Below the belt

First mentioned by Chinese President Xi Jinping during a state visit to Kazakhstan five years ago, the Belt and Road Initiative (or BRI) celebrates its birthday this week.

Backers of the biggest infrastructure build-out the world has ever witnessed have worked hard at promoting it, although some of their efforts have missed the mark, including a children’s song that was mocked in the Western media this summer. “Everybody let’s make friends,” the kids beg. “Take my hand, and let’s dance all night.”

The problem for policymakers is that plenty of people need more convincing to about the Belt and Road, amid criticism that the plan is poorly conceived.

Critics of the policy have asked why it needs such a hard sell if it is really such a boon, while others describe it as a ‘debt trap’ designed to deceive its participants. Cancellation of one of the biggest projects in Malaysia last month proved awkward for the anniversary too. But back in China the mood was more bullish, as Xi defended his signature policy at a gathering of African leaders this week, before doubling down on his promises to partner with nations via BRI investments.

Has the BRI been a success?

Unfortunately there’s no straightforward way for tracking how it is progressing. Chinese officials talk mostly about topline investment in the plan and debtor countries don’t disclose their loans in any detail. Chinese lenders, including the Asia Infrastructure Investment Bank, have showcased some of the key financings but there’s no authoritative breakdown of how all the capital has been allocated or how the projects are performing.

Unsurprisingly, the propaganda push from media like China Global Television Network, the international incarnation of state broadcaster CCTV, is that things are going even better than expected.

“The Belt and Road Initiative is like welcome rain after a long drought,” it ventured last week, before switching metaphors to describe how friends of the programme have been getting a “free ride on the Chinese fast-train”.

Railways are a feature in the anniversary coverage, which has tried to talk about some of the outcomes of the initiative, including the 10,000th journey involving freight trains between China and Europe.

Other newspapers also talked about the savings in travel time on Belt and Road journeys, courtesy of freshly dug tunnels through the mountains of Uzbekistan, or newly laid track along the Kenyan coast.

In loftier prose, the Chinese media has championed BRI as an opportunity for all, with benefits that more than transcend the train timetables.

“The BRI focuses on promoting the connectivity of the land, sea, air and the internet,” China’s state television channel enthused in the kind of celebration that makes critics of Belt and Road cringe. “It is curing the ills of neoliberal globalisation, channelling money into the real economy, eliminating the causes of the global financial crisis, and making globalisation work for the broader community.”

Other countries have been celebrating too?

With hard numbers in short supply, negative stories about Belt and Road have been getting more of the headlines, like this summer’s events in Malaysia, where Prime Minister Mahathir Mohamad has called a halt on the construction of the East Coast Rail Line (see WiC417).

The Malaysian leader kiboshed plans for two pipelines too, confirming the cancellations during a trip to the Chinese capital last month.

His reasoning was that the economics of the projects didn’t make sense, although he was careful to say that it was his predecessor Najib Razak’s administration that had erred.

“That is Malaysians playing around with money, not even doing proper feasibility studies and due diligence before going into business,” he lamented.

Setbacks like these have stoked wider talk of a “debt trap” in which poorer countries find themselves knee-deep in loans from the Chinese, some of which they will struggle to pay back. Similar fears led to warnings from the IMF that countries were borrowing too much and that the Chinese should be looking more at the sustainability of the debt (see WiC404).

A report in March by the Centre for Global Development, a Washington-based think tank, warned that 23 of 68 countries were at “quite high” risk of debt distress because of Belt and Road projects. Eight others looked like they would have trouble servicing their loans – Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan.

Repayment problems first came to the fore in Sri Lanka, when the Sirisena government reneged on commitments run up by its predecessor. After protracted negotiations, the Chinese swapped some of their loans for equity in the Hambantota port zone (see WiC322).

The status of more than $60 billion in spending on transport and energy projects in Pakistan also looks a little precarious (the so-called China Pakistan Economic Corridor, or CPEC). The central bank there has reserves of less than $10 billion, or enough for about two months of imports, which raises questions as to how Islamabad is going to meet its financial commitments after borrowing another $5 billion from the Chinese in the latest fiscal year alone.

On similar lines, Myanmar’s finance minister told the press in July that plans for another new port on the Bay of Bengal would be “slimmed down” because his country’s obligations to the Chinese already amounted to about 40% of its external debt (“not recommendable”, the minister suggested).

Pakistan has shown caution about committing to further loans under the Belt and Road badge, stepping back from a request for more cash for a $14 billion dam on the River Indus last year. But Islamabad is importing the large majority of the materials and machinery needed for construction of its CPEC from China, and the Pakistanis can only afford it because the Chinese have lent them the cash. Just the bill for the machinery for the new power plants and transport hubs could exceed $27 billion by the middle of 2021, according to Jonathan Anderson of Emerging Advisors Group. Eventually these loans will need to be repaid and the fear is that the reckoning could come faster than the economic gains Islamabad will need to settle its accounts.

Is talk of a ‘debt trap’ fair?

Foreign ministry spokeswoman Hua Chunying hinted this week at how rankled the Chinese have become by claims that they are shackling poorer nations in debt with some of her comments this week.

“I can’t help but wonder why the money is ‘money pie’ when it is offered by the Western countries but ‘money trap’ when offered by China? Isn’t it a glaring double-standard?” she asked.

All the same, Mahathir’s warnings about “a new version of colonialism”, which he raised in front of Chinese Premier Li Keqiang during their joint press conference in Beijing, will have been wounding to the Chinese, who draw heavily on their own experience of exploitation by foreign powers.

Brahma Chellaney, an Indian scholar, also coins the term “creditor imperialism” in a warning that China is using sovereign debt to bend other countries to its will.

Xi has defended Belt and Road robustly, denying that it is designed to create “exclusive circles or a China club”. Ning Jizhe, vice chairman of the National Development and Reform Commission, which oversees China’s economic plans, also hit back at the notion of ‘debt trap diplomacy’, arguing that many nations were in hock long before Belt and Road was conceived.

“China is a late comer. It is not the biggest creditor,” Ning insisted.

Still, it’s fair criticism that some of the problems are of China’s making, especially when arch-loyalists like the Global Times are warning the government to think more about the hazards of not getting its money back.

Concerns that projects won’t pay their own way haven’t stopped China’s construction and engineering giants from chasing all kinds of loosely-defined Belt and Road business, however, usually with funds cajoled out of the country’s state-controlled banks.

This is exactly the kind of situation we discussed last year with Jonathan Beard, an expert on the Belt and Road plan in Asia, who talked about instances in which investment was lacking a clear rationale (see WiC385).

Interestingly, Beard said that some of the new ports in the maritime sector in Malaysia were particularly unconvincing, because there wasn’t the demand to justify the new capacity. “In general, projects look more promising if they start out with feasibility studies that are made available for public scrutiny. Bidding processes for construction should also be open and transparent,” he warned. “Direct investment or project finance with some kind of private sector participation is best, rather than concessionary loans from Beijing to the host nation.”

Projects where the Chinese partners are shareholders or operators are better bets, he believed too, because they are more likely to stick around over the longer term, rather than racing through the construction and heading home.

So is BRI going backwards?

Beijing will try to claw back the costs of the cancelled construction in Malaysia, although it won’t want to ruin its relationship with Kuala Lumpur, because other projects still have to proceed. On the other hand, it can’t be seen to give too much ground because that might prompt others to ask for similar consideration.

There are signs that other countries already think they have negotiating leverage, perhaps by embarrassing the Chinese over the details of some of the financing. For example, Pakistani officials are said to be demanding a review of their loans from China or they will go to the IMF for a bailout, making the terms public. Tonga Prime Minister Akalisi Pohiva called last month for China to write-off debts owed by Pacific Island countries.

Belt and Road’s reach means that the Chinese are going to be dragged into the domestic politics of other countries, whether they like it or not (the drama in Hambantota is an early example; see WiC351). And demanding further guarantees to stop other loans from going sour is going to generate more accusations of imperial behaviour as well.

But Xi Jinping has been burnishing his Belt and Road message at the Forum on China-Africa Cooperation this week, where he welcomed leaders from more than 50 African countries. He pressed ahead with his charm offensive in the lead-up to the conference, meeting more than 30 of the delegates in person, and he reiterated in his keynote address that investment from China comes without political conditions, avoiding “demands that people feel are difficult to fulfill”.

That was a reminder of China’s “five-no” commitment: no changes to how countries choose to pursue economic growth, no interference in their affairs, no imposing of China’s will, no “strings” to financial assistance, and no seeking of political gain.

In the signature moment at the summit, Xi also committed to $60 billion in additional financing in Africa, matching a pledge at the last meeting in South Africa three years ago. China’s companies will be encouraged to invest $10 billion more, the media reported.

So will Africa benefit from additional BRI largesse?

There was some frosty feedback from social media on Xi’s $60 billion promise, with complaints from Chinese netizens that the money should be spent at home.

The censors soon neutered the comments, while the media called on the public to recognise the realities of their nation’s global mission. “Chinese people should be aware that major powers must fulfil their obligations,” the Global Times lectured. “Otherwise they can hardly stay where they are for long, not to mention going forward.”

China is already the largest financier of infrastructure projects on the African continent, although critics claim that they have failed to live up to the headline numbers in their pledges of support.

Another complaint is that most of the financing has flowed to borrowers that have collaterised their debt with commodity sales, like Angola, a major oil producer and a member of OPEC, which has grabbed the lion’s share of loans.

Chinese diplomats counter that there is plenty of commitment to resource-poor countries as well, pointing to Xi’s latest tour of the continent in July.

African nations are, however, pushing for more say in how the Chinese loans are disbursed with as much focus on factories and export zones as bridges and roads.

Competition from China decimated much of Africa’s local manufacturing sectors in industries like plastics and garments in the 1990s but strategists say the tide is turning because of the increases in Chinese labour costs. Some manufacturers have even started to move some of their production to Africa, especially Ethiopia, where more than 400 Chinese firms now have plants.

Other African governments want to host trade and manufacturing zones of their own and the Financial Times says the talk before this week’s summit was about securing a wider range of investment than in the past. “We want a strategic relationship. Not just ‘you build us a bridge and we’ll give you money’,” warned Kamissa Camara, an adviser to Mali’s president.

There were other signs that borrowers won’t simply bow down before their benefactor, with reports in the Namibian press that Hage Geingob, the country’s president, had given the Chinese ambassador a dressing-down in advance of this week’s forum.

The ambassador caused ire when he told Geingob: “We sincerely hope, your Excellency comrade President, in your speech, you can touch on the matter of the theme of the forthcoming Beijing summit, and you can focus maybe, and speak highly on China-Africa economic relations.” But the suggestion was not to the Namibian president’s liking. “I have my speech writers. They will handle it. You should not tell us what we should do, we are not puppets,” he fired back.

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