THE ECONOMIC TIMES
2 November 2018
by NISID HAJARI
Five years after Xi announced his Silk Road plans, the program still has plenty of boosters — especially in China’s state-run press.
As a line on a map, Malaysia’s East Coast Rail Link makes sense. Slashing diagonally across the peninsula from Port Klang at one end to the port of Kuantan and towns north at the other, the project looks well-situated to encourage travel and commerce, and to spread prosperity from the country’s rich west to its poorer east. Connecting its dotted line to others spreading outward from China to the Middle East, Africa and Europe only strengthens the case. As a critical link in China’s “trillion-dollar” global infrastructure scheme, the so-called Belt and Road Initiative, it would enable oil and other commodities to flow from the Middle East to mainland China without making the age-old journey by ship through the narrow and easily blockaded Strait of Malacca. Seen this way, the project seems not just a solid investment but also a stroke of strategic genius.
Reality is more sobering. The project’s original $13 billion price tag was already eye-wateringly high. After returning to power this spring, Malaysian Prime Minister Mahathir Mohamad estimated the total would run closer to $20 billion. Would it be worth the price? Some residents of Kuala Lumpur might welcome a speedier route to the white-sand beaches of Malaysia’s east coast. But it’s hard to see why shipping companies would: They’d pay more and save barely 30 hours if they chose to unload thei r cargo at one end of the line, file the requisite paperwork, send containers trundling across the country and then reload them on a different ship at the other end. Barring war with the U.S., even Chinese shippers would be unlikely to make the effort.
Mahathir suspended work on the rail line and canceled three Chinese-linked pipeline projects outright. He’s undercut a multibillion-dollar condo development by warning potential Chinese buyers that they shouldn’t expect visas to live in Malaysia. Prospects for a Chinese-funded port complex at Malacca, which analysts say would struggle to draw business away from Singapore — bigger and more efficient — look shaky as well.
Skepticism about the Belt and Road is spreading well beyond Malaysia. Nearby Myanmar has dramatically scaled back its own Chinese-funded port. Thailand has rejected Chinese financing for rail projects across the country. Even loyal ally Pakistan, which faces a current-account crisis in part because of all the money spent on importing Chinese equipment to build the $62 billion China-Pakistan Economic Corridor, has talked about reassessing the scope and character of the scheme .
Five years after Chinese President Xi Jinping announced plans for a land-based “Silk Road Economic Belt” and sea-based “21st Century Maritime Silk Road,” the program still has plenty of boosters — especially in the pages of China’s state-run press. It isn’t about to collapse or be abandoned. But Xi and the rest of the Chinese leadership have good reason to take another look. There’s a risk, otherwise, that this plan to project Chinese power, influence and trade across much of the world could undermine all three.
Xi didn’t invent the idea of using Chinese money and expertise to build infrastructure overseas. (Many projects now encompassed by the Belt and Road plan were launched long before the scheme was conceived.) What he did in 2013 was fit those efforts into a larger narrative.
The concept was elegant. Lay down a coordinated network of roads, pipelines, ports, power plants, rail lines and industrial parks linking China to the rest of Eurasia and Africa. If successful, the scheme would help energize trade across a vast swath of the developing world — and put China back where it once was, at the center of the global economy.
Financed and most often built by China, the projects would also help relieve excess capacity in the country’s steel and construction industries. They’d offer higher returns to state-run banks than could be earned at home. Chinese exporters would develop new markets. Businesses and jobs would shift to China’s poor, landlocked western provinces.
It all made sense in strategic terms, as well. Growth would help stabilize troubled countries along China’s periphery. Like Malaysia’s East Coast Rail Link, some projects would help China evade the “Malacca dilemma” of having its most vital trade artery be vulnerable to U.S. blockade. Other Chinese-built ports might provide bases for China’s warships and submarines to prowl the world’s seas.
The 80 or so countries that have ostensibly signed up to the scheme hoped to gain as well. Many are desperate to improve their infrastructure. (The Asian Development Bank says that the region needs to spend roughly $1.7 trillion a year on infrastructure between now and 2030, although it’s important to note that China’s own needs account for more than half the total.) The authoritarian governments that populate much of the Belt-and-Road map like the fact that China is willing to strike big deals quickly, without asking too many questions. Some of the vast sums of money sloshing around doubtless ends up lining the pockets of local potentates.
Giving all this a name (for a while “One Belt, One Road,” until that was deemed too domineering) implied more coherence than the program can rightly claim. Billion-dollar announcements suggest unstoppable momentum, even if some of them never transpire. There’s no formal definition or official list of Belt-and-Road projects, so virtually any China-linked deal can be included. Chinese officials say with straight faces that the initiative now spans projects in Latin America, the Arctic and outer space.
Xi, who enshrined the Belt and Road in the Chinese Communist Party’s constitution, has done little to check such exuberance. As a result, the program has acquired added ideological and political weight. It’s seen as a main driver of the return to Chinese greatness on which Xi has staked his future and that of the Communist Party. This excess of grandiosity, in turn, has contributed to two fundamental problems.
The first is economic. Until recently, linking any project to the Belt and Road — whether a metro in Lahore or cloud-computing center in Guizhou — has almost guaranteed funding. But the projects are of very variable quality. They don’t always fit together as neatly as China’s maps might suggest. And, as with other high-profile, state-led campaigns, a rush of easy money from state banks has caused excess, fraud and waste. (Out of nearly 1,000 BRI projects examined by Fitch Solutions, international financial institutions are currently involved in fewer than 100.)
Compounding the problem, the program extends to nations not well-known for competence or fiscal discipline. According to Moody’s, the median credit rating of countries involved is Ba2, or junk. Nearly 15 percent of projects are already in financial trouble, according to RWR Advisory — a number that’s sure to grow.
Some critics see a deliberate strategy of throwing money at governments that can’t handle it — as a way for China to gain economic leverage over smaller nations in order to extort diplomatic support or even strategic facilities. The Sri Lankan port at Hambantota, handed over to China after the government couldn’t service its debts, is cited as an instance. Chinese loans threaten to push at least eight countries — from Laos to Djibouti to Montenegro — into debt distress.
Whatever the motives — whether the lending is shrewdly predatory or just financially incompetent — many of the projects seem unlikely to cover their costs. A gas pipeline from Myanmar’s port of Kyaukpyu has operated at barely a third of capacity since 2013, for instance. The World Bank concluded as far back as 2015 that another port at Malacca, barely two hours’ drive from Kuala Lumpur, was unnecessary. Add the fact that Chinese projects are most often assigned to Chinese contractors, who use Chinese equipment and often labor, and the benefit to the host country dwindles further.
Certainly, China isn’t always to blame. Many of the borrower governments are impatient with the World Bank and the Asian Development Bank, which are reluctant to approve uneconomic or environmentally damaging projects. They want to sign deals without having to worry too much about what will be required to make them work. Some have a poor reputation for the ease of doing business, so investment falls short even when infrastructure improves. Economic reforms are needed, but don’t happen. Project locations are chosen for domestic political reasons, not on economic merit. Belt-and-Road schemes are as vulnerable to local red tape and corruption as any others would be.
These economic issues aggravate the second problem — which is political. By ceaselessly expanding the scale and number of Belt-and-Road projects, China has awed observers with its ambitions. And some are getting scared. In country after country, this flood of Chinese money, investors and workers — and, in some places, crooks, prostitutes and gamblers — has tapped into a deep vein of suspicion about China’s intentions.
Mahathir rode to victory in part on allegations that the previous Malaysian government had sold out the country; so did Sri Lanka’s current president. Even among Pakistanis, who have largely embraced Chinese aid and investment, rumors abound about China dispatching thousands of colonists to work in, and profit from, their country. In some Cambodian and Laotian border towns, such fears aren’t exaggerated, and the resentment is palpable.
China’s actions have often exacerbated rather than assuaged such anxieties. Its takeover of the Hambantota port, in which it swapped debt for a 99-year lease over the facility and a large swath of surrounding land, reinforced fears that its true goal is to develop a network of vassal states housing Chinese naval bases across the Indian Ocean region. By pushing Belt-and-Road countries to use Chinese telecoms infrastructure and standards, Beijing appears to be supplanting the open internet promoted by the U.S. and other Western countries for more than two decades. Citizens of Belt-and-Road countries have plenty of grist for their conspiracy theories.
It doesn’t help that China has done a lot of its deal-making behind closed doors — often with authoritarian governments that prefer to avoid public scrutiny. This is consistent with China’s stated emphasis on noninterference in the internal affairs of other nations. It certainly speeds up necessary approvals. But for every Hun Sen who has cowed all internal opposition, there’s a Mahinda Rajapaksa or Najib Razak – former leaders of Sri Lanka and Malaysia, respectively — who gets thrown out of office in part because of opaque dealings with China. (Rajapaksa may be making a comeback now.)
Finally, China’s assertiveness has aroused a backlash among its geopolitical rivals, led by the U.S., India and Japan. None of these countries will match Chinese investment dollar-for-dollar. (The U.S. decision to create an International Development Finance Corporation with $60 billion to lend is a good start.) But their criticisms resonate in host countries that are already wary of becoming too dependent on China.
Japan is ramping up its lending in Southeast Asia, where it has a reputation for delivering high-quality projects. India has started to exert greater diplomatic influence in its own region, successfully pressing Bangladesh, for instance, to pass on a Chinese bid to develop a deep-water port. Uniting its rivals in this way won’t help China to realize its larger ambitions.
The Belt and Road is by no means doomed to fail. Some of its current projects will probably be scaled back or canceled. Many will never get off the drawing board. Others will saddle Chinese lenders with losses. But many others would make economic sense regardless of how they’re labeled. And the label helps these projects go forward. As long as Xi remains in power, he’s unlikely to admit defeat. That means that state-owned companies and banks will do whatever it takes to keep the projects, good and bad, alive.
Nonetheless, China would be wise to narrow its ambitions. Many of the program’s difficulties are self-inflicted, due to a rigid, top-down system that encourages overzealous lending, triumphalist rhetoric, disregard for public opinion, and stifling of internal as well as external criticism. Cadres, bank officials and local bureaucrats have rushed to follow the leadership’s edicts without giving enough thought to the viability of particular projects. Greater transparency and a more limited agenda would benefit China at least as much as it would help the countries hosting the investments.
A recalibration seems to be underway. China’s big development banks, which closely serve the government’s priorities, have reportedly been told to partner with the likes of the World Bank to improve the quality of projects. (The Asian Infrastructure Investment Bank, with more international participation, has always subjected its lending to the same high standards as other multilateral banks.) The number of contracts signed in Belt-and-Road countries declined nearly 28 percent year-on-year in the first eight months of 2018.
Meanwhile, critics of the program shouldn’t settle for complaining about debt traps and looming Chinese hegemony. Smaller countries need help not just in assessing Chinese deals for their sustainability, but also in developing projects that are capable of attracting private funding: The U.S. and its allies should step forward. Without lowering their standards, multilateral banks should try harder to speed up their processes, and should welcome opportunities to partner with Chinese banks.
The fact that a successful Belt and Road will add to China’s influence doesn’t argue against helping the program to work. China’s influence could be beneficial. As it gets more involved in troubled countries such as Pakistan and Afghanistan, its local knowledge and diplomatic clout will increase as well; it could play a stabilizing role where the U.S. has failed.
Above all, a scaled-down, better-managed Belt and Road — guided more by economics and less by politics — should, as intended, promote growth and trade across the region and beyond. That would serve everybody’s interests.