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China’s Silk Road Isn’t So Smooth

Mihir Sharma @mihirssharma

11 July 2018

(Bloomberg Opinion) -- You may not have noticed, what with the outbreak of trade war with the U.S. and all, but China’s economic diplomacy has had a bad few weeks. The country’s flagship Belt and Road Initiative is dealing with ever-greater resistance, slowing a momentum that once seemed unstoppable. In fact, I’d argue that the BRI is stalled.

The clearest sign of this, perhaps, was the news that Malaysia had halted Chinese projects worth $22 billion, including a controversial rail link along the country’s east coast. The decision looked inevitable after May’s elections. One of the pillars of Prime Minister Mahathir Mohamad’s successful campaign to unseat Najib Razak was the charge that Najib’s close links to China had bred corruption and bad decisions. Mahathir’s associates linked the scandal at the 1MDB development fund to BRI financing, while Najib’s associates doubled down, putting Chinese President Xi Jinping on their party posters. One Malaysian politician complained visitors might’ve thought Xi himself was on the ballot.

QuicktakeChina’s Silk Road

In many ways, China’s stumbles in Malaysia are exactly what BRI skeptics had always warned would happen in countries across Asia. Projects that might be easy to execute in China would run into delays and cost overruns in less-regimented countries; growth in debt, deficits and Chinese immigration would spark political opposition; and, when a new political leadership cancelled those projects, bilateral and multilateral tensions would spike.

Malaysia is only the most high-profile example. To the north, Myanmar’s Planning and Finance Minister Soe Win told Nikkei this week that his government would demand that a new port on the Bay of Bengal be “slimmed down.” For China, the port is pivotal — the shortest way to get oil from the Indian Ocean to southern China, avoiding a strategic chokepoint at the Straits of Malacca. But Myanmar now owes 40 percent of its external debt to China, which, as Soe Win pointed out with gentle understatement, is “not recommendable.”

Myanmar’s leaders can hardly be blamed for scaling back, especially given “lessons learned from our neighboring countries,” as Soe Win put it. In Sri Lanka, an overindulgence in Chinese finance has already pushed one government out the door and left its successor saddled with expensive white elephants. Interest payments on Chinese loans — about $11 billion a year — would’ve consumed almost all of the island nation’s tax revenue. (Chinese infrastructure finance doesn’t come cheap — Sri Lanka reportedly pays six percent.) That prompted the new government to grant a Chinese company a controlling share of the big, empty port at Hambantota in a debt-for-equity deal, and panicked India enough to explore buying the world’s emptiest airport 20 kilometers away — also Chinese-financed, naturally — just to ensure it stays out of Chinese hands. Negotiators began talks this week on a price.

Even in Pakistan, which had embraced the China-Pakistan Economic Corridor as an effective antidote to dependence on an increasingly unfriendly West, policymakers are having second thoughts. Expensive Chinese machinery imports have pushed the current account deficit — and the rupee — to the wall. Pakistan’s central bank only has enough reserves to cover a couple of months of imports — and that’s after the country borrowed nearly $4 billion from the Chinese last year.

Pakistani officials have reportedly warned the Chinese that they’d better keep lending or Pakistan would turn to the International Monetary Fund, and then “we would have to make full disclosure of the terms on which China has agreed to build the CPEC.” Pakistan’s voters, going to the polls shortly, should perhaps be asking themselves why a full disclosure of these terms would be so embarrassing. China’s leaders will shortly learn a lesson the U.S. learned ages ago: Pakistan is the only country in the world that negotiates with a gun to its own head. My guess is that China will pay up this time, but that won’t make the CPEC any more sustainable financially.

And while all this was happening, China’s Premier Li Keqiang was in Sofia meeting with the leaders of Central and Eastern Europe for the annual “16+1” forum — a meeting notably lacking in enthusiasm compared to previous such conclaves. The European leaders will have noted that big infrastructure investment hasn’t exactly been turning up on time from China — and, for that matter, where it has, as in Athens’ Piraeus port, it may also have opened the door to criminality and fraud.

When the Belt and Road was first announced, it must have felt like a gift from heaven for embattled governments trying to raise money for the infrastructure their voters wanted. But, the truth is that China’s cash came with onerous conditions — high interest rates, procurement guarantees for Chinese companies, imported workers. Nor was China really prepared for the hurdles faced by big-ticket investments in countries with messy, more accountable politics.

Can the initiative be salvaged? Perhaps. After all, China has a capital surplus that needs to go somewhere. But, if it wants its investments to be sustainable, China will have to behave in these countries a lot more like the Western capital it seeks to displace. That means being cautious, cooperative with local capital and civil society, and respectful of political sentiment, even from dissidents. In other words, the Chinese state would have to behave like the private sector. And we know how tough an ask that is. 

©2018 Bloomberg L.P.


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