CHINA’S BELT & ROAD INITIATIVE PAVED WITH RISK AND RED HERRINGS

ASEAN
By Alvin A Camba, John Hopkins University and Kuek Jia Yao, Harvard University
East Asia Forum-26 June 2018

There is no shortage of sceptics of China’s Belt and Road Initiative (BRI). Indeed, stories about the BRI often include the evocation of debt ‘traps’ and ‘vassal states’. While some concerns merit consideration, popular criticisms of the BRI tend to be built upon incomplete and distorted stereotypes, which only draws attention away from the actual shortcomings of the BRI that need to be addressed.

Common criticisms of the BRI are flawed in five important ways. First, they ignore how the impact of the BRI on a participating country depends upon the individual characteristicsof the host country: things like a country’s credit rating, its domestic politics, and its foreign currency reserves and the productivity of BRI-related projects taking place there. The Center for Global Development’s systematic study of the BRI found that 23 out of 68 countries that are hosting BRI projects will be at risk of debt distress, due to a diverse range of domestic problems. These criticisms also ignore that the actualization and design of BRI projects depend on the dynamics of host-state elites. Large Chinese investments in the past have been cancelled or delayed due to domestic elite conflict, such as ICBC in the Philippines, Myanmar’s Myitsone Dam, and Indonesia’s Jakarta–Bandung High Speed Railway. The Philippines’ ZTE project was overpriced due to a host state politician’s demand.

Second, criticisms often point to the high interest rates on Chinese loans and the risks this may present to host countries, which is a red herring that distracts from the actual harmful impacts there might be. The common Chinese interest rate of 2 to 3 per cent on concessional loans is still lower than commercial rates, and Chinese loans are more flexible and expedient than those under Western aid. Chinese loans can be used for riskier projects, require less scrutiny and depend on the host state’s political relations with Beijing. Under certain conditions these factors can perpetuate rent seeking and encourage irresponsible borrowing.

Third, popular narratives of China’s foreign investment overlook the role of self-interested Chinese firms and host-state actors. Chinese firms sometimes take advantage of government financing to fund overpriced and badly assessed projects in order to profit from guaranteed material sourcing. For instance, a World Bank-blacklisted Chinese company made a bid for Marawi’s reconstruction after the siege of the city in 2017 and got the approval of the Philippine government. While China has started to limit outbound outflows that don’t have government approval and is taking money laundering more seriously, many Chinese actors evade their country’s regulations. Indeed, Patrick Ho, a member of the CEFC China Energy-backed China Energy Fund Committee, was arrested in November 2017 in the United States on charges of allegedly bribing government officials in Chad and Uganda.

Host-state firms also use their national government networks to get Chinese funding, and Chinese partners often go along with such operations. This tends to occur in countries with significant local government deregulation. These projects become overpriced and economically less viable, or worse, they operate illegally for profit.

In these cases, neither the Chinese state nor the host state gains from the project’s completion due to the enormous overhead costs and negative social impact. In response to these issues, the Chinese government has centralised aid-investment decisions, has investigated higher standards of environmental assessment and has begun discussions on consultation mechanisms with civil society in host countries.

Fourth, critics argue that the BRI deliberately targets countries to generate military concessions. While this remains a possibility in the future, their recent examples have relied on hearsay. China’s and Vanuatu’s governments both denied the reports of a military base being built in Vanuatu.

Finally, this criticism ignores the urgent demand of the developing world for infrastructure capital. Since the end of the Cold War, Western institutions have recalibrated overseas development aid to fund social development and begun demanding governance or political reforms as conditions for funding. These conditions place unreasonable constraints upon the developing world, whose governments have weaker capacity, tighter budgetary constraints and more limited tenure to perform than their developed-country counterparts.

There are, however, some empirically supportable objections to the BRI. China’s falling rate of profitability on domestic investments has led to its increased foreign investment activity. Economic necessity to pursue profits abroad, bolstered by the BRI, may limit China’s willingness to reform domestically, disrupt the balance of influence among international financial institutions and hinder the capacity of host states to refuse desperately needed aid. In other words, China and its capitalists may disrupt any momentum of reform.

There is also no standardized procedure on how to proceed when a BRI-financed project fails. Answers to questions about who pays the loans, how much should be paid and what happens to the initial investments remain vague. Case-by-case bilateral negotiations with China seem to be the default option, but specifying these at the outset is important to avoid more worrisome political returns.

Another worrying trend is that in some cases, China has asked for equity in these projects or strategic infrastructure acquisitions in return for debt forgiveness. While China will assume the projects’ risks, these infrastructure projects will give China greater capacity to project geostrategic power in the host state, which could lead to militarisation.

The final issue is China’s geopolitical ambition alongside the BRI. While seeking economic leverage is not unique to China, the simultaneous increased projection of military power can generate regional insecurities, like in the newly installed missiles in the South China Sea. To remedy this, stronger regional bodies with channels for coordination and communication can open the lines for further dialogue. It is crucial for ASEAN and other supporting states to come together and challenge China at the negotiating table, push for concessions and constrain China’s tendencies for expansion.

The scale, scope and complexity of the BRI means that there are substantial risks, for China and for host countries. But rather than focusing on red herrings, a more nuanced conversation about the BRI will do more to help resolve these underlying issues.

Alvin Camba is a doctoral candidate at the Department of Sociology, Johns Hopkins University. He researchers and publishes on the link between Chinese foreign direct investment and host state elite conflict in Southeast Asia.
Kuek Jia Yao is an incoming MA student at the Regional Studies-East Asia (RSEA) Program at Harvard University.