.

5. Terrorist Threats

Another major challenge to the economic diplomacy of China is the terrorist threat in the region. Security and development are interlinked with one another. If the region is not secure, it will attract fewer foreign investors and will also make the accomplishment of the already existing economic projects difficult. The issue of Uyghur Muslims in the Xinjiang province demands the separation of east Turkistan and their constant military exercises and violent measures adopted in that area. It creates a volatile situation across the borders. These terrorist groups also declared their ideological affinity with Taliban and Al Qaeda in 2008 which further worsened the socio-economic condition in the region due to continuous militant instability in central as well as south Asia (Khalid, 2023).

6. Legal Hurdles

Many countries linked with the One Belt One Road imitative of China have different sets of laws and legal systems. Many states are yet to develop their laws, rules, and regulations with respect to the externally planted economic projects of actors such as China. China invested more than US dollars One Billion on a high-speed rail project in Indonesia. However, this project could not be completed due to the incompletion of the required legal paper works and documentation. Out of the proposed one-hundred-and-fifty-kilometer track, permission was only granted for the construction of five kilometers which was apparently very less to achieve the main goal of construction. China has laws that restrict guarantees that can be given by state entities so the concept of Public-Private Partnerships just doesn’t work in China. You cannot guarantee debt in the same way from a state organization. China takes a more commercial rather than government liability perspective, shifting the risk much more to the private sector (Zhao, 2022).

7. Environmental Costs

Chinese economic diplomacy also falls short of the appropriate mechanism and infrastructure to curb the environmental costs of economic projects. The production of cement and sand dredging has serious environmental impacts. It also hampers the coastlines and survival of the life underwater. Many Chinese projects are also rejected because of weak emissions and environmental standards. The activities of China in the polar regions or the Arctic will also lead to the melting of ice caps through the massive drilling of Arctic oil which eventually contributes to global warming (Hilman, 2021). China’s economic projects such as BRI also impact wildlife due to the cutting down of forests to construct infrastructure. The fossil fuels that are being used cause an immense rise in the emission of greenhouse gases. The lack of transparency and hunger for growth on the part of Beijing even if it means harming the environment means that the community of common destiny may take a while to come to fruition (Quintal, 2021).

8. Debt Sustainability

Debt is sustainable in a state while the lender is investing or granting loans to a state who is capable enough to meet future payment obligations based on the cost, benefit, and risk management assessment. China’s greed for more and more investment itself becomes an economic challenge to economic diplomacy. China takes drastic steps and invests in volatile regions whereby the return of the debt is very less likely and this leads to the mounting of the public debt due to extending credit to the underserved subprime markets.

The limits to debt finance can be a binding constraint for Belt and Road investments. Country risk is probably the highest risk for private investors to be considered. Political and credit risks can be mitigated only to a certain extent. This calls for caution in debt financing, for a greater reliance on domestic resource mobilisation and for a surveillance mechanism, instituted through the International Monetary Fund (IMF) or through regional institutions, which ensures that country debt limits are regarded by market players(Wolff, 2018).

 

9. US-China strategic competition

US and China are currently under a great strategic competition across the world. US has adopted several countermeasures to tackle the rapidly growing economic influence of China by engaging it on other fronts. US-China trade war whereby tariffs were imposed on China in 2018 in the imports and exports, the balloon incident in 2023 which was again a low-intensity face-off between US and China. China was accused of surveillance through the balloon and the issue of the identity of Taiwan remains a major bone of contention. US-China is a strategic competitor in the Asia Pacific region. US and China both aim for control over the region through soft power means. However, these geopolitical dynamics impact Chinese economic diplomacy in the region (Quintal, 2021).

10. Political Instability

For the continuation of economic projects, political consensus, and economic stability are crucial. The second phase of the massive CPEC project which cost dollar sixty-two billion was put on rest after the political turmoil in Pakistan in the year 2022. The political situation was not favorable for China whereby on the contrary if there was political stability halted the investments of the various Chinese pharmaceutical and information technology sector in Pakistan (Ahmed, 2022).

11. Indian Hegemony

Indian hegemonic ambitions in the region. There is staunch political difference and competition between India and China. India aims to be a hegemon in South Asia and thus challenges China’s economic diplomacy in the region. There is also a constant tussle over the Indian Ocean which is highly significant for trade and transit. The oil that China imports from the middle east also passes from the Indian Ocean and the strait of Hormoz and China’s export to other countries also pass from the Indian Ocean. China to build infrastructure over the littoral states and even in Pakistan. It also aims to be part of SAARC however; Indian opposition is a major challenge. Japan and China do not have stable relations yet the cordial Japanese relations with India have led to Japan’s interests in the Indian Ocean contrary to China’s leading to the plans of connecting the Indo- Pacific Ocean corridor.

12. Arabian Challenges

China’s economic diplomacy with the Arab world is not a centralized policy, and local entities sometimes compete for their provincial interests in the Arab world. For instance, the National Development and Reform Commission (NDRC) has the authority to approve foreign investment proposals worth more than $1 billion from Chinese companies. However, the Ministry of Commerce holds more influence than the Foreign Ministry in the CASCF as it can implement Beijing’s aid programs in the Arab world.

China’s economic diplomacy with the Arab world has been hampered by a lack of cultural connections. The foreign ministry, as well as Chinese embassies and consulates abroad, have traditionally focused on commercial and business relations. Additionally, China’s state-run Xinhua News Agency has been unable to compete with Western media since 2013. Contacts between China and the Arab world in areas such as academia, media, youth, and think tanks are limited. Although bilateral trade is growing, it does not necessarily enhance China’s image in the Arab world. Thus, Beijing still has a long way to go to win the hearts and minds of the Arab people, which has hindered China’s economic diplomacy (Zreik, 2022).

 

Conclusion:

The Belt and Road Initiative (BRI) has been a major driver of China’s economic diplomacy, and its implications on Asia have been far-reaching. The BRI’s emphasis on infrastructure development has helped to address the region’s significant economic and infrastructure deficit, but it has also raised concerns about debt sustainability and the risk of strategic dependence. The BRI has also been criticized for being opaque, non-transparent, and not always conforming to international standards. These challenges have led to growing skepticism and resistance from some countries in the region as well. Nevertheless, China’s economic diplomacy is likely to remain a critical feature of Asia’s political and economic landscape in the coming decade. As China continues to grow and assert itself on the global stage, its economic engagement with the region will have significant implications for both regional and global politics, trade, and security. While it will be interesting to see how regional as well as major powers respond and adapt to these new challenges, the success of China’s economic diplomacy will ultimately depend on its ability to address the challenges and concerns that have been raised and to build trust and cooperation with its partners in the region and beyond.

 

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