Why Asian Countries Turn to BRI For Infrastructure Investment
The second Belt and Road Forum was held in Beijing from April 25-27, 2019. (Photo: AP)
By Anita Inder Singh

Why Asian Countries Turn to BRI For Infrastructure Investment

May. 20, 2019  |     |  0 comments

The second Belt and Road Forum, held in Beijing from April 25-27, 2019, retold and enlarged the complex story of China’s Belt and Road Initiative (BRI) which was inaugurated by President Xi Jinping in 2013. The BRI makes clear how China has taken the commercial and diplomatic lead in making infrastructure development a high global priority. Cutting across more than 100 countries and increasing connectivity between continents since it was announced more than six years ago, the BRI has simultaneously won the praise from international organizations and earned criticism that it pushes countries on board into a “debt trap”. A debt trap implies that China ensnares countries by deliberately giving nonrepayable loans with the intent of making political or other gains when default becomes inevitable.

China has denied the charge. At the Forum, Xi attempted to allay growing complaints that the BRI was a predatory debt trap and assured his international audience that China would promote high financial and environmental standards to steer its projects. Chinese Foreign Minister Wang Yi pointed out that participant countries develop at a faster pace and have received real benefits.  Liu Kun, China’s finance minister, promised that China would create a system to prevent and resolve debt risks as it builds more ports, railways, airports, roads and pipelines.

Whatever the opinion, most Asian countries have joined the BRI in the hope of getting Chinese funding to upgrade their route and supply networks.

The scope of the BRI is obvious. The BRI comprises a Silk Road Economic Belt — a trans-continental passage that links China with Southeast Asia, South Asia, Central Asia, Russia and Europe by land – and a 21st century Maritime Silk Road, a sea route connecting China’s coastal regions with Southeast and South Asia, the South Pacific, the Middle East and Eastern Africa, across to Europe. These trans-continental links — most of them in Asia — are reflected in the BRI’s network of connectivity and industrial hubs, and in the revival of ancient overland and sea trade routes.

UN Secretary-General Antonio Guterres foresees the BRI coinciding with the UN’s development goals. He is optimistic that the BRI’s debt problems can be resolved multilaterally. The UN, World Bank, International Monetary Fund, Asian Development Bank and the China-sponsored Asian Infrastructure Investment Bank are among the international and regional organizations collaborating with the BRI in Asia and elsewhere.

One reason why the international spotlight was on China’s cheque book diplomacy at the BRI Forum is that information about BRI debts is opaque since the loans are issued by competing Chinese agencies and state-owned enterprises. According to an international official, the Chinese themselves do not know the scale of the debts.

How many countries are indebted? Some analysts say that two dozen countries are struggling to repay their debts, and eight — Mongolia, Montenegro, Pakistan, Laos, Maldives, Djibouti, Kyrgyzstan and Tajikistan — are near or in effective default.

But all the news on the debt front is not bad. In Asia, the worst debt case so far has been Sri Lanka, where China built the Hambantota port. When Sri Lanka was unable to service the debt that had accrued on Hambantota, China was given a 99-year lease and reportedly allowed to develop it as a military base. Sri Lanka denied this and, in July 2018, welcomed a new USD 295 million loan from China to be spent on housing projects.

In Central Asia, another creditor nation, Tajikistan, agreed to hand 1,158 sq km of territory in the remote Pamir mountain range to Beijing in what the two sides said was a historic settlement of a territorial dispute. However, details of the deal have not been made public and, so far, no link between it and China’s lending practices has been established.

A recent study makes the case that China renegotiated debts with several countries in Asia, Africa and Latin America. It questions charges that the BRI leaves or will leave countries with debts they cannot repay and force them to hand over strategic assets or natural resources to Beijing. In most cases, debts have been written off or payment deferred. And Beijing renegotiated about USD 50 billion of loans.

The “success” of the BRI is evident from the fact that some of China’s rivals, or those who are alarmed at the military implications of its economic rise, have initiated their own competitive infrastructure projects to dissuade Asian countries from entering China’s political and economic orbit.

Countries on the BRI do have options — including the one of stopping BRI projects. One   example is Malaysia. Soon after being elected prime minister in May 2018, Mahathir Mohamad launched probes into corruption involving several Chinese-funded projects. He threw out a USD 20 billion BRI railway project. But China showed flexibility and cut construction costs by one third. Eventually Mahathir’s government chose to resume construction of the railway line. Shortly before the Forum meeting, he did warn the Philippines against becoming too indebted to China. But — probably with Malasysia’s experience in mind — he also said that debt trap diplomacy could be regulated or limited by the borrowing country.

Early this year, Bangladesh terminated a plan to have a Chinese state-run firm construct a 214-kilometer road highway from its capital Dhaka to its northeast. Bangladeshi officials made allegations of corruption against the state-backed Chinese Harbor Engineering Company and the cost of the project: USD 2 billion. Bangladesh will now fund the road itself at a reduced cost of around USD 1.5 billion.

Other countries that have cancelled or sought to renegotiate BRI projects due to high costs have included the Maldives and Myanmar. They can renegotiate in part because Beijing’s leverage is not unlimited. Its BRI partners can turn to other sources of credit, including the IMF or international markets.

Borrowing countries have also changed their positions or interest in Chinese funding and construction after a change in leadership. In Malaysia and the Maldives, newly elected governments demanded more favorable lending terms. And last autumn, the Maldives turned to India for financial help while keeping its Chinese door open.

Generally, though, developing Asian countries have few options except to ask China for infrastructure investment. China has the necessary skills, knowledge, surplus foreign exchange, construction capacity, and mid-level manufacturing: it seeks and easily finds overseas markets for them. Asia will need an estimated USD 26 trillion worth of infrastructure investment by 2030. Neither Western governments nor the World Bank — which actually cut spending on infrastructure after 1998 — have engaged private finance in building infrastructure in developing countries. Japan offers cash for upgrading infrastructure and simultaneously finances some BRI projects. The US and Japan offer less funding than China, so they cannot compete directly with Chinese funding. Additionally, China is the top investor in ASEAN and the largest trading partner of most Asian countries, including India and the Philippines, an American ally. India offers Sri Lanka more trade than China, but China offers more investment.

At the BRI forum, IMF director Christine Lagarde hailed China’s promise to keep close tabs on infrastructure debts. Welcoming the BRI’s infrastructure investment and development of global supply chains, international organizations favor more transparent funding, debt and “green” (environmental) sustainability.

The controversies, as well as the discussions with international organizations on handling them, show that China has the chance to show its commitment to transparent financing and building high quality infrastructure, establishing and maintaining high environmental standards and even using its Asian Infrastructure Investment Bank as a model of sorts to improve governance of BRI loans.

The “success” of the BRI is evident from the fact that some of China’s rivals, or those who are alarmed at the military implications of its economic rise, have initiated their own competitive infrastructure projects to dissuade Asian countries from entering China’s political and economic orbit. China’s competitors include Japan, India and Australia. The US is also working out its own investment plan to counter China’s economic influence. The advancement of infrastructure projects in more countries will benefit the recipients of more foreign cash. It will even strengthen them to resist any Chinese attempts at dominance. In that sense the BRI has encouraged constructive competition between China and its rivals.

If China abides by the norms of good governance, it could enhance the prestige of the BRI. For, endorsed by international and regional organizations, the BRI has turned out to be a durable — if naturally controversial — fact of international relations.

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