**4.3 The 'Great Stone': the potential to attract direct investments and avoid the "debt trap"**

Russian Kaluga oblast, with one million inhabitants, could be an example of foreign direct investment mobilization for the 'Great Stone'. It has succeeded in attracting over USD 1 billion owing to its industrial parks. Another example is the mentioned Suzhou industrial park, with an index of 'investment density' of over USD 1.7 bln per square kilometer. At the same time, care should be taken to distinguish between investments for the establishment of a park and investments into an already established park:

## *4.3.1 Investments in the establishment of the industrial park*

The cost of modern infrastructure for a technological park is continuously increasing. For instance, 20 years ago, the average cost of one square kilometer of internal infrastructure of an industrial park in China was \$23 m, while at present, that average indicator is up to \$80 m. If take into account the territory of 'Great Stone' is around 100 square kilometers then the total amount of investments should be around \$8bn. Nevertheless, the expected size of Chinese investments into the 'Great Stone' infrastructure might prove to be overoptimistic. First of all, in many foreign industrial parks and Belarusian free trade zones, the infrastructure, together with 'amenities' options, is provided by the state, free of charge. Therefore, major foreign investments flow into already operating industrial parks rather than into those being established. Secondly, China's *de facto* investments into overseas industrial parks under construction are normally lower than planned [26].

In the case of 'Great Stone' in 2013–2019, about \$500 m was invested in this Park on a long-term basis to develop infrastructure. Of this, 3.6% was funded by Belarus, and rest financed by China. \$113 m was part of the budgetary resources of the two countries, including the Government of Belarus (\$18 m), the Government of China (\$20 m in the form of technical assistance) and privileged loans by the Government of China to the 'Great Stone' Development Company under the guarantee of the Government of Belarus (\$75 m). The remaining share accounts for foreign direct investments that came to the Park through Chinese shareholders. In 2013–2015, China invested \$25.7 m in the Park, but, in 2016–2019, over \$100 m was injected or around \$25 m per year. The joint company for park development was, in fact, the key investor in the first three years of the Park's development, directing its longterm investments to the infrastructure creation.

#### *4.3.2 Investments into the established industrial park*

In 2013–2015, seven companies were registered in the Park, including six from China, but, in 2016–2018, 34 new residents joined (with 18 from China). Over those three years, the Park's residents became its main investors, most of whom were at the stage of design, construction, and equipment of facilities. However, even against an increase in the number of residents and the volume of investments in the Park, the so-called 'dead investments' - companies that registered but failed to start their operation, or worked slowly - also joined. Therefore, in early 2020, two residents were deprived of their status, and, by April 2020, the Park had a total of 59 companies, including 34 which were Chinese. The Park's Chinese residents invested \$22.7 m in 2017, and \$70.5 m in 2018. In 2019, the figure reached \$80.4 m.

The existing minimum threshold for authorized capital in the Park (\$5 m), against a small Belarusian sales market, takes residents into a production trap. Why are large capacities needed if a big sales market is now available? There are several

ways to get away from this trap: either to lower the threshold for joining the Park (in this case large industrial companies will become small and medium-sized, assembling and creating small added value in the international production chain), or expand the sales market.

In line with the Park's business plan dated 2014, the EAEU and the EU were considered target markets for its residents. Since 2015, the external economic situation has changed: a trade war between Russia and the EU and mutual financial restrictions between Russia and the US began, import substitution intensified in Russia, similar industrial clusters competing with the Park were launched in Russia and Kazakhstan, and numerous trade barriers and contradictions remained in EAEU. All these elements push investors to look for new options for selling their products. For example, the largest and most active Chinese residents of the Park, Weichai, its Shanxi subsidiary Fast Gear, Zoomlion, and Chengdu Xinzhu, started to liaise with Belarusian MAZ and Belkommunmash, providing them with their products as components for the further sale of joint goods in the traditional markets of the Belarusian partner.

According to the business plans of the Park's residents, the EAEU, China, the EU, and the CIS, are viewed as priority sales markets. New opportunities are opened by the China-Europe-China trade route passing through Belarus; a trade war between the US and China which makes it possible to use the Park in Chinese-American trade; and the changed structure of China's economic growth from exports to imports. In this regard, the attraction of high-tech European and American residents with the orientation of their products on the Chinese market may become a new priority for the Park's development.

To assess the effect of such a scenario, it is necessary to look at which European and American goods China imports. In 2017, China's import revenue from the EU was \$245bn, accounting for 1,151 commodity items. Of these, 45 product groups, with a share of 0.5–11%, comprised equipment, machinery, apparatuses, chemical, agricultural, and woodworking Product*s. china*'s imports from the US the same year reached \$154.4bn, involving 1,122 commodity items; 44 were product groups enjoying a large share of 0.5–9%. Many products were similar to those imported from the EU. Comparing the volume of China's imports of major product groups, taking into account the priority areas of the Park's activities, and its ability to register about 500 residents, the potential for the Park's exports to China could be up to \$34bn (depending on localization and other factors). The most-favored-nations regime is applied to goods originating in, and imported into, China from Belarus. With an average tariff of 4.4%, taking into account the structure of imports, according to the Ministry of Commerce of the People's Republic of China, the creation of a free trade regime between the Park and China will annually save at least \$1.5bn.

The creation of the 'Park-China' free trade regime envisages the transformation of the 'Great Stone' into an industrial offshore site. This will require — primarily, from Belarus – the correction of national legislation, and negotiations with the WTO to obtain the right for the Park to be an independent customs territory for concluding agreement on a free trade regime with China, the EU, the US, the EAEU, and other countries and regions. The creation of a free trade zone for China and the EAEU, taking into account the structure of their trade, has now more advantages for China than for the EAEU member-states. About 70% of EAEU exports to China are mineral resources, while about half of Chinese imports comprise machinery, equipment, and mechanisms. To avoid an industrial shock due to lowered customs tariffs, the EAEU is restricting the process of creating a free trade zone and, on May 17, 2018, a non-preferential agreement on trade and economic cooperation between the EAEU and China was signed, which does not imply an automatic reduction of trade barriers, is sectoral, and contains many reference norms to the WTO agreements,

#### *Belarus-China: Avoiding the "Debt Trap" DOI: http://dx.doi.org/10.5772/intechopen.96858*

including for the Republic of Belarus, which is not a member. The prospects for creating a fully-fledged free trade zone are still very ambiguous [27]. It is important to note that the long-term scenario of China's trade rapprochement with the EAEU may lead to a dulling of external incentives in the EAEU to change the structure of the economy and exports, and, accordingly, to its long-term 'freezing' and maintaining China's competitive advantage over the EAEU. In case of the accelerated creation of a free trade zone, the EAEU authorities may react to an external shock, adjust regulation, and improve the structure of the economy.

The experience of the countries that created a free trade zone with China demonstrates that supplies to the Chinese market are growing, though not necessarily immediately. For example, Georgia has experienced this already. On September 10, 2015, the prime ministers of Georgia and China met in China to agree on the creation of a free trade zone. In February–September 2016, three rounds of negotiations and two working meetings took place and, on May 13, 2017, the Minister of Commerce of the PRC, Zhong Shan, signed an agreement in Beijing with his colleague on the creation of a free trade zone between the PRC and Georgia. In line with this document, 94% of goods and services are delivered duty free. The agreement entered into force on January 1, 2018 and, according to the National Statistics Service of Georgia, in 2018, Georgian exports to China dropped to \$198 m (\$201.7 m in 2017) but increased in 2019 to \$227.6 m.

In conclusion, it is important to note that with the current speed of Chinese direct investments inflow into the 'Great Stone' (around \$100 m per year) it could be possible to ease Chinese debt burden but hard to avoid overall "debt trap", while the country needs to pay back its state debt of more than \$3bn average per year during 2021–2025. So in order to attract bigger FDI and increase the role of 'Great Stone' in avoiding not only Chinese but general external "debt trap" the Park should be opened to bigger markets for example with the free trade agreement with China.
