BRI plan involves linking more than 120 countries across Asia, Europe and Africa via a series of rail, road and sea infrastructure projects, thus reprising a new Silk Road.
China’s ambitious Belt and Road Initiative (BRI) announced by President Xi Jinping in 2013 was meant to enhance its economic structure, and industrial manufacturing and supply chain. Seven years since its inception, the BRI is now perhaps facing its biggest challenge in an increasingly volatile post-pandemic world.
The ambitious BRI plan involves linking more than 120 countries across Asia, Europe and Africa via a series of rail, road and sea infrastructure projects, thus reprising a new Silk Road. Beijing wanted to foster regional connections and economic integration, thereby intensifying its economic and political influence.
Critics called the BRI as being “too generous to be true” and were worried that it was a way for China to debt-trap smaller nations that offered rich strategic interests.
Here we highlight the key problems associated with the BRI, formerly known as One Belt One Road:
1. The ever-changing goalposts of the BRI Many have questioned the benefits BRI brings to the table for the participating countries as compared to that of China. Critics feel while the BRI does offer a lot on paper for countries that are part of this initiative, the risks associated with the same are bigger too.
The BRI has changed from a majestic and all-inclusive regional trade strategy to a non-aligning association of abstract infrastructural projects.
The gradual separation of the BRI from its original goals has now made its completion and future a major challenge. Given the political and diplomatic climate prevailing between China and the other world superpowers, the rail, road and maritime routes part of the BRI now are also seen as a serious threat to the security implications that may arise.
China’s Maritime Silk Road has already attracted considerable anxiety and attention from the United States, raising the stakes between the biggest naval power (USA) and a soon-to-be naval superpower (China). Given the negative implications following the Covid-19 pandemic, the USA, and a few European nations like the UK along with Canada and Australia have slowly come together in recognising the imminent threat posed by China.
Critics also opine about the financial and infrastructural imbalance within China as part of the BRI concerning the resourcing of projects between the northwest and southwest regions of China. The plan was originally touted to be looking at improving its western regions but is now continuing to favour the already prosperous coastal regions of China. The western China region is way underdeveloped compared to its richer provinces. While the western part is vital for the West-bound BRI routes, the Maritime Silk Road has gained a higher level of importance owing to the strategic impact it has in China’s quest to naval supremacy.
2. Sustainability of the BRI and debt traps
Perhaps the biggest fear surrounding the future of the BRI is the model of “state-owned enterprise and infrastructure”. The vast development initiative has now wandered way off the rails and is no longer as fiscally sustainable as it was originally deemed to have been. Outcomes in countries like Maldives, Sri Lanka and across Africa show that the BRI is becoming less and less sustainable at the economic level owing to the debts concerned with the projects. According to data from Organisation for Economic Co-operation and Development (OECD), as of Q2 - 2018, China’s non-performing assets (NPA) across BRI projects have exceeded $101.8 billion. Sri Lanka’s Hambantota Port is a prime example. No, we are not talking about a debt- trap here.
Unlike popular notions, the port was not leased off to China owing to Sri Lanka’s failure to pay off loan dues. The deal was actually a lease agreement separate from the loans obtained for the purpose of constructing the port. But, Sri Lanka continues to pay a significant amount of loan payments, with some of them obtained at interest rates as high as 6 per cent. There has been no cancellation of debt, despite the port being leased out to China for 99 years. There has been no change in ownership as Sri Lanka still owns it. However, as per the lease agreement, a significant portion of the operations in the port will be handled by China Merchant Port company, thus a large portion of the profit, if any, will be earned by CM Port. As of today, the port has seen little activity to result in profits. But it does offer a significant strategic benefit to China.
Leasing out Hambantota port by Sri Lanka is not a direct reflection of the Chinese debt trap, but more of a reflection of the crisis such projects bring in for countries that participate in the BRI. The economic value and benefits of such projects need to be deeply considered. Of course, debt-trapping projects of China do exist across Asia, Europe and Africa but a more dangerous problem is the validity and rationality of some of them.
As it can be seen, not only is Sri Lanka impacted by its participation, but China too has faced severe losses with reports estimating around $450 million as of 2018 with respect to Hambantota Port. There are many cases of similar nature in the current BRI.
Collin Koh, a researcher at the S. Rajaratnam School of International Studies, Singapore, speaking exclusively to India Today, said, “On the one hand, China can’t allow BRI to collapse given how much has been invested, and its death will deal a severe prestige blow to the ruling CCP and none other than Xi Jinping, the chief architect who has long been synonymous with this mega scheme since it was unveiled in 2013. On the other hand, infrastructure and other economic projects under BRI are still seen as helpful for the partner countries’ economic recovery, especially where it comes to alleviating unemployment that is caused by the pandemic.
“There’s also a plausible concern that calling for major restructuring of BRI cooperation, or its cancellation altogether, may impact goodwill with Beijing, which could result in possible diplomatic and/or economic retaliation in the future, such as denial of access to Chinese investments and export market.”
Collin’s focus area includes naval affairs, maritime security and geopolitics in Southeast Asia, and especially the South China Sea. The latest country to fall into a debt-trap is Laos. Sources from Laos news agencies suggest that the Laos finance ministry has requested China to restructure its debts to avoid defaulting. Laos and China are linked by a US$6 billion valued high-speed railway project (connecting southern province of Yunnan with mainland Southeast Asia) as well as Mekong River hydropower project.
The government of Laos allocated $250 million from the national budget and took out a further $480 million loan from the Export-Import Bank of China to finance this project. The current financial climate has, however, pushed the government to sell state assets to stay afloat. In August 2020, Moody’s rating agency downgraded Laos to “junk territory” (B3 to Caa2) and changed its outlook on the country from neutral to negative due to “severe liquidity stress.” Soon after this, Reuters reported that Laos is set to cede majority control of its national electric power grid to China’s Southern Power Grid Company, a state-owned enterprise. Much of Laos’ power generation is exported to China as well as neighbours Thailand and Vietnam. This will help China gain commercial and strategic leverage over those two countries.
Laos has a population of 7.3 million, with around 60 per cent of them living in small villages without good access to road and power. Laos’ per capita is a paltry $2,670, among the lowest in Asia. Hence, like many other BRI projects, this railroad is something that will hardly be used by the general public and hence may not be a very profitable venture.
Collin surmises by saying, “Fiscal sustainability has become very important owing to this pandemic. Now, countries will be more cautious when proceeding with these projects, including their exercise of due diligence in properly evaluating, with or without external assistance, the fiscal sustainability and risks attached to BRI projects.”
3. Militarisation of ports and links
The vast expanse of the BRI project creates a sense of uneasiness among nations like the USA, Australia and India. The Asia Society Policy Institute (ASPI) released a report which said China had carved out a model of building multipurpose infrastructure at “strategic strongpoint sites” in countries, including Sri Lanka, Pakistan, Myanmar and Cambodia.
The report suggests that “a Sino-centric ecosystem of trade, technology, finance and strategic strongpoints” could pave the way for military use to undermine “American influence and role as a security guarantor” in the Indo-Pacific region. China’s construction of commercial ports could meet national defence requirements.
“The ports are designed more as hybrid commercial and military logistics support points,” the report said. This has now made the bigger participants of the BRI sit up and take notice. Many European nations are now wary of the security risks that BRI poses, especially after the recent pandemic and the spate of trade and diplomatic wars China has got itself entangled into.
On asked about how the USA and Australia perceive the BRI in the current climate, Collin responds: “I don’t expect them to perceive it in a positive light. But I should nuance it: if you’re talking about the Trump administration and Morrison government that may be true. At the local, or sub-national level, Australian and the US entities appear not to have all shunned BRI. For example, Australia’s Victoria State Government in recent years struck a BRI deal with China, though now it’s mired in controversy after the federal government sought to countenance this agreement. Therefore, in sum, such perceptions need to be seen in a nuanced manner.”
India, a non-participant of BRI, is closely watching the projects take shape. The BRI-related CPEC infrastructure at Gwadar may in future be a blocker for India to access Central Asia. This port along with linkages at Sri Lanka, Myanmar and Djibouti may help expand China’s footprints into Indian Ocean and Arabian Sea.
4. The financial burden of the BRI
The BRI is mostly funded through bank loans offered by the government policy banks, state-owned banks and the sovereign wealth funds of China. Apart from this, entities like the World Bank, Asian Development Bank, Asian Infrastructure Investment Bank and New Development Bank also participate in funding projects. Refinitiv, a global provider of financial market data and infrastructure, estimates that as of the first quarter of the year 2020, the overall value of BRI and non-BRI projects involving China exceeded US$4 trillion.
Among these, 1,590 projects valued at US$1.9 trillion were belt and road projects, while 1,574 other projects with a combined value of US$2.1 trillion were classified as non-BRI projects but, with Chinese involvement. Non-BRI projects with Chinese involvement are those not officially tagged as belt and road projects, but ones that still have direct Chinese participation as the owner, consultant, contractor or financier.
The Institute of International Finance, a policy institute, reports that China is now the world’s largest bilateral creditor to developing countries, with a significant portion of this as part of the BRI. Recently, China’s ministry of foreign affairs conceded that 1/5 th of the projects part of the BRI were “seriously affected” this year. While the Covid- 19 pandemic is a significant reason for this, one cannot discount the delays owing to breakdown of negotiations and requests for re-negotiating deals and investments in the post-pandemic environment. Even before the pandemic, a few countries had already expressed their displeasure in some of the terms offered by China. Questions have also been raised about the sustainability of BRI loans and projects, especially considering the risks involved and the not-so-guaranteed profits generated to pay off the debt.
Former Malaysian prime minister Mahathir Mohamad had suspended the East Coast Rail Link project in 2018 owing to “unfair” terms agreed to by the previous government. He was quoted as saying “the terms are very damaging to our economy.” The deal was later re-negotiated in 2019, for a much lower price than the original terms.
According to IMF, countries like Djibouti, Ethiopia, Laos, the Maldives and Tajikistan are rated as having a “high risk” of debt distress with majority of their loans obtained from China as part of the BRI.
The Future of BRI
The immediate future of the BRI lies in the loan payments by partner countries of China. Many countries have already started asking China for interim debt-relief owing to economies ravaged by the pandemic. Collin remarked: “There are instances of projects that were put on a standstill or shelved due to travel restrictions as a result of Covid-19, which therefore created delays in their implementation. Moreover, some of the countries partnering in BRI projects have either called for renegotiation of how those initiatives are funded or called for their cancellation altogether in view of long-term financial sustainability amid the pandemic.”
Ghana is the first in line in Africa to have officially requested China for a debt-relief package. President Jinping has requested the Chinese financial institutions to consult African countries in order to work out arrangements. In South Asia, the Maldives has sought to renegotiate its debt to China while Bangladesh has requested China to consider deferring payments. Not to forget, but China itself is going through some difficult times when it comes to financial recovery of its economy.
A large portion of the BRI loan repayments were expected to be paid this year, but it is now increasingly becoming difficult for partner nations to make payments.
TS Lombard, an independent global investment research provider based in London, reported that 16 per cent of China’s overseas lending was subject to renegotiation in 2019 and this figure is expected to increase in 2020 as bulk of China’s loans mature. Simultaneous, renegotiation of loans with multiple countries may not be an easy task currently for China. While China may look at writing-off a small part of the outstanding loan payments, it nevertheless has to ensure the projects go ahead as scheduled as most of the nations can only pay-off the full loan amounts subject to these projects seeing completion and bearing fruits in form of profits.
Rhodium group, an independent research, data and analytics firm has reported that as much as 40 BRI related loans worth in excess of $50 billion have been restructured by China Development Bank and Export- Import Bank of China and 22 of these loans concern African countries.
Roughly, this also amounts to 1/4 th of all African lending. The report warned, “The sheer volume of debt renegotiations points to legitimate concerns about the sustainability of China’s outbound lending.”
Local resistance to BRI projects
There has been an increase in local protests against Chinese projects over the past two years across Africa. It all started In Nigeria, where local protests erupted over the demolishing of buildings without compensation for the construction of the LagosIbadan Railway Line.
In Tanzania, around 2,000 people were forced to displace, leading to protests that resulted in the suspension of the Bagamoyo Port. In Madagascar, protests began after the demolition of a church and a school was proposed to accommodate mining activities by a Chinese firm. In Kenya, protests erupted in the area around Voi over a 6-km elevated section of the planned Mombasa Nairobi Standard Gauge Railway Line that was supposed to cross environmentally sensitive Nairobi national park; consequently, the Kenyan government paused its construction. Cameroon protests erupted over the demolition of houses for building the Kribi Deep-sea Port.
Ghana’s Environmental Justice Foundation has launched an investigation over claims by the nation’s fishing community that 90 per cent of its fleet is now owned by Chinese entities which have got around a local law that forbids foreign companies from operating in the fisheries sector.
Another problem facing the BRI is that some loans to partner countries were not offered by China’s policy or state banks, but by private firms and state-owned enterprises to projects, companies and markets they happened to like as part of BRI or as separate entities. This was part of the large push by the Chinese government for local companies and states to invest in international projects. But the problem now is that many of these are invisible to Beijing itself. Hence, the overall outstanding’s could be a lot more.
The pandemic too has played a part which has halted or delayed BRI specific projects like the China-Pakistan Economic Corridor (CPEC), Cambodia’s Sihanoukville Special Economic Zone, the Payra Power Plant in southern Bangladesh, and the Port City development project in western Sri Lanka to name a few. The Chinese economy has contracted by 6.8 per cent in the Q1 of 2020. Beijing is looking to prioritise mitigating the financial impact of the virus and resolving the ongoing trade war with the US, Australia and Canada over rolling out new overseas infrastructure projects as part of the BRI.
A substantial portion of BRI projects may never see the end of the day, and the final BRI may well be a dwindled version of the original plan and vision.
Collin concludes: “As China’s economy rebounds into next year, and other countries who partner Beijing in BRI embark on their own economic recovery programmes, we will still see the BRI continue despite more sense of need for caution over those projects’ long-term fiscal sustainability. The pandemic might have taken quite a bit of shine off BRI and slowed down its momentum, but it’s far from dealing a premature death to this mega scheme.”
(The writer is a Singapore-based Open-Source Intelligence analyst