9 Nov 2017
Will All Roads Lead to Beijing? Risks and Challenges in China’s “Belt” and “Road” Plan
By Yawei Liu, Director of The China Program at The Carter Center, Atlanta, Georgia
China’s “One Belt, One Road” initiative is perhaps the most ambitious development plan ever devised by any nation-state. Plans call for trillions of dollars to be invested in roads, railways, and ports to create land corridors across the vast reaches of Asia and sea lanes that link China to markets in Europe, the Middle East, Africa, and beyond. The “Belt and Road” project – as it is now called – is President Xi Jinping’s signature foreign policy instrument, and is the cornerstone of China’s ambition to transform itself from a mere player and benefactor of globalization to a reformer and leader of the international order.
But the questions and potential pitfalls to the Belt and Road initiative are easily as large as its ambitions.
The overriding question is this: does the Chinese government have the will, willingness, and wherewithal to overcome all difficulties and accomplish the mission? To succeed, China must negotiate with governments of scores of host countries and international institutions to design, build, and maintain projects. The Belt and Road initiative envisions mammoth Chinese government loans to Chinese companies and foreign governments to finance projects. Will projects become financially viable? Will loans be repaid, or will the initiative devolve into a massive boondoggle? Lack of transparency on the sources of project design and funding means these crucial questions cannot be answered fully. In fact, available evidence suggests there is reason for major concern.
The Origins of the Initiative
The “One Belt, One Road” initiative was first announced by President Xi in September and October in 2013 in Kazakhstan and Indonesia respectively. At the time, it was simply a concept and an idea. In March 2015, the Chinese government issued a paper that began to turn the concept into a plan.
On April 20, 2017, the spokesperson of the Chinese Ministry of Transportation said during a press conference that China has signed more than 130 bilateral and regional transport agreements with countries involved in the Belt and Road. He said that China had opened 356 international road routes for both passengers and goods, while maritime transportation services now cover all countries along the Belt and Road. Every week, some 4,200 direct flights connect China with 43 Belt and Road countries, and 39 China-Europe freight train routes operate.
Before the Beijing Belt and Road Forum for International Cooperation was held on May 14-15, 2017, the Chinese government issued another paper entitled “Building ‘One Belt, One Road’: Concept, Practice, and China’s Contribution.” The paper mentioned six corridors and six means of communication: a New Eurasian Land Bridge Economic Corridor, a China-Mongolia-Russia Economic Corridor, a China-Central Asia-West Asia Economic Corridor, a China-Indochina Peninsula Economic Corridor, a China-Pakistan Economic Corridor, and a Bangladesh-China-India-Myanmar Economic Corridor. The means of communication are rail, highways, seagoing transport, aviation, pipelines, and aerospace.
Xi himself touted the progress already made at the May forum, saying building had accelerated on a number of projects: a Jakarta-Bandung high-speed railway, a China-Laos railway, an Addis Ababa-Djibouti railway and a Hungary-Serbia railway. Ports at Gwadar and Piraeus had been upgraded, and other projects were “in the pipeline. Xi pledged to avoid “outdated geopolitical manoeuvering” and said China hoped for “win-win” relationships. “We have no intention to form a small group detrimental to stability. What we hope to create is a big family of harmonious co-existence.”
International think tanks and news organization have taken note. The Center for International and Strategic Studies published a research paper saying the Belt and Road project could span 65 countries, comprising roughly 70 percent of the world’s population. Economically, it could include Chinese investments approaching $4 trillion.
The New York Times reported that the initiative was designed to open new markets and export China’s state-led development model “in a quest to create deep economic connections and strong diplomatic relationships.” The Times highlighted some of the projects:
- Africa’s first transnational electric railway, which opened this year and runs 466 miles from Djibouti to Addis Ababa, the capital of Ethiopia. China financed most of the $4 billion price tag. Chinese companies designed the systems, supplied train cars and engineers who built the line over a six-year period.
- A 260-mile rail line from northern Laos to the capital, Vientiane. China is leading the $6 billion investment. Mountainous terrain means bridges and tunnels will account for more than 60 percent of the line, and construction is further complicated by the need to clear unexploded land mines left from American bombing of the country during the Vietnam War.
- The deep-water port at Gwadar, Pakistan. The facility, on the Arabian Sea, will be linked by new roads and rail to western China’s Xinjiang region, creating a shortcut for trade with Europe. The port is part of the $46 billion China says it is spending on infrastructure and power plants in the China-Pakistan Economic Corridor.
Geopolitical Risks Will Not Go Away
For all the hoopla about the Belt and Road initiative, there are signs that all is not well when it comes to international cooperation needed to make the initiative work. The Belt and Road “summit” in May was attended by only 29 heads of state. Germany, Great Britain, the United States, and Japan sent only government ministers or lower ranking officials to the meeting. India, one of the most important countries for the initiative, chose not to send any representative to the summit because its government believes that China harbors an ulterior motive in establishing the China-Pakistan Economic Corridor, a signature component of the Belt and Road program. “No country can accept a project that ignores its core concerns on sovereignty and territorial integrity,” said Gopal Baglay, spokesperson of India’s External Affairs Ministry.
Other countries, including the United States, also expressed concerns about Chinese motives. To them, “new international order,” “new security framework,” “new economic model,” “new civilization exchange,” and “new ecological order” are synonymous with China’s domination first in Asia and eventually in the whole world.
Western press reports reflected the skepticism. “Neighbors Japan and India have stayed away from the summit, suspicious that China’s development agenda masks a bid for strategic assets and geopolitical ambitions,” wrote Carrie Gracie of the BBC. CNN’s James Griffiths reflected similar sentiment in his reporting on the Beijing meeting. “Its boosters tout its massive economic promise and claim it could benefit the entire world and lift millions out of poverty. But no one can say for sure what exactly the plan encompasses, and detractors warn it could be an expensive boondoggle at best or a massive expansion of Chinese imperial power at worst.”
Russia appears to be increasingly wary of the Belt and Road initiative. President Vladimir Putin attended the summit, but proposed linking the program to the Eurasian Economic Union, Moscow’s own regional economic project. It is common knowledge that Moscow has reservations because Russia is loath to cede influence over Central Asian countries, a main focus of the Belt and Road initiative. A New York Times report quoted a senior associate of Carnegie Center in Moscow saying, “Russia’s elites’ high expectations regarding Belt and Road have gone through a severe reality check, and now oligarchs and officials are skeptical about practical results.”
The Belt and Road initiative faces serious geopolitical risks. Many countries involved in the initiative are situated in the most complicated geopolitical regions pressured by political, religious, and ethnic conflicts. Some are proxies of rival major powers. Pakistan and Afghanistan, key countries for Belt and Road, confront tribal political power that refuses to yield to central control, radicalism, terrorism, and secessionism.
Countries like these can easily derail any connectivity projects in place. The China-Pakistan Economic Corridor is a case in point. The corridor is home to an unprecedented estimated Chinese investment of $48-$57 billion dollars, and the expansion of Pakistan’s Gwadar port would provide China with a much-needed access to the Indian Ocean. But this corridor goes through the province of Baluchistan, where “separatist militants have waged a campaign against the central government for decades, demanding a greater share of the gas-rich region’s resources.” Since 2014, militants trying to disrupt construction on the “economic corridor” have killed 44 Pakistani workers.
Financing Can Be a Challenge
The initiative faces challenges attracting Chinese capital in both the state and private sectors. To be sure, the Chinese state is marshaling significant investment resources: a $40 billion Silk Road Fund was created in 2014; the Asian Infrastructure Investment Bank was launched in 2015 with $100 billion of initial capital that is expected to be spent chiefly in Belt and Road countries; three Chinese state-owned banks received $82 billion in state funds in 2015 for Belt and Road projects.
Yet only a small portion of available investment funds appears to be going toward Belt and Road projects. Capital leaving China is largely going to markets that are safer, richer, and better-developed than those under the Belt and Road framework, according to David Dollar, an economist at the Brookings Institution in Washington. Aside from Hong Kong, the top destinations for Chinese overseas direct investment at the end of 2016 were: the Cayman Islands, the Virgin Islands, the United States, Singapore, Australia, the Netherlands, the United Kingdom, Russia, Canada, and Indonesia. “Of these, only Russia and Indonesia are along the Belt and Road,” Dollar writes. China’s two policy banks, the China Development Bank and the China Export & Import Bank report Belt and Road-related lending totaled $101.8 billion at the end of 2016, or 15 percent of their total overseas lending. Data cited in the Wall Street Journal says Chinese companies have invested more in the United States since 2014 than the 60-plus countries touched by the initiative combined. In other words, Xi’s regional investment priorities have not translated into a shift in private investors’ decision-making.
Jonathan E. Hillman of the Center for International and Strategic Studies, writes that OBOR could include Chinese investments approaching $4 trillion. But Nicholas R. Lardy, a China specialist at the Peterson Institute for International Economics, told New York Times reporter Jane Perlez, “China’s outlays for the plan so far have been modest: only $50 billion has been spent, an ‘extremely small’ amount relative to China’s domestic investment program.” The funding gap is obvious, and the lack of market appeal to capital will certainly become a huge obstacle.
Lending Perilous for Borrowers
Countries involved in Belt and Road projects often take on crushing debt burdens.
Laos, a country with a total output of $12 billion annually, has borrowed $800 million from China’s EXIM Bank, in part to finance a rail line from the northern part of the nation to the capital, Vientiane. According to the New York Times, Laos still faces a huge debt burden. The International Monetary Fund warned this year that the country’s reserves stood at two months of prospective imports of goods and services. It also expressed concerns that public debt could rise to around 70 percent of the economy.
It is reported that Sri Lanka is already overburdened by debt resulting from accepting Chinese concessional loans. As a result of Sri Lanka being unable to keep up with its payments, the Sri Lankan government has converted some of this debt into equity, allowing Chinese firms to control 80 percent of the Hambantota port for a period of 99 years.
The Pakistan corridor is projected to result in $50 billion of debt that will take Pakistan 40 years to pay off. Just like in Sri Lanka, Pakistan’s debt contract could ultimately result in a transfer of local assets to Chinese ownership. Some Pakistani critics refer to the corridor as “the new East India Company.” Jane Golley of the Australian National University told a Financial Times reporter: “The lack of commercial imperatives behind OBOR projects means that it is highly uncertain whether future project returns will be sufficient to fully cover repayments to Chinese creditors.”
Many projects are in Central Asian countries. It is clear some of these countries are suffering from “from weak and unstable economies, poor public governance, political stability, and corruption.” Chinese lenders are not always blind to risks but many “are being pressed to lend to projects that they find less than desirable. An Economist article indicates that Chinese government sources expect “to lose 80 percent of the money they invest in Pakistan, 50 percent in Myanmar, and 30 percent in Central Asia.” This is not just speculation. China has recently lost $60 billion in Venezuela as it descended into chaos.
In addition to this, the Chinese foreign currency reserve is rapidly declining as many companies and individuals are moving their money out of China due to an unprecedented anticorruption campaign and political uncertainty. Thus, Beijing has erected new barriers designed to stem the exodus of capital outflow. In this context, there are two channels through which capital is fleeting from China: first, state-driven, politically motivated, and commercially dubious deals that have backfired on Beijing in the past; second, capital that is going to safer places in the name of the OBOR initiative. One result of the state driven overseas investment will add to China’s fast-growing debt burden, “now standing at more than 250 percent of GDP.”
Not All Roads Will Make Economic Sense
Building major railway lines, one of the primary goals of the initiative, may not make economic sense, even though rail transport is faster and greener than shipping by sea. Turloch Mooney, senior editor of Global Ports writes, “The cost of shipping a 20 foot-equivalent unit by rail to Europe still averages around five times more than by ocean, and the capacity constraints of trains and rail infrastructure compared with ocean-going vessels mean that, while rail services have the potential to create a significant dent in air cargo volumes, they will most likely never account for more than one to two percent of ocean volumes.” To ship cargo from Suzhou to Warsaw, ocean freight takes 40 days and creates 2.1t of carbon emissions. Now, more and more Chinese companies are shipping goods to Europe via rail but for every five containers going to Europe, only one comes back filled with goods. The other four, unfortunately, come back via ships.
Tom Holland published an article on April 24, 2017 in the South China Morning Post declaring, “The idea of a ‘Belt and Road’ rail cargo route between Europe and China remains nothing more than a fanciful curiosity.” The online magazine Quartz elaborates:
“There is really no need to use trains to increase commerce between Europe and China. Sea cargo transportation is much cheaper, and companies already rely on it. More than 19,000 containers can be placed on a single cargo ship, and they only take 30 days from Europe to reach China. The railway is faster than a shipping container, but is also riskier because it goes through a few unstable countries and can be interrupted by extreme weather, terrorist attacks, and politics. China is trying to justify its domestic overproduction by creating the One Belt, One Road, and framing it as a business strategy that is also beneficial for other nations, but the actual benefit for some trading partners and the long-term global economy is still to be seen.
There Are More Important Things than Roads
In the name of investing overseas, state-owned Chinese companies have experienced spectacular failures, costing the Chinese government an astronomic amount of money. The unexpected decision by the Myanmar government to suspend the Myitsone Project may have cost the Chinese government $3 billion. The Chinese company involved in the deal firmly believed its agreement with the military-controlled government of Myanmar was ironclad.
The toppling of Gadhafi in Libya led to at least $6 billion in losses as Chinese companies all had to abandon their projects. One of the leading investors in Libya, the Sinohydro Group, said it had never imagined a strong leader like Gadhafi could be overthrown.
The China Railroad Group signed a high-speed train deal with the Venezuelan government worth $7.5 billion although it was clear that country did not have money, electric power, and density of population to sustain such a project. It launched a project even after the Venezuelan government defaulted on repaying a loan of $18 billion from China. The project is now worth nothing. The Belt and Road initiative is only about three years old and there have already been failures and losses of immense proportions. More will certainly come.
Failures are bound recur in the coming years and the Belt and Road initiative surely will be littered with projects that are costly and unsustainable white elephants. In fact, this is already happening. A Chinese scholar recently came back from Ethiopia and said the electric railroad built by the Chinese from Addis Ababa to Djibouti – hailed as one of the first landmark accomplishments – in fact made only one run with a diesel locomotive, and has been idle since completion. When asked why, the scholar said, “Well, there is no electricity to power the trains. The hydraulic power plant is yet to be built.”
Any of the factors discussed above could prevent the Belt and Road initiative from achieving its lofty goals and lead China into a financial abyss. It cannot be China’s exclusive endeavor and needs to enlist support from all countries in the world to make it a success. To do that, China needs to be transparent about its geopolitical considerations, decision-making processes, and financial arrangements.
Market forces and not just state investment must be employed. Social dynamics and political uncertainties in each country where a project is launched must be carefully scrutinized. The Chinese government cannot blindly force state enterprises to delve into projects and by the same token, state enterprises must not obediently do what they are asked without due diligence on projects.
Signs are emerging that silent resistance against reckless and mindless Belt and Road projects may be shaping up. China’s overall investment in such projects has dipped despite the central government’s recent demand for more and larger investments in related projects. China’s decision to be part of a globalized market and to follow rules and laws required by this market has enabled China to launch the Belt and Road initiative in the first place. To ignore global market rules is short-sighted and suicidal in the long term.
The initiative is not just about development and prosperity. It is also about China transforming itself from a mere player and benefactor of globalization to a reformer and leader of the international order. Beijing must be aware that before all roads lead to Beijing, it must study past development failures and avoid strategic arrogance and national selfishness; it has to learn that the new roads will go nowhere if they are paved with national glory and supremacy and not common destiny and co-prosperity. Without a broad view, few roads will lead to Beijing.
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