China's largesse for major projects comes at a price

Chinese largesse under the BRI umbrella will remain a feature of global strategy and commerce for the foreseeable future - at least until China decides that the political clout from lending money is not worth the losses that follow.

By Philip Bowring (Taking Stock)

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Published: Sat 1 Sep 2018, 9:23 PM

Last updated: Sat 1 Sep 2018, 11:25 PM

China has launched a new publicity drive to promote the benefits of its Belt and Road Initiative - and the surprise is that a publicity campaign is necessary at all. BRI was unveiled in late 2013 to build infrastructure in Asia, Africa and Europe, strengthening trade linkages via new versions of old land and sea routes between east and west, showing China as a strong global payer, financing viable projects and not projecting strategic power. Soon afterward, the initiative was widely seen as a propaganda masterstroke, providing badly needed investment in roads, railways, power and ports to countries in dire need of such infrastructure while showing China's commitment to open trade. Chinese money was seen as cheap, available and without some of the strings attached to loans from the likes of the World Bank and the Asian Development Bank.
China also sponsored creation of the Asian Infrastructure Investment Bank, gaining support from European countries while the US stood aloof.
Criticism of BRI by its targeted beneficiaries has surfaced earlier than expected, as the shadow of debt begins to loom over some once-enthusiastic borrowers - thus, the motivation behind China's new campaign. Officially, China is sticking to its original script, but in practice caution is rising in the government and among state corporations. Beijing leaders do not want to be seen throwing money away to feckless foreigners while so much still needs to be done at home. At one level, a shift in foreign perception of BRI could be seen as reflecting a global tendency toward tighter money and higher interest rates after years of unusually low levels - and fits with China's policy of reducing domestic financial risk after years of bold GDP growth targets.
But criticisms are becoming more specific. Mahathir Mohamad, lately reinstalled as prime minister of Malaysia, highlighted foreign fears in August and warned of the dangers of a "new colonialism." His experience and age, and that he was on an official visit to China, gave special weight to his words.
Mahathir's comments followed an election campaign during which he had attacked multibillion dollar, China-financed projects as unaffordable for a country with already large debt. He criticised projects, now subject to cancellation or renegotiation, as partly driven by Chinese strategic objectives relating to the South China Sea and Melaka Strait. He also criticised China's purchase of Malaysian power stations, deals done by his predecessor, Najib Razak, to bail out the scandal-ridden state investment company, 1MDB, casting this as China's attempt to gain leverage with a beleaguered prime minister.
The Malaysian spat will probably not have lasting impact on relations between Kuala Lumpur and Beijing, but it has been noticed, not least by countries with bigger debts and greater reliance on China than is the case for Malaysia. The criticism comes at a time when other events have drawn attention to the dangers of excessive borrowing in foreign currencies. Most obvious is Venezuela, which has borrowed some $20 billion from China. Even partial servicing of the debt through oil supply is crippling. The Venezuelan loans mostly date back long before BRI and have no direct connection. But excessive foreign debts have a long history of spurring economic turmoil or subservience to lenders. Five of the eight most vulnerable countries, according to the Center for Global Development - Mongolia, Pakistan, Laos, Kyrgyz Republic and Tajikistan - share a border with China and two small countries, Maldives and Djibouti, are strategically located on the Indian Ocean.
Of major countries, Pakistan is the most overtly in debt to China. The China-Pakistan Economic Corridor has a price tag of upwards of $50 billion. It includes links between China - the 4,800-metre Khunjerab Pass - along with the Gwadar Port and other projects carried out by Chinese companies, often using Chinese labour. Pakistan certainly needs investment, but its huge trade deficit and shaky relations with western countries make it hard to service loans whether in US dollars or yuan.
China has been adept at winning friends in countries seeking to offset the influence of bigger neighbours. For Turkic-speaking, nominally Muslim Central Asian countries, the Chinese investment provide some offset to Russian might. Likewise, small countries ranging from Laos to Djibouti to Montenegro have opened themselves to massive - relative to their size - Chinese loans.
Some loans make economic sense. For example, a railway from Djibouti to Addis Ababa, opened in January, provides a crucial trade link for landlocked Ethiopia, particularly since conflict with Eritrea cut off road access to Massawa port. Thanks to China, Kenya now has a modern rail link from its major port Mombasa to Nairobi - needed because a colonial-era railway fell into neglect.
Kenya chose $3.5 billion new construction instead of refurbishing the old. Ironically China's first railway venture in Africa - from Tanzania to Zambia, completed in 1975 - now operates at a fraction of capacity.
Even when borrowers are aware of the dangers, short-term political considerations may be the priority both for China and local rulers anxious for grandiose projects financed by long-term loans.
China is learning from past mistakes involving large-scale corruption and brash behaviour. There is less emphasis on bringing in large numbers of Chinese workers, who may enable faster project completion but arouse local resentment. Recipient countries may argue that bad projects are better than no projects, and China will bear most of the losses anyway. For some countries, Beijing is less threatening than western powers have been - and the US remains in some regions. If money is tight globally, the Chinese purse may prove more open than others, particularly that of a Trump-led United States.
Chinese largesse under the BRI umbrella will remain a feature of global strategy and commerce for the foreseeable future - at least until China decides that the political clout from lending money is not worth the losses that follow.
-Yale Global
Philip Bowring is a Hong Kong based journalist


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