China Retreats Globally

By Milton Ezrati

China has retreated globally – not from its artificial islands in the South China Sea but economically and financially. 

It seems just yesterday that the Middle Kingdom, as China calls itself, resembled an unstoppable juggernaut, cutting constructions contracts and buying properties all over the world. 

That is no longer the case. 

Trade war with the United States gets the credit, but even if Washington and Beijing were to sign a deal tomorrow, China would not regain its old momentum.
Official Ministry of Finance (MOF) figures, not surprisingly, offer a soothing picture of moderate decline, but private sources tell a much more dramatic story. 

According to the American Enterprise Institute’s well-regarded China Global Investment Tracker (CGIT), Chinese overseas investments of all kinds in the first half of this year averaged only $27.5 billion, half the rate averaged during the same time in 2018 and barely a quarter the rate of 2017’s first half. 

This year’s figures are lower than any time since 2008. 

Construction contracts, largely in the third world as part of China’s Belt and Road initiative, have fallen off, too, but less dramatically. 

China clearly has become much less engaged with the world than it was.
Two things have caused this retreat. 

One is a growing hostility among host countries toward Chinese investment. 

Especially developed countries, the United States in particular, have balked over the ugly Chinese practice of stealing technology. 

Suspicions along these lines have held up approvals for Chinese purchases and other direct flows of funds. 

Some familiar with Chinese practice have gone a step further. 

The European Chamber of Commerce has warned against developing a dependence on China and Chinese funds. 

This combination of concerns and suspicions have centered primarily on China’s huge state owned enterprises and less on private Chinese investment. 

But if private investment has fallen off less dramatically, this growing reluctance in the West has had its effect there, too.
More significant is China’s relative shortage of hard currency. 

Despite Beijing’s efforts to make the yuan a global currency, it is little used in currency transactions – no more than 2% of the total in fact – and so is of little use in overseas purchases. 

Meanwhile the trade war with the United States has already begun to cut into Beijing’s supplies of foreign exchange. 

Beijing actually anticipated the problem and in 2017 began to ration foreign exchange even before the White House added any tariffs. 

The first major investment declines occurred in late 2018, when the While House first imposed 10% tariffs on a range of Chinese products. 

The next drop coincided with this past spring’s increased tensions. 

To be sure, Beijing’s foreign exchange hoard remains huge, but officials are wary of how rapidly it has shrunk, falling some 25% from almost $4 trillion at its peak in 2014 to barely over $3 trillion during the first half of this year.  

Beijing’s rationing of these financial resources has affected the state-owned sector in particular. Private companies have a greater willingness and ability to borrow hard currencies abroad.
Within the investment pullback, North America, which historically has accounted for some 17% of China’s overseas investment flows, has seen the biggest drop. 

No doubt, the hostility created by trade friction has played a role. 

But China has also pulled back in Europe, where British and Swiss destinations have long dominated. 

 Australia and Singapore, which historically have accounted for about 10% of Chinese overseas investment flows, have seen less relative shortfall but some nonetheless.
China has concentrated its remaining financial resources on less developed countries. 

The reasons are two fold. 

First, activities in these countries center more on construction contracting than investing. 

Such efforts may require subsidies, but they demand little hard currency. 

Indeed, China collects fees on many of these projects. 

Second, Beijing has clearly made its Belt and Road initiative (BRI) a political priority. 

This effort at land trade routes between China on one side and Europe and the Middle East on the other may not generate the secure financial returns that investments in the developed world offer, but monies spent in these projects pay Beijing huge political dividends by tying these countries to China and by advancing a project that China has touted as an alternative to U.S.-led, mostly maritime trade arrangements. 

BRI historically has captured more than three-fifths of China’s overseas construction volumes with almost three quarters of the monies involved in energy and transportation in such places as Pakistan and Iran, Saudi Arabia and Nigeria. 

Preliminary figures for 2019 show that as all other efforts have diminished, BRI has captured a still larger proportion of China’s efforts.
Even if China and the United States were to sign a trade deal tomorrow, these trends would likely persist. 

Though trade would increase with a new treaty, the terms would no doubt create a more even balance than previously, making it highly unlikely that China could replenish its reserves of hard currency quickly, if at all. 

At the same time, suspicions of Beijing’s agenda and practices, especially China’s state-owned enterprises, will persist, trade deal or no. 

Political imperatives will, of course, keep China focused on BRI and its construction projects. 

For the investment flows, the best to expect is stability. 

It seems that for better or worse, the world has already seen the high water mark of Chinese investment flows.

Italian Horse

Italy May Split With Allies and Open Its Ports to China’s Building Push

By Jason Horowitz and Jack Ewing

The port at Gioia Tauro, Italy. Italian officials are poised to take a first step toward accepting Chinese infrastructure investment as part of Beijing’s One Belt, One Road initiative.

ROME — In a move certain to cause consternation among American officials and leaders of the European Union, Italy appears poised to help China extend its vast global infrastructure push deeper into Western Europe, part of Beijing’s sweeping plan to advance its economic interests and influence around the world.
A first step toward Italy’s cooperation on the Chinese initiative, One Belt, One Road, would be the signing of a memorandum of understanding when Xi Jinping visits Rome this month, Michele Geraci, Italy’s under secretary in the economic development ministry, said in an interview on Wednesday.
“We are not yet as of today 100 percent sure,” said Geraci, one of the lead negotiators on the agreement. 

“But I think there is a likely, good probability.”
If Italy takes such a step toward encouraging Chinese investment, it will be the first member of the Group of 7, the world’s richest economies, to actively participate in Beijing’s effort to build cargo hubs around the world to fuel its own economic growth.
In recent months, top American diplomats in Italy have expressed concerns to leaders of Italy’s new government about the prospect of such a deal. 

Geraci said he and other Italian officials had considered those concerns carefully before deciding to proceed.
Asked on Wednesday about the potential agreement, an official at the United States Embassy in Rome referred to comments by Garrett Marquis, a National Security Council spokesman, in the Financial Times. 

In those remarks, Mr. Marquis said, “We are skeptical that the Italian government’s endorsement will bring any sustained economic benefits to the Italian people, and it may end up harming Italy’s global reputation in the long run.”
Geraci noted that there was currently very little Chinese investment in Italy compared with in the United States, and he sought to allay any concerns about predatory intentions by China.
“I know China very well, and we are more able than others to spot any risks,” he said.
He also said the estimated investments, a few hundred million euros in Italy’s ports, were essentially minuscule.
“We are in no way tilting the geopolitical axis,” Geraci said, emphasizing that nothing in the deal would shift Italy away from its alliance with the North Atlantic Treaty Organization or the European Union.
He argued that cooperating with China on the infrastructure push would allow Italy, which is saddled with enormous debts and stuck at about zero growth, to export fashion, machinery, food, chemical and other goods to China in greater numbers. 

He said Italy’s current exports to China paled next to those of Germany and France. 

France, he said, sells seven times as much wine to China, and even Ireland exports more food and beverages there.
Those countries have been aggressive in pursuing trade with China, but they have also been wary of One Belt, One Road investment in their nations.
Germany and other countries have erected obstacles to foreign investment after Chinese companies, with close ties to Beijing, bought big stakes in the carmaker Daimler, Deutsche Bank and Kuka, a German maker of industrial robots.
Italy abstained this month when the European Union voted to approve a regulation giving countries more power to scrutinize and block foreign investment, especially when it is supported by a foreign government. 

But the regulation, clearly written with China in mind, allows countries to let foreign money in if they choose.
Michele Geraci, Italy’s under secretary in the economic development ministry. “It is a very fertile area for investment,” he said of the potential influx of money from China.

European leaders’ resistance to Chinese investment may have slowed, but it has not stopped. 

Direct investment by Chinese companies in the 28 countries of the European Union plunged 40 percent in 2018 to €17.3 billion, or $19.6 billion, according to a study published this week by the Rhodium Group, a consulting firm, and the Mercator Institute for China Studies in Berlin.
Much of the decline reflected the reduced buying power of Chinese companies because of slower economic growth. 

And Chinese investments in Germany still rose €400 million, to €2.1 billion, last year with the acquisitions of a pharmaceutical company and an auto industry supplier, the study found.
Money from China is still welcome in the poorer countries of Eastern Europe that are eager for investment. 

Chinese money is helping to finance improvements to the rail line between Budapest and Belgrade and Black Sea port facilities in Bulgaria.
Chinese investments in the relatively small economies of Eastern Europe fell last year to €2 billion from €3 billion, according to the study. 

Since 2000, Chinese investment in the region has been about €7 billion, or about a third of what has gone to Germany. 

Hungary attracted about €2.4 billion of that sum, much more than any other Eastern European country.
Italy has ports that are attractive to China in Trieste in the country’s northeastern region, in Genoa on the Ligurian coast and in Palermo, a Sicilian city close to Africa, where China has invested deeply.
“All of these ports have the benefit of being closest to Africa,” Geraci said. 

“Without being in Africa,”
For now, China’s most important port in Europe is the Piraeus port outside Athens, where the state-backed shipping conglomerate Cosco had taken control.
Italy wants in on the action.
Already this week, with the framework agreement pending, the port authority of Genoa is proceeding with a deal to create a new company with the China Communications Construction Company, Geraci said.
“One way for us to increase trade values is to first increase investment” from China, he said.
“This is done by these memorandums, One Belt and One Road. It is a very fertile area for investment.”
The office of President Sergio Mattarella confirmed on Wednesday that Xi Jinping will meet with him in Rome on March 22 and be honored with a state dinner that evening.
Xi is also scheduled to meet with Prime Minister Giuseppe Conte.
Geraci said China’s leader had also expressed a desire to visit Palermo.
Geraci spent a decade in China teaching economics and writing financial columns before being called back to Italy in 2018 by Deputy Prime Minister Matteo Salvini, the populist leader, to work in the government with a concentration on China.
During his time there, other Italian officials seemed to warm up to the country.
In May 2017, the Italian prime minister at the time, Paolo Gentiloni of the Democratic Party, was one of the few Western leaders to attend the One Belt, One Road conference in Beijing.
“Italy can be a protagonist in this great operation that China cares about so much,” Gentiloni said at the time.
“It is a great opportunity for us, and my presence here speaks to how important we consider it.”
But Gentiloni, a supporter of the European Union who believed in keeping a united European front, did not ultimately sign on for Italy to cooperate in the infrastructure initiative.
The populists now in control of Italy’s government ran against Brussels and seem less interested in maintaining such unity.
“The big change,” Geraci said, “is wanting to do things.”

China Is Forced to Reconsider Its Route Into Eastern Europe

• 16+1 members disappointed as projects fail to materialize
• Dealing with China ‘like milk production’ in communist times

By Alan Crawford and Peter Martin

China’s efforts to make inroads in eastern Europe are being hindered by what nations see as failed promises on money materializing and the strings attached to investments.
The so-called 16+1 framework was established by China as a means to deepen its footprint in eastern Europe. 

Its members -- 11 European Union countries, from Poland to Hungary and Estonia, plus five Balkan states -- saw the annual forum as a means to attract Chinese investment in infrastructure like roads and rail networks to boost their economies.

China’s involvement with eastern Europe

But many of those states are disenchanted with the lack of investment from China, according to people with direct knowledge of the forum. 

Members are also unhappy at Beijing’s preference to provide loans rather than cash, and now recognize that better deals are available within the EU framework, such as via the European Bank for Reconstruction and Development, the bloc’s development bank.
Some of those projects that have materialized with Chinese help have attracted unwelcome attention. Mounting costs for a highway development in Montenegro prompted the Washington-based Center for Global Development to single out the country as “at particular risk of debt distress,” while the tender for an as-yet unfinished high-speed rail link between Budapest and Belgrade prompted an EU commission probe.

Growing Unease
“Some feeling of unease about the whole scheme has been brewing for some time,” said Jan Weidenfeld, head of European affairs for the Mercator Institute for China Studies in Berlin. 

The conditions attached to projects are seen by 16+1 members as similar to those offered to African states, meaning that some countries “even feel insulted,” he said. 

“The package just isn’t quite as attractive as China would make believe it is.”
Trade and investment links between China and central and eastern Europe have improved over the past decade, yet growth “has not hit declared values and did not meet the expectations” of some countries, Erste Group noted in a report in May. 

Li Keqiang will have an opportunity to raise the matter when he meets European leaders in Brussels on Friday during an EU-Asia summit.
The 16+1 has been controversial from its inception in 2012. 

Armed with its own secretariat staffed by Chinese diplomats, the forum features an annual summit of member state leaders, offering them the chance of bilateral talks with the Chinese premier. 

The focus is on projects that fall under the umbrella of China’s vast Belt and Road infrastructure initiative.
From the outset, EU officials were concerned that it was an attempt by China to split off the bloc’s poorer east rather than deal with Brussels. 

A December 2017 report on EU-China ties by the European Council on Foreign Relations concluded there was “no doubt that the 16+1 is part of a broad ‘divide and rule’ practice.”

Skipping Sofia
The troubles surrounding the forum may be welcomed by Brussels as well as by core member states such as Germany and France, which have been at the forefront of efforts to tighten up screening of Chinese investments in critical infrastructure and companies in the bloc. 

Germany in particular has been increasingly vocal in its criticism of the 16+1.
Germany is fine with countries in eastern Europe pursuing closer economic ties with Beijing, but not at the cost of undermining joint EU policy on China, according to a senior government official in Berlin. 

There’s an implied risk that Chinese investment assumes political favors in return, the official added.
Li is due in Brussels along with some 50 fellow leaders including German Chancellor Angela Merkel, French President Emmanuel Macron and Polish Prime Minister Mateusz Morawiecki, who leads the largest European nation in the 16+1.
Yet Morawiecki skipped this year’s 16+1 summit in the Bulgarian capital Sofia and sent his deputy instead. 

Among the eastern framework’s members, Poland has been key in leading skepticism, two of the people familiar with the deliberations said. 

Hungary under EU-baiting Prime Minister Viktor Orban remains doggedly stuck to China, the people said.

Polish Mismatch
“There was a mismatch of expectations,” said Piotr Buras, head of the Warsaw bureau of the European Council on Foreign Relations. 

Poland wanted Chinese direct investment and involvement in greenfield projects, whereas the Chinese were more interested in public contracts for infrastructure, preferential terms and purchases of high-tech companies.
He also cited a conflict among some east Europeans at being seen to choose China as a strategic partner over the U.S. 

Poland, said Buras, “has chosen the U.S. and it’s tough for them to go into bed with both.”
Inefficiency and needless state interference are among other complaints expressed by forum members. 

The central bureaucracy means it’s often easier to deal directly with Chinese provincial governments than with Beijing, said one official from an eastern EU government.
“It’s like stories my grandfather told me about milk production” in communist times, the official said, asking not to be named discussing the forum since it remains politically sensitive. 

The upshot is a lot of effort with little to show for it, the official said.

China still feels that former Soviet bloc countries in eastern Europe are closer to them, but those diplomatic ties often don’t translate to today, according to an official from another European government.
For all the disappointment, the 16+1 is unlikely to be scrapped, the official said. 

Countries still see value in the guarantee of an annual audience with the Chinese premier, and find that the 16+1 raises their profile in China’s investment-rich provinces. 

That’s an especially important benefit for the forum’s smallest nations, the official said.

Chinese boss: "Kenyans were like a monkey people"

Chinese Investment Brings Racism and Discrimination

By Joseph Goldstein

Richard Ochieng’, 26, at his home in Nairobi, Kenya. His Chinese boss called him and other Kenyans monkeys.

RUIRU, Kenya — Before last year, Richard Ochieng’, 26, could not recall experiencing racism firsthand.
Not while growing up as an orphan in his village near Lake Victoria where everybody was, like him, black.
Not while studying at a university in another part of Kenya.
Not until his job search led him to Ruiru, a fast-growing settlement at the edge of the capital, Nairobi, where Mr. Ochieng’ found work at a Chinese motorcycle company that had just expanded to Kenya.
But then his new boss, a Chinese man his own age, started calling him a monkey.
It happened when the two were on a sales trip and spotted a troop of baboons on the roadside, he said.
“‘Your brothers,’” he said his boss exclaimed, urging Mr. Ochieng’ to share some bananas with the primates.
And it happened again, he said, with his boss referring to all Kenyans as primates.
Humiliated and outraged, Mr. Ochieng’ decided to record one of his boss’s rants, catching him declaring that Kenyans were “like a monkey people.”
After his cellphone video circulated widely last month, the Kenyan authorities swiftly deported the boss back to China.
Instead of a tidy resolution, however, the episode has resonated with a growing anxiety in Kenya and set off a broader debate.
As the country embraces China’s expanding presence in the region, many Kenyans wonder whether the nation has unwittingly welcomed an influx of powerful foreigners who are shaping the country’s future — while also bringing racist attitudes with them.
It is a wrenching question for the nation, and one that many Kenyans, especially younger ones, did not expect to be confronting in the 21st century.
Kenya may have been a British colony, where white supremacy reigned and black people were forced to wear identification documents around their necks.
But it has been an independent nation since 1963, with a sense of pride that it is among the region’s most stable democracies.
Today, many younger Kenyans say that racism is a phenomenon they largely know indirectly, through history lessons and foreign news.
But episodes involving discriminatory behavior by the region’s growing Chinese work force have unsettled many Kenyans, particularly at a time when their government seeks closer ties with China.

An unfinished stretch of the Standard Gauge Railway, a 300-mile Chinese-built railroad between Nairobi and Mombasa.

“They are the ones with the capital, but as much as we want their money, we don’t want them to treat us like we are not human in our own country,” said David Kinyua, 30, who manages an industrial park in Ruiru that is home to several Chinese companies, including the motorcycle company where Mr. Ochieng’ works.
Over the last decade, China has lent money and erected infrastructure on a sweeping scale across Africa.
To pay for such projects, many African nations have borrowed from China or relied on natural resources like oil reserves.
And when tallying the cost, African nations have generally focused on their rising debts, or occasionally on the exploitative labor practices of some Chinese firms.
But here in Nairobi, concerns about racism and discrimination are a growing part of the conversation about China’s expanding presence.
In Nairobi, workers in their 20s and 30s swap stories of racism or discrimination they have witnessed. One described watching a Chinese manager slap her Kenyan colleague, who was also a woman, for a minor mistake.
Other Kenyan workers explained how their office bathrooms were separated by race: one for Chinese employees, the other for Kenyans.
Yet another Kenyan worker described how a Chinese manager directed his Kenyan employees to unclog a urinal of cigarette butts, even though only Chinese employees dared smoke inside.
The Chinese population in Kenya is difficult to count accurately, although one research group put the figure at around 40,000.
Many are here for just a few years, to work for one of hundreds of Chinese companies.
Many of the employees live together in large housing developments and are bussed back and forth from work, leaving little social interaction with Kenyans.

Silk Noodles, a Chinese restaurant in Nairobi, is in a group of Chinese storefronts popular with Chinese who live in the city.

“Because of the isolation and lack of integration, usually they are not very aware of the local situation,” said Hongxiang Huang, a Chinese conservationist and former journalist who has lived in Nairobi.
“They do not know very well how to interact with the outside world.”
And they arrive with hierarchical views of culture and race that tend to place Africans at the bottom, said Howard French, a former New York Times correspondent who wrote the 2014 book “China’s Second Continent,” which chronicles the lives of Chinese settlers in Africa.
Accusations of discrimination have even emerged on a major state-sponsored project: a 300-mile Chinese-built railroad between Nairobi and Mombasa.
The train has become a national symbol of both progress and Chinese-Kenyan cooperation, though positive reviews have at times been overshadowed by concern over its $4 billion price tag.
But in July, The Standard, a Kenyan newspaper, published a report describing an atmosphere of “neocolonialism” for Kenyan railway workers under Chinese management.
Some have been subjected to demeaning punishment, it said, while Kenyan engineers have been prevented from driving the train, except when journalists are present.
It was a particularly explosive claim because during the train’s maiden voyage, with President Uhuru Kenyatta on board, two Kenyan women drove the train to much fanfare.
In interviews with The New York Times, several current and former locomotive drivers agreed that only Chinese drivers got to operate the train, describing a range of racist behavior.
Cheering after President Uhuru Kenyatta flagged off a cargo train for its inaugural journey to Nairobi on the Chinese-built railway last year.

“‘With uniforms on, you won’t look like monkeys anymore,’” Fred Ndubi, 24, recalled his Chinese supervisors saying.
Two other workers with him offered the same account.
Mr. Ndubi, who has since left the railroad, said his family had sold about a quarter of its land so he could afford the training needed to become a train operator.
“We just stood there and asked him, ‘How can you call us monkeys?’” Mr. Ndubi recalled.
Sometimes, the racial controversies have unfolded in full public view.
Two years ago, a laundry detergent company in China ran a television commercial in which the detergent’s effectiveness was demonstrated by transforming a black man into a light-skinned Asian man. 
Last year, WeChat, the country’s popular messaging app, apologized after its software was found to translate the Chinese words for “black foreigner” into a racial slur in English.
This year, China’s televised Lunar New Year gala, estimated to reach 800 million viewers, included caricatures of Africans, with blackface and men in animal suits.
When asked about the controversy, China’s foreign ministry spokesman suggested that Western news organizations had blown the matter out of proportion in an effort to “sow discord in China’s relations with African countries.”
Mr. French, the author of “China’s Second Continent,” said that when it comes to Africa, China has had a tendency to dismiss criticism of its conduct by noting that the West, not China, fueled the slave trade and colonized the continent.
But that misses the point, Mr. French said, by ignoring the treatment of Africans today.
“Their experience is that they are being treated in flagrantly disgusting, racialized ways,” Mr. French said.

Chinese employees helping passengers at the new Standard Gauge Railway terminal in Nairobi last year.

Kenya, home to more than 40 officially recognized ethnic groups, has long had its own problems with prejudice and ethnic tensions.
A disputed election in 2007 led to several weeks of mass violence, much of it along ethnic lines.
And Kenyans of Indian and Pakistani descent have long felt secluded from mainstream Kenyan life, although the government has granted them greater official recognition.
But the Chinese presence has added a volatile new element and, at times, the Kenyan government has seemed divided over how to respond.
When allegations of discrimination by Chinese employers emerged over the summer, a Kenyan government spokesman suggested that part of the problem lay instead with Kenya’s national work ethic, which he said might need to change.
There are signs that elements within the government may be pushing back.
Last month, the Kenyan police raided the Nairobi headquarters of a Chinese state-run television channel, briefly detaining several journalists.
The timing struck many as curious: It was the same week that President Kenyatta was in Beijing, raising the question of whether someone inside the Kenyan government wanted to create a diplomatic row.
The experience of Mr. Ochieng’ and other workers speaks to the future of relations between the two countries.
He took a job as a salesman, thinking it would secure a prosperous future, but when he showed up to work he found a different reality.
The pay was a fraction of what he was initially offered, he said, and it was subject to deduction for a long list of infractions.
“No laughing,” was one of the injunctions printed in the company rules.
Each minute of lateness — sometimes unavoidable given Nairobi’s notorious traffic — came with a steep fine.
An employee who was 15 minutes late might be docked five or six hours’ pay, he said.
One Chinese manager, Liu Jiaqi, 26, loomed particularly large.
At times, he was smiling and good-natured, Mr. Ochieng’ said, but whenever the question of pay came up or something went wrong, Liu turned on his subordinates.
When Mr. Ochieng’ left a sales brochure behind in the car during a sales visit and had to excuse himself to retrieve it, he said Liu began crowing, “This African is very foolish.”
But the most painful, he said, were the monkey insults — the kind of dehumanization used to justify slavery and colonization.
Mr. Ochieng’ said he protested several times, but the monkey comments did not stop.
“It was too much,” he said.
“I decided, ‘Let me record it.’”
The rant that Mr. Ochieng’ recorded came after a sales trip had gone awry.
Mr. Ochieng’ asked his boss why he was taking out his anger on him.
“Because you are Kenyan,” Liu explained, saying that all Kenyans, even the president, are “like a monkey.”
Mr. Ochieng’ continued that Kenyans may have once been oppressed, but that they have been a free people since 1963.
“Like a monkey,” Liu responded. “Monkey is also free.”
Inspecting part of the railway in June.

The day after the video began to circulate widely, Liu, who could not be reached for comment, was deported.
It was an especially stark illustration of the clash between the two cultures, with many adding that it produced a noticeable chill in relations between Kenyans and Chinese people in the capital.
“That video had a big effect,” said Victor Qi, the Chinese manager of a noodle restaurant in Nairobi, adding that business from black customers seemed to fall off after that.
After the video emerged, an official with the motorcycle company called Liu’s behavior an “unfortunate transgression.”
Mr. Ochieng’ says he has heard stories of colonialism — “what our forefathers went through” — and worries that the Chinese will take Kenya backward, not forward as the nation’s leaders have assured.
“These guys are trying to take us back to those days,” he said in the tiny room he shares with his wife and 2-year-old son.
On the wall hung a poster with a verse from Ephesians.
Nearby, on a little desk rested two Bibles, both equally dog-eared with use.
“Someday I will tell my son that when you were young, I was despised because I was black,” he said.

‘We Cannot Afford This’: Malaysia Pushes Back Against China’s Paranoia

A country that once courted Chinese investment now fears becoming overly indebted for big projects that are neither viable nor necessary — except to China.

By Hannah Beech

Melaka Gateway, a set of artificial islands in Malaysia, is a joint project between a Malaysian group and Chinese companies.

KUANTAN, Malaysia — In the world’s most vital maritime chokepoint, through which much of Asian trade passes, a Chinese power company is investing in a deepwater port large enough to host an aircraft carrier.

Another state-owned Chinese company is revamping a harbor along the fiercely contested South China Sea.
Nearby, a rail network mostly financed by a Chinese government bank is being built to speed Chinese goods along a new Silk Road. 

And a Chinese developer is creating four artificial islands that could become home to nearly three-quarters of a million people and are being heavily marketed to Chinese citizens.
Each of these projects is being built in Malaysia, a Southeast Asian democracy at the heart of China’s effort to gain global influence.
But where Malaysia once led the pack in courting Chinese investment, it is now on the front edge of a new phenomenon: a pushback against Beijing as nations fear becoming overly indebted for projects that are neither viable nor necessary — except in their strategic value to China or use in propping up friendly strongmen.
At the end of a five-day visit in Beijing, Malaysia’s new leader, Mahathir Mohamad, said on Tuesday that he was halting two major Chinese-linked projects, worth more $22 billion, amid accusations that his predecessor’s government knowingly signed bad deals with China to bail out a graft-plagued state investment fund and bankroll his continuing grip on power.
His message throughout his meetings with officials, and in public comments, has been unambiguous.
“We do not want a situation where there is a new version of colonialism happening because poor countries are unable to compete with rich countries,” Mr. Mahathir said on Monday at the Great Hall of the People in Beijing after meeting with Li Keqiang.

For a time it appeared that China’s standard playbook for gaining favor was working in Malaysia. 

It had successfully courted Mr. Mahathir’s predecessor, Najib Razak, with easy loans and showcase projects, and secured deals that were of strategic value for its ambitions.
But in May, Mr. Najib was voted out of office by an electorate tired of the corruption scandals swirling around him, some of which involved China’s highest-profile investment deals in Malaysia.
Mr. Mahathir, 93, was voted into office with a mandate that included getting the country out from under its suffocating debt — roughly $250 billion of it, some of it owed to Chinese companies.
From Sri Lanka and Djibouti to Myanmar and Montenegro, many recipients of cash from Chinese’s huge infrastructure financing campaign, the Belt and Road Initiative, have discovered that Chinese investment brings with it less-savory accompaniments, including closed bidding processes that result in inflated contracts and influxes of Chinese labor at the expense of local workers.
Fears are growing that China is using its overseas spending spree to gain footholds in some of the world’s most strategic places, and deliberately luring vulnerable nations into debt traps to increase China’s dominion as the United States’ influence fades in the developing world.
“The Chinese must have been thinking, ‘We can pick things up for cheap here,’” said Khor Yu Leng, a Malaysian political economist who has been researching China’s investments in Southeast Asia. “They’ve got enough patient capital to play the long game, wait for the local boys to overextend and then come in and take all that equity for China.”
In his action in Beijing on Tuesday, Mr. Mahathir said he was halting a contract for the China Communications Construction Company to build the East Coast Rail Link, thought to have cost the government around $20 billion, along with a $2.5 billion agreement for an arm of a Chinese energy giant to construct gas pipelines. 

He had earlier suspended the projects, leading some analysts to believe he wanted to renegotiate the terms during his China trip. 

Instead, he announced that the deals were off for now.
“It’s all about borrowing too much money, which we cannot afford and cannot repay because we don’t need these projects in Malaysia,” Mr. Mahathir said.

Prime Minister Mahathir Mohamad has been given an electoral mandate to guide Malaysia out from under $250 billion in debt, some of it owed to Chinese companies.

A rooftop bar at Melaka Gateway.

A Pentagon report released last week said “The ‘Belt and Road Initiative’ (BRI) is intended to develop strong economic ties with other countries, shape their interests to align with China’s and deter confrontation or criticism of China’s approach to sensitive issues.”
“Countries participating in BRI could develop economic dependence on Chinese capital, which China could leverage to achieve its interests,” the report said.
Malaysia’s new finance minister, Lim Guan Eng, raised the example of Sri Lanka, where a deepwater port built by a Chinese state-owned company failed to attract much business. 

The indebted South Asian island nation was compelled to hand over to China a 99-year lease on the port and more land near it, giving Beijing an outpost near one of its busiest shipping lanes.
“We don’t want a situation like Sri Lanka where they couldn’t pay and the Chinese ended up taking over the project,” Mr. Lim said.
In a recent interview with The New York Times, Mr. Mahathir made clear what he thought of China’s strategy.
“They know that when they lend big sums of money to a poor country, in the end they may have to take the project for themselves,” he said.
“China knows very well that it had to deal with unequal treaties in the past imposed upon China by Western powers,” Mr. Mahathir added, referring to the concessions China had to give after its defeat in the opium wars. 

“So China should be sympathetic toward us. They know we cannot afford this.”

Strategic Location

The Malaysia-China Kuantan Industrial Park.

Malaysia has long served as a prize of empire, with a geopolitical importance that belies its relatively small size. 

The Portuguese, Dutch and British flocked here, eager to control a fulcrum linking the Pacific and Indian Oceans. 

China is the latest power to try to share in the riches.
Kuantan, a Malaysian city nestled on the South China Sea coast, had never been a hot spot. 

But then China began adding military heft to its territorial aspirations in the sea, where five other governments, Malaysia’s included, have competing claims.
Chinese financing began washing over Kuantan five years ago. 

Guangxi Beibu Gulf International Port Group, a state-owned firm from an obscure Chinese autonomous region, won a contract supported by the Malaysian government to build a deepwater terminal and industrial park. 

Nearby was a planned stop on the East Coast Rail Link that would mostly be financed by the Export-Import Bank of China, a government institution.
Presiding over the official launch for the Malaysia-China Kuantan Industrial Park in 2013, Mr. Najib conferred on the project a global import.
“China and Malaysia remain closely connected at a time when the balance of global trade is tilting in Asia’s direction,” he said. 

“On economic cooperation — and diplomatic — I am proud to say that Malaysia is ahead of the curve.”
Kuantan residents, though, have long worried that the city could be saddled with white-elephant projects.
“We welcome foreign investment and development, but we question the huge price that we will have to pay,” said Fuziah Salleh, a Kuantan lawmaker for Malaysia’s new governing coalition. 

“Who is the real beneficiary of all this financing? The Malaysians or the Chinese?”
“I am worried that our sovereignty has been sold,” Ms. Fuziah said.
Mr. Mahathir, however, is not averse to standing up to the superpower of the day. 

He was prime minister before, from 1981 to 2003, and back then he railed against the United States and other Western countries for what he said was a plot to hold back developing nations like Malaysia.
“Mahathir thinks China is a hegemonic force that can control economies like Malaysia,” said Edmund Terence Gomez, a political economist at the University of Malaya. 

“He’s always been worried about powerful forces. Before it was the U.S., now it’s China.”
Mr. Mahathir’s administration has been in power for little more than 100 days. 

In that time, Malaysian officials say, they have discovered that billions of dollars in inflated Chinese contracts were used to relieve debts associated with a Malaysian state investment fund at the heart of a graft scandal that led to Mr. Najib’s downfall.

Former Prime Minister Najib Razak arriving at court in Kuala Lumpur last month after his arrest on corruption charges.

The construction site of a deepwater port in Kuantan.

The United States Treasury Department has accused Mr. Najib and his family and friends of plundering billions of dollars from that fund, 1Malaysia Development Berhad, or 1MDB. 

When the indebted fund began a fire sale of assets, two Chinese state-owned giants, the China General Nuclear Power Corporation and the China Railway Engineering Corporation, moved in, prompting speculation that Beijing was happy to keep Mr. Najib’s cash-strapped government afloat.
Sitting at his desk during an interview after the election, Mr. Mahathir pointed to a sheaf of papers before him. 

It was a proposal from a Malaysian construction company that he said contained evidence that the East Coast Rail Link could have been developed by a Malaysian company for less than half of the $13.4 billion contract won by the China Communications Construction Company, a state-owned Chinese firm with extensive operations overseas.
Notably, the bidding process for the rail contract was closed.
Last week, Mr. Lim, the finance minister, told Parliament that Malaysia would not be able to cover the operational cost for the railway, much less the capital expenditure, which he estimated at nearly $20 billion rather than $13.4 billion.
Neither the Chinese company nor its Malaysian partner responded to requests for comment.
“It looks like not all the money is being used for building the railway line,” Mr. Mahathir said of the East Coast Rail Link deal. 

“The likelihood is the money has been stolen.”
Malaysian investigators are looking into whether an associate of Mr. Najib’s stepson may have brokered the rail deal to alleviate the debt accrued by 1MDB or to fund Mr. Najib’s re-election campaign.
The United States Treasury Department considers that associate, Jho Low, an exiled financier who has an arrest warrant out on him, to be the prime agent in the 1MDB scandal. 

On the eve of Mr. Mahathir’s trip to China, Malaysian finance ministry officials said they believed that Low had been hiding out in China.
Malaysia’s new administration, which unseated a coalition that had ruled, in one form or another, since independence in 1957, has also been scrutinizing the $2.5 billion deal for a subsidiary of the China National Petroleum Corporation to build energy pipelines in Malaysia. 

Mr. Lim said he had discovered upon taking up his post that the Malaysian government had already disbursed more than $2 billion for the project.
There was one catch. 

“From what we understand,” Mr. Lim said, “zero percent of the construction work has been carried out.”

Building Big Ports

Melaka Gateway includes three artificial islands and an expanded natural islet.

While the role of Chinese money in bailing out Mr. Najib’s indebted administration has received the most attention, another Chinese megaproject raises even sharper questions about Beijing’s geopolitical aims.
The Malaysian city of Malacca was once a conduit for spices and treasures that flowed from Asia to Europe. 

The strait named after the city is still the channel through which much of Asia’s seaborne trade — and most of China’s oil imports — flows.
But Malacca’s port silted up centuries ago and is now a backwater. 

Instead, nearby Singapore, which sits at the southern end of the Strait of Malacca, ranks as the world’s busiest transshipment hub.
A $10 billion development project — backed by PowerChina International, a major Chinese utility, and two Chinese port developers — is supposed to propel Malacca back into global significance, as a vital stop on a maritime trade route that stretches from Shanghai to Rotterdam.
The plan for this project, Melaka Gateway, includes three artificial islands and an expanded natural islet, which will hold an industrial park, cruise terminal, theme park, marina, offshore financial hub and self-styled seven-star hotel.
And there will be a new deepwater port, with berths large enough to host an aircraft carrier. 

The port operator was given a 99-year lease for the deepwater terminal, rather than the more common 30-year time frame.
The local partner in Melaka Gateway is KAJ Development, which counts among its previous accomplishments building the local zoo and bird park.

Chinese tourists posing in front of an “I Love Melaka” sign in Malacca.

A road worker sweeping near the entrance to Melaka Gateway.

To explain how a little-known company was able to work with Chinese firms to transform such a strategic spot, locals have remarked on the close ties between the head of KAJ Development and Mr. Najib’s party machine. 

The company did not respond to a request for comment.
“We have so many questions about the project but no answers,” said Sim Tong Him, a former lawmaker from Malacca. 

“How did KAJ get the contract? What might happen if the Malaysian side can’t pay up? The Chinese are so secretive about this. It leaves us with a very bad feeling.”
Malacca State’s new chief minister has promised an investigation into the feasibility of the entire project, including the possibility that land on one island could be sold as a freehold to a Chinese state-owned company.
Melaka Gateway’s necessity, at least for locals, has never been clear. 

After all, the nearby Singaporean port is unlikely to be eclipsed. 

And Malaysia is already expanding other ports, even as many are running under capacity.
“We are very concerned because in the first place we don’t need any extra harbor,” Mr. Mahathir said of the Malacca project.
“We don’t have to depend upon foreigners to come,” he added. 

“When they build, they use foreign labor, foreign materials. What do we get? Nothing.”
But Beijing has funded the building of ports across the Indian Ocean, a strategy known as the string of pearls. 

Military experts have said that these ports could one day welcome Chinese warships and submarines.
“You look at a map and you can see the places where China is plotting ports and investments, from Myanmar to Pakistan to Sri Lanka, on toward Djibouti,” said Liew Chin Tong, Malaysia’s deputy defense minister. 

“What’s crucial to all that? Our little Malaysia, and the Malacca Strait.”
Under Mr. Najib, Malaysia conducted joint military drills with China and allowed Chinese attack submarines to make a port call. 

Mr. Mahathir has shifted course.
“I say publicly that we do not want to see warships in the Strait of Malacca or the South China Sea,” he said.

City of Dreams

A showroom model of Forest City, a China-financed real estate project in Johor Bahru, Malaysia.

In Forest City, a new metropolis being built at the tail end of the Malaysian peninsula, a tour guide gazed up at a bank of screens showcasing the latest in Chinese facial-recognition technology, and gave his best pitch to a group of would-be investors from a coal town in northern China.
Forest City, he said in Mandarin, was a jewel on the South China Sea.
Best of all, he said, everything in the city was designed for a Chinese clientele, from the layout of the luxury apartments to the signage in Mandarin.
The development — four artificial islands covering around eight square miles, or enough space for around 700,000 people — was conceived of by Country Garden, one of the largest private Chinese property developers, in cooperation with an investment entity whose largest shareholder is the local sultan.
In the sales gallery, an electronic display plays up Forest City’s “strategic location” and places it at the center of a map of Beijing’s Belt and Road Initiative projects.
“We are doing something that will alter the world map,” the sales pitch reads.

Forest City showroom employees putting on a show in Chinese for the children of prospective buyers.
Ceramic sea lions on the beach at Forest City.

More than any other project, Forest City helped turn local sentiment against Chinese cash, amid suspicions that a private Chinese property developer was somehow plotting to reshape Malaysia’s delicate ethnic balance.
“This is not Chinese investment but a settlement,” Mr. Mahathir said during the election campaign, using Forest City as a frequent punching bag.
Forest City is not a strategic play by the Chinese People’s Liberation Army to station warships in Malaysia. 

Nor is it viewed as a way for Beijing to finance the excesses of a corrupt leader. 

Instead, it represents something even more alarming to the average Malaysian — four man-made islands on which Chinese can live as they like and, in the process, dilute the Malaysian national identity.
Although the majority of Malaysians are Malay Muslims, the country’s second largest ethnic group is Chinese, followed by an Indian population. 

Many Chinese migrated to Malaysia during the colonial era, and the feeling that they were given preferential treatment by the British lingers to this day.
Affirmative action programs that gained full force during Mr. Mahathir’s first stint as prime minister ensure that Malays and indigenous populations get a leg up over ethnic Chinese Malaysians.
In that context, the prospect of a new wave of Chinese migration, even if only a population of part-time sunbirds, is politically sensitive in Malaysia.
But what if that wave doesn’t even materialize? 

Capital controls in China have made it far more difficult for Chinese to get their money out to pay for overseas real estate, worrying the Mandarin-speaking sales staff at Forest City. 

Who will buy all these condominiums, which are priced far above the local property market, if not the Chinese?
“We all want Forest City to succeed, because we cannot afford for it to fail and become an empty ghost city,” said Wong Shu Qi, a member of parliament for the Democratic Action Party, which is part of the governing coalition.
“The reality is that wishing for a Chinese concession in Malaysia is the best thing we can hope for,” she added. 

“How sad is that?”

A residential tower project under construction at Forest City.

No Country for Predatory China

Doors Slam Shut for China Deals Around the World
Tighter rules for CFIUS are echoed in great scrutiny from Europe to Australia.

By Nisha Gopalan
Ant Financial’s Alipay: Rolling in Japan, but MoneyGram was off limits.
Doors are slamming shut in the developed world not just to Chinese investment in technology but potentially to a wave of acquisitions with a tech element, as diverse as smart heaters and robotic lawnmowers.
President Donald Trump last week signed an update to legislation for the Committee on Foreign Investment in the U.S. that broadened the inter-agency vetting committee group’s scope to encompass even minority and passive investments in three areas: Critical technology, infrastructure, and businesses that handle personal data. 

This tightening of the rules has been happening for some time, but it’s now explicit.
Just ask Jack Ma, who earlier this year had to abandon Ant Financial’s bid for MoneyGram International Inc. amid CFIUS concerns that malicious China could obtain data on U.S. military personnel who use the payments service. 

Or Broadcom Ltd., whose $117 billion bid for Qualcomm Inc. was rejected by Trump after the committee worried that the deal, and the inevitable post-merger cost-cutting, would give China’s Huawei Technologies Co. a tech leg-up.
But there’s more to this CFIUS update.
In the past, “notifications to CFIUS were voluntary, at least until CFIUS came knocking,” said Rod Hunter, a Washington-based trade partner at Baker & McKenzie LLP. 

Now, an acquirer planning to invest in anything remotely “smart” in the U.S. stands to be investigated.
Ambiguity abounds: What kinds of “personal data” are vulnerable in a world where pretty much every company must seek to monetize such information to get ahead? 

If all information is critical infrastructure, can any Chinese incursion come in under the radar? 

Would Haier Group Corp.’s purchase of General Electric Co.’s home-appliance business a couple of years ago – partly to leverage the American company’s smart-home technology – get the green light now?
China’s challenges aren’t limited to U.S., or to similar stances in Australia and Canada. 

Europe, the favored destination of late, is getting a lot tougher.
This month, Chancellor Angela Merkel’s government vetoed for the first time a possible Chinese takeover of a German company, blocking the bid for a machine-tool manufacturer, Leifeld Metal Spinning AG. 

Berlin is still reeling from the outcry sparked two years ago by Midea Group Co.’s purchase of Kuka AG, a robotics firm, and wants to lower the threshold at which it screens non-European Union acquisitions from the current 25 percent. 

Even the U.K., keen to cultivate China as Brexit looms, is proposing removing thresholds for small takeover targets, minority stakes, or even the acquisition of intellectual property.
That's not to say Beijing will have to give up all of its Made in China 2025 ambitions. 

As my colleague Noah Smith has written, joint ventures are still a way to acquire coveted technology. 

And when all else fails, China can wave its own antitrust stick. 

You can blame the current trade spat, but it’s hard not to connect President Trump’s veto of Broadcom-Qualcomm with the U.S. chipmaker’s failure to win Chinese approval of its pursuit of NXP Semiconductors NV this summer.
The fact remains that China doesn’t have a lot of options for bringing in the technology it needs. 

That puts Beijing on the back foot, under pressure to play fair and open its market to the rest of the world.
China has already promised to permit investment its financial sector, after decades of complaints from Wall Street, and now is making it easier for foreign buyers to take strategic stakes in domestically listed companies in many industries. 

That may eventually be seen as the kind of reciprocal treatment Western governments want. 

For now, though, the world’s doors are shutting to Chinese investments.

Colonialism with Chinese Characteristics

Chinese investment in Africa creates national economies entirely dependent on China

Independent

Gold bars are displayed at South Africa's Rand Refinery in Germiston. 

Chinese investment in Africa could be accelerating debt on the continent and creating economies which are “entirely dependent on China”, according to financial experts.
Around $86bn (£64bn) in loans were issued by China between 2000 and 2014 to finance over 3,000 infrastructure projects in Africa.
But as leaders gather in Beijing for China’s Belt and Road Summit this week, under the banner of Xi Jinping’s flagship policy, experts have warned that this level of investment may not be as rosy at it appears.
Zuneid Yousuf, from MBI Group, said: “The 10,000 state owned firms operating in China today arrive off the back of these mammoth investments, and there’s no doubting their significant positive impact in many areas.
“However, these firms come under the guise of partnership, but this rhetoric, combined with genuine short term benefits masks longer term problems.”
One of the main issues around the Chinese approach is the dangerously high levels of debt that it brings, which could prove unsustainable for growing economies.
There is also a risk that the continent becomes overly dependent on one country, which could allow it to hold an uncomfortably high level of influence.
Mr Yousuf said: “China is seeking to present itself as the new face of globalisation, an image it will work hard to portray at this week’s Belt and Road summit.
“The problem with this is that the current model of their ‘globalisation’ doesn’t so much encourage increased interaction between nations on a worldwide scale, as increased interaction with China on a worldwide scale.
“The reality in Africa is a model of globalisation that works only in China’s interests.
“A far more effective model, one which would not lose the short-term benefits outlined above whilst simultaneously avoiding the pitfalls of unsustainable debt, would be to focus investment on partnerships with local businesses.
“This way there would be no need for vast government loans, and the job creation, skills development, and technology transfer would be ingrained at a local level and grow organically.”
Zambia is an interesting case study of Africa-China relations.
China is the largest foreign investor in the country, but it is often cited as an example of the limitations of Chinese investment.
The top-down, large government loan model has led to tensions.
One recent example is the problem of labour laws, and the news that Chinese investors in Zambia have been preventing labour representatives from being present at construction sites.

Malaysia Is Fed Up With Chinese Cash

Belt and Road funding has become a bitter election issue.
By Adam Minter
Too much of a good thing? 

Xi Jinping won't be on the ballot when Malaysians vote for a new government on Wednesday. 

But he is on election billboards. 

Although it's probably not a role that Xi would've chosen for himself, China's influence on Malaysia's economy has become one of the most bitterly contested issues in a bruising campaign.
That's certainly awkward for China, which presents itself as a champion of economic development around the world. 

Increasingly, though, its vision isn't shared. 

In Malaysia and elsewhere, popular opposition to Chinese investment is rising, driven by the perception that its benefits flow only one way. 

In that sense, Malaysia's election should be a wakeup call.
Until recently, Malaysia actually sent far more investment to China than the other way around. 

But in 2013, Xi announced his signature Belt and Road initiative, a $1.5 trillion infrastructure project spanning 80 countries. 

It's designed to knit distant markets more closely to China, while also spurring local development. Malaysia's strategic location on the Strait of Malacca, through which about 40 percent of global trade flows, makes it a prime destination for such investment.
And China has indeed invested. 

So far, there are $34 billion worth of government-backed projects underway, including a gas pipeline and the $17 billion (at least) East Coast Rail Link. 

China's private sector is splurging, too: Between 2012 and 2016, Malaysia received $2.37 billion in Chinese real-estate investment, ranking it third among Belt and Road countries. 

Chinese money is also pouring into manufacturing, energy, and metals, as well as logistics and e-commerce.
Malaysia's current government has welcomed these investments as needed infusions into an economy battered in recent years by low oil prices and scandal-driven financial uncertainty. 

But several factors have started turning Malaysians against them.
For one thing, there are widespread fears about how China is financing these big projects and whether Malaysia can actually meet its payments. 

Last year, Sri Lanka handed over its Port of Hambantota to Chinese state-controlled firms in return for $1.1 billion in relief from debts incurred building the port. 

That development wasn't missed in Malaysia, where China has been lending just as aggressively.
Chinese companies are also notorious for importing workers, equipment and materials from back home, rather than relying on local resources. 

In the case of Malaysia's rail link, the government has even cited language barriers to defend the practice. 

Similar complaints have been aired from Ghana to the Philippines.
Chinese real-estate investment, meanwhile, has spurred jealousy, sovereignty concerns and xenophobia. 

Between 2012 and 2016, foreigners accounted for about 35 percent of residential land transactions in Malaysia, with Chinese making up the majority. 

Most notable is the massive Forest City development off the Straits of Johor, which is expected to eventually have 700,000 residents. 

So far, 70 percent of the buyers have been Chinese. 

The units, costing upward of $250,000, are out of reach for most locals.
Malaysia's opposition, led by former Prime Minister Mahathir Mohamad, hasn't shied away from exploiting these concerns. 

In a recent interview with Bloomberg News, Mahathir invoked both Sri Lanka's loss of Hambantota and the surge of foreigners into Forest City as reasons to scrutinize China's investment splurge. 

"No country wants to have an influx of huge numbers of foreign people into their country," he said.
It's a potent message. 

In 2015, Sri Lanka's president lost a reelection bid over accusations that he was too cozy with China, and his successor is now coming under similar attack. 

Although Mahathir is unlikely to unseat Prime Minister Najib Razak on Wednesday, his criticisms are taking a toll, as evidenced by the government's increasingly elaborate defenses of Chinese investment. 

No matter who wins, the Malaysian public will have become more cynical about China's role in its economy.
For China, that's surely an unwelcome development. 

But Belt and Road investment will become a divisive political issue in other countries unless China ensures that it doesn't become a burden for places that can ill afford it. 

That means lending on less onerous terms, hiring locally, and generally making sure that the benefits of its largesse are more widely shared.
Such steps won't make everyone happy. 

But they'll go a long way toward keeping Xi Jinping off of other election billboards.

Chinese Quiet Invasion of Siberia: A Geopolitical Time Bomb

Demographic genocide: The influx of Chinese migrants fuels resentment regarding China’s presence

BY IVAN TSELICHTCHEV

Children transport spring water to their village outside Khabarovsk, Russia. A 100 billion yuan investment fund is the latest in a string of efforts to strengthen ties along the border of China and Russia.

Recent meetings between Beijing and Moscow – at the Belt and Road Forum last month and at a two-day summit last week in Russia – are the latest in a string of efforts to strengthen Sino-Russian ties, especially along the border. 

However, like many nations, Russia has found that working with China can be a double-edged sword.
Sino-Russian relations are “at their best time in history”, Xi Jinping told Russian media attending the summit – words that were backed up with the announcement of a US$10 billion fund for cross-border infrastructure projects.
But for all the fanfare surrounding the fund, Chinese investment in the region is helping to fuel tension, raising fears of China’s growing presence in the Russian Far East. 

A side effect of Beijing’s investment – an influx of Chinese migrants – is perceived by locals as an expression of China’s territorial expansion. 

Russian political groups and media outlets have tapped into this anxiety.

An apocalyptic film China – a Deadly Friend (in the series “Russia Deceived”) became an instant internet hit after its release in 2015. 

In the film, China is preparing to invade the RFE in its quest for global dominance and that Chinese tanks could reach the centre of the city of Khabarovsk within 30 minutes. 

Just 30km from the Chinese border, Khabarovsk is the second largest city in the RFE after Vladivostok and the region’s administrative centre.

According to Russia’s census of 2010, the number of Chinese residing in the country was just 29,000, down from 35,000 in 2002 – no more than 0.5 per cent of the total population of the RFE.
Other estimates, however, put the number of Chinese in Russia at 300,000 to 500,000.
Transfer of territory: Xi Jinping shakes hands with Vladimir Putin during their meeting in Astana. 

The issue of Chinese presence in the RFE touches a raw nerve in Russia, largely for two reasons. First, Russians view it in the context of the enormous and growing economic and population incongruence with China and second, the three-decades-long Sino-Soviet confrontation, including border clashes in the late 1960s.

China’s population is about 10 times that of Russia. 

The population of the RFE, comprising seven provinces, is only a little more than 6 million – an average density of less than one person per square kilometre. 

Furthermore, the population in this region is in decline due to low birth rates and migration to other regions of Russia where living and working conditions are better. 

Since 1991, the RFE has lost about a quarter of its population.
China’s gross domestic product is almost 10 times that of Russia’s and the gap is increasing. 

The Chinese economy grows almost 7 per cent a year, while Russia has just gotten over a recession and is unlikely to grow more than 1.5 per cent to 2 per cent in the coming years.
Irrespective of its rich natural resources, the RFE remains one of the most problematic Russian regions in terms of infrastructure, industrial development and living conditions. 

The outdated infrastructure of most towns and villages, especially those in the border area, is in stark contrast to the state-of-the-art facilities built in Chinese border cities like Suifenhe or Heihe.

Territorial issues
The 1858 Aigun Treaty between the Russian Empire and the Qing Dynasty established the Sino-Russian border along the Amur River, reversing the previous Nerchinsk Treaty of 1689. 

Russia got over 600,000 sq km on the left bank of the Amur, known as Priamurye, which had been held by China. 

With the signing of the Convention of Beijing two years later, it also acquired the vast area on the right bank of Amur, east of its tributary Ussuri River (Ussuri joins Amur in Khabarovsk) – thus gaining complete control over the Primorye region down to Vladivostok.

A Chinese man sells goods at a market in the town of Vladivostok. Some estimates put the number of Chinese in Russia at 300,000 to 500,000.

In China, both treaties are viewed as unequal, drawn up in a time of China’s weakness.
In 1969, when confrontation between Beijing and Moscow peaked, military clashes broke out on the border, raising fears of an all-out war. 

In 1989, bilateral relations were normalised. 

The border was largely finalised by the agreement of 1991. 

Historian Boris Tkachenko said China netted 720 sq km. 

Ironically, the territories it got included the Island of Zhenbao – the scene of the bitterest military confrontation in 1969. 

The issue of the territorial status of the two small islands near Khabarovsk along the junction of Amur and Ussuri rivers – Yinlong and Heixiazi – was left to be settled later. 

Under the agreement of 2004, the former and about half of the latter were transferred to China. Critics say that Moscow made too many concessions. 

With the signing of the additional border agreement in 2008, officially all the territorial issues were settled. 

China and Russia are now strategic partners. 

But many in China feel that as the Aigun Treaty and the Convention of Beijing were unjust, China should at some point get back territories it ceded.

The economic dimension
Economic activities of the Chinese in the RFE are still expanding, with the tacit approval of the Russia.
One of the major Chinese activities in the RFE, and also Siberia, is agriculture. 

Chinese farmers are cultivating corn, soybean, vegetables and fruits there while many are engaged in pig husbandry. 

For this, Russia is leasing land – hundreds of thousands of hectares, usually at preferential rates.
Recently a new accord was signed to lease about 150,000 hectares of farm land in the Trans-Baikal region in Eastern Siberia to the Chinese for 49 years at a symbolic price of about US$5 per hectare. 

Almost all the woodlands in the area near the Chinese border had already been leased for timber extraction.
Critics are saying that it means a sell-out of the native land at a discount price. 

However, more major matters for concern also exist.
The top headache is the excessive use of chemicals. 

The nitrates in the fruits and vegetables grown by the Chinese far exceed the norms, according to Russian monitoring authorities. 

Many chemicals they use are unknown in Russia, and there is no methodology for their analysis. 

This poses health risks for consumers, and also risks soil degradation.
One more surprise for Russians was Chinese-run pig farms. 

The animals grow at an “unthinkable” pace and to an “unthinkable” size – apparently, due to the intensive use of chemicals in their forage.
Builders work at the construction site of Heihe-Blagoveshchensk road bridge at the border of China and Russia. The 19.9km highway bridge stretches from Heihe, a border town in northeastern China's Heilongjiang Province, to the Russian city of Blagoveshchensk. The road bridge is scheduled to open to traffic in October 2019. 

In 2009, China and Russia launched a long-term programme of cooperation in the border regions. 

It includes 205 key projects: 94 on the Russian side and 111 on the Chinese side. 

The latter, however, are mostly stalled as Russian counterparts don’t provide enough financing to implement them. 

In contrast, projects started in Russia by the Chinese are extracting metallic ores and other natural resources, producing cement and modernising customs and border control facilities.
When implementing cooperation projects, the Chinese side, first and foremost, seeks to send in large numbers of labourers. 

More often than not, it appears to be a precondition for launching such projects.
In 2014, Russia enacted the Territories of Accelerated Development (TAD) law – special economic zones providing substantial tax and other benefits, including reduced mineral extraction fees. 

No permits are required for hiring foreign workers.

The territories are established initially for 70 years, but the term can be extended. 

They are managed not by local administrations but by Committees and Management Companies appointed by the government. 

Land or real estate there can be confiscated from Russian citizens at the request of the managing company.
Initially TAD will be created only in the RFE, starting from the Khabarovsk and Primorye provinces. The Chinese will be the major players and beneficiaries.
China may transfer more major enterprises to the RFE, from construction projects to shipbuilding to telecoms. 

The Russian side is willing to accept them, provided they meet environmental standards.
All this obviously sets the stage for a deeper involvement of the Chinese in the RFE economy and the rise in the number of Chinese residents. 

Yet, their numbers will not surge dramatically. 

Economic factors, limiting China’s presence are also at work.
Guests view the sand table model of a heat and power plant in Yaroslavl Province, Russia. A gas-steam combined heat and power plant built by a China-Russia joint venture has been officially brought online.

First, China has vast underdeveloped areas of its own, especially in the west with a sparse population density comparable to the RFE. 

For Beijing, development of those areas appears to be a priority.
Second, Russia’s attractiveness as an employment destination is declining as wages in China are growing faster and may have already exceeded Russian levels.
Third, Russia’s economy has gone through a recession and very low growth rates are expected. Chinese investors’ enthusiasm is not increasing. 

They have many other attractive foreign investment destinations around the world to choose from.

Diagnosis and prospects
The scale of the Chinese presence in the RFE is still comparatively small. 

In the coming years it is likely to grow at a moderate pace.
Economic interests of both sides are complementary, not conflicting. 

The RFE needs Chinese labour resources, money and technologies. China needs RFE’s land, natural resources and markets. 

That said, there is a risk that those stronger links may also raise anxieties and tensions, especially on the Russian side, and may amplify xenophobic sentiments. 

Russia will have to accommodate more and more Chinese, providing a comfortable working and living environment, making them abide by their rules.

Interaction with the Chinese will be productive only if more Russians choose to live and work in the RFE, drawn in by improved infrastructure and new industries. 

Otherwise, as Vladimir Putin put it, the majority of Russia’s population there will speak Chinese, no doubt. 

The issue of the Chinese in the RFE is manageable only if Russia is able to attract more Russians to the region. 

If not, then the growing Chinese presence may become a geopolitical bomb. ■

Chinese Peril

U.S. weighs restricting Chinese investment in artificial intelligence
By Phil Stewart | WASHINGTON

An MQ-9 Reaper remotely piloted drone aircraft performs aerial maneuvers over Creech Air Force Base, Nevada, U.S., June 25, 2015. 

U.S. Defense Secretary James Mattis testifies before the Senate Armed Services Committee on Capitol Hill in Washington, D.C., U.S., June 13, 2017.

The United States appears poised to heighten scrutiny of Chinese investment in Silicon Valley to better shield sensitive technologies seen as vital to U.S. national security, current and former U.S. officials tell Reuters.
Of particular concern is China's interest in fields such as artificial intelligence and machine learning, which have increasingly attracted Chinese capital in recent years. 

The worry is that cutting-edge technologies developed in the United States could be used by China to bolster its military capabilities and push it ahead in strategic industries.
The U.S. government is now looking to strengthen the role of the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee that reviews foreign acquisitions of U.S. companies on national security grounds.
An unreleased Pentagon report, viewed by Reuters, warns that China is skirting U.S. oversight and gaining access to sensitive technology through transactions that currently don't trigger CFIUS review. 

Such deals include joint ventures, minority stakes and early-stage investments in start-ups.
"We're examining CFIUS to look at the long-term health and security of the U.S. economy, given China's predatory practices" in technology, said a Trump administration official, who was not authorized to speak publicly.
Defense Secretary Jim Mattis weighed into the debate on Tuesday, calling CFIUS "outdated" and telling a Senate hearing: "It needs to be updated to deal with today's situation."
CFIUS is headed by the Treasury Department and includes nine permanent members including representatives from the departments of Defense, Justice, Homeland Security, Commerce, State and Energy. 

The CFIUS panel is so secretive it normally does not comment after it makes a decision on a deal.
Under former President Barack Obama, CFIUS stopped a series of attempted Chinese acquisitions of high-end chip makers.
Senator John Cornyn, the No. 2 Republican in the Senate, is now drafting legislation that would give CFIUS far more power to block some technology investments, a Cornyn aide said.
"Artificial intelligence is one of many leading-edge technologies that China seeks and that has potential military applications," said the Cornyn aide, who declined to be identified.
"These technologies are so new that our export control system has not yet figured out how to cover them, which is part of the reason they are slipping through the gaps in the existing safeguards," the aide said.
The legislation would require CFIUS to heighten scrutiny of buyers hailing from nations identified as potential threats to national security. 

CFIUS would maintain the list, the aide said, without specifying who would create it.
Cornyn's legislation would not single out specific technologies that would be subject to CFIUS scrutiny. 

But it would provide a mechanism for the Pentagon to lead that identification effort, with input from the U.S. technology sector, the Commerce Department, and the Energy Department, the aide said.
James Lewis, an expert on military technology at the Center for Security and International Studies, said the U.S. government is playing catch-up.
"The Chinese have found a way around our protections, our safeguards, on technology transfer in foreign investment. And they're using it to pull ahead of us, both economically and militarily," Lewis said.

"I think that's a big deal."

China made the United States the top destination for its foreign direct investment in 2016, with $45.6 billion in completed acquisitions and greenfield investments, according to the Rhodium Group, a research firm. 

Investment from January to May 2017 totaled $22 billion, which represented a 100 percent increase against the same period last year, it said.

AI'S ROLE IN DRONE WARFARE
Concerns about Chinese inroads into advanced technology come as the U.S. military looks to incorporate elements of artificial intelligence and machine learning into its drone program.
Project Maven, as the effort is known, aims to provide some relief to military analysts who are part of the war against Islamic State.
These analysts currently spend long hours staring at big screens reviewing video feeds from drones as part of the hunt for insurgents in places like Iraq and Afghanistan.
The Pentagon is trying to develop algorithms that would sort through the material and alert analysts to important finds, according to Air Force Lieutenant General John N.T. "Jack" Shanahan, director for defense intelligence for warfighting support.
"A lot of times these things are flying around (and)... there's nothing in the scene that's of interest," he told Reuters.
Shanahan said his team is currently trying to teach the system to recognize objects such as trucks and buildings, identify people and, eventually, detect changes in patterns of daily life that could signal significant developments.
"We'll start small, show some wins," he said.
A Pentagon official said the U.S. government is requesting to spend around $30 million on the effort in 2018.
Similar image recognition technology is being developed commercially by firms in Silicon Valley, which could be adapted by adversaries for military reasons.
Shanahan said he was not surprised Chinese firms were making investments there.
"They know what they're targeting," he said.
Research firm CB Insights says it has tracked 29 investors from mainland China investing in U.S. artificial intelligence companies since the start of 2012.
The risks extend beyond technology transfer.
"When the Chinese make an investment in an early stage company developing advanced technology, there is an opportunity cost to the U.S., since that company is potentially off-limits for purposes of working with (the Department of Defense)," the report said.

CHINESE INVESTMENT
China has made no secret of its ambition to become a major player in artificial intelligence, including through foreign acquisitions.
Chinese search engine giant Baidu Inc launched an AI lab in March with China's state planner, the National Development and Reform Commission. 

In just one recent example, Baidu Inc agreed in April to acquire U.S. computer vision firm xPerception, which makes vision perception software and hardware with applications in robotics and virtual reality.
"China is investing massively in this space," said Peter Singer, an expert on robotic warfare at the New America Foundation.
The draft Pentagon report cautioned that one of the factors hindering U.S. government regulation was that many Chinese investments fall short of outright acquisitions that can trigger a CFIUS review. Export controls were not designed to govern early-stage technology.
It recommended that the Pentagon develop a critical technologies list and restrict Chinese investments on that list. 

It also proposed enhancing counterintelligence efforts.
The report also signaled the need for measures beyond the scope of the U.S. military, such as changing immigration policy to allow Chinese graduate students to stay in the United States after completing their studies, instead of returning home.
Venky Ganesan, managing director at Menlo Futures, concurred about the need to keep the best and brightest in the United States.
"The single biggest thing we can do is staple a green card to their diploma so that they stay here and build the technologies here – not go back to their countries and compete against us," Ganesan said.