Skip to main content

Why China can’t win the world with easy money

September 23, 2018, 2:00 AM IST SA Aiyar in Swaminomics | BusinessWorld | TOI


Indian politicians and diplomats fear China’s Belt and Road Initiative (BRI), which aims to finance and build massive infrastructure projects in 78 countries, controlling infrastructure running through Asia and Europe. China believes this will help it dominate the 21st century.

Asia needs a lot of infrastructure. India itself is a partner with China in the New Development Bank and Asia Infrastructure Investment Bank. But BRI is far more ambitious, planning giant projects. Many are turning into white elephants. This is sparking a financial drama in Pakistan.

In worst-case scenarios, BRI will become a debt trap for borrowers who cannot repay Chinese loans. Indian diplomats fear this debt trap will make borrowers Chinese puppets, or at least give China strategic footholds (like naval bases) in these countries. Maybe so, but I suspect most borrowers will turn against an overweening China, not to it. Indeed, an over-ambitious BRI could blow up in China’s face, causing such massive loan defaults that China’s own financial system staggers.

Malaysia has just reneged on two major Chinese-financed projects worth $22 billion, calling them scams. It will not be the last.

In Pakistan, China is financing giant infrastructure projects called the China-Pakistan Economic Corridor (CPEC), costing $62 billion. Serious Pakistani analysts now fear the CPEC is a debt trap.

Today, Pakistan’s coffers are empty. It seeks $12 billion from the IMF. But US spokesman say they will not allow the IMF to lend money to Pakistan since this will rescue Chinese banks that made dud loans that Pakistan cannot repay. Trump is determined to scotch Chinese attempts to become economically dominant, and so has denied it a free ride on the global financial system. This is bad news for Pakistan and China. If the IMF shuns Pakistan, China will surely provide rescue funds in the short run. But this will damage the credibility and prestige of the BRI.

The IMF is the lender of last resort across the globe, rescuing many bankrupt countries. The BRI was supposed to provide additional finance, over and above traditional sources. Suddenly Trump’s action shows that borrowing from China can cut you off from the global financial system.

Many countries resent tough loan conditions of traditional financial institutions. China has offered them easy finance with little risk assessment for gigantic but dubious projects.  It has no global tendering — all contracts go to Chinese companies, which can inflate costs. Easy Chinese money once seemed manna from heaven. But the implosion of Chinese projects in Sri Lanka and Malaysia shows easy loans can become burdens. Trump now warns that countries in a Chinese debt trap may lose access to international financial institutions.

Conditions for CPEC projects are opaque. The Financial Times says the return on equity is sometimes a whopping 34%, not the 17% normally assumed (which is anyway very high). The profit is guaranteed by the government regardless of project success or failure. Any failure can bankrupt the borrower.

This reminds me of Enron. It rushed into developing countries, offering to build huge infrastructure. It demanded high returns, guaranteed by governments regardless of project performance. Many countries including India and Argentina agreed. But when borrowers found the guarantee cost exorbitant, they reneged. A multitude of such defaults and fiascos ultimately busted Enron. That’s a warning to China.

In Sri Lanka, the Chinese-financed Hambantota port was a white elephant, unable to repay Chinese banks. China wrote off a billion dollars, in return for a 99-year port lease. Indian diplomats see this not as a financial debacle but a strategic Chinese triumph, getting a naval base by luring Sri Lanka into a debt trap. But Sri Lanka says it will not allow Hambantota to become a naval base.

Countries are prickly about sovereignty. Even the US in its prime faced local hostility to its bases in Asia. So will China if it tries to gain military bases through debt traps.

Moreover, Trump’s stand on Pakistan now indicates that BRI finance can sink borrowers, by reducing their access to traditional institutions. This will make BRI much less attractive, hitting China’s strategic ambitions.

Repeated BRI fiascos could endanger even the mighty finances of China. It already has the highest debt/GDP ratio in the world of over 300%. The 2008 financial crisis showed that even the richest nations can be felled by bad debts.

The grander BRI tries to be, the greater will be its risk of failure, financially and strategically. The more modest BRI is, the greater will be its chances of economic success. But the less will be its chances of strategic success and domination.

DISCLAIMER : Views expressed above are the author's own.


SA Aiyar

Swaminathan S Anklesaria Aiyar is consulting editor of The Economic Times. He has frequently been a consultant to the World Bank and Asian Development Bank. A popular columnist and TV commentator, Swami has been called "India's leading economic journalist" by Stephen Cohen of the Brookings Institution. "Swaminomics" has been appearing as a weekly column in The Times of India since 1990. In 2008, The Times of India brought out the book "The Benevolent Zookeepers - The Best Of Swaminomics".


Popular posts from this blog

SSG Commando Muddassir Iqbal of Pakistan Army

“ Commando Muddassir Iqbal was part of the team who conducted Army Public School operation on 16 December 2014. In this video he reveals that he along with other commandos was ordered to kill the innocent children inside school, when asked why should they kill children after killing all the terrorist he was told that it would be a chance to defame Taliban and get nation on the side. He and all other commandos killed children and later Taliban was blamed.
Muddassir Iqbal has deserted the military and now he is  with mujahedeen somewhere in AF PAK border area”
For authenticity of  this tape journalists can easy reach to his home town to interview his family members or   ISPR as he reveals his army service number”
Asalam o Alaikum: My name is Muddassir Iqbal. My father’s name is Naimat Ali. I belong to Sialkot divison (Punjab province), my village is Shamsher Poor and district, tehsil and post office  Narowal. Unfortunately I was working in Pakistan army. I feel embarrassed to tell you …

CPEC Jobs in Pakistan, salary details

JOBS...نوکریاں چائنہ کمپنی میںPlease help the deserving persons...Salary:Salary package in China–Pakistan Economic Corridor (CPEC) in these 300,000 jobs shall be on daily wages. The details of the daily wages are as follows;Welder: Rs. 1,700 dailyHeavy Duty Driver: Rs. 1,700 dailyMason: Rs. 1,500 dailyHelper: Rs. 850 dailyElectrician: Rs. 1,700 dailySurveyor: Rs. 2,500 dailySecurity Guard: Rs. 1,600 dailyBulldozer operator: Rs. 2,200 dailyConcrete mixer machine operator: Rs. 2,000 dailyRoller operator: Rs. 2,000 dailySteel fixer: Rs. 2,200 dailyIron Shuttering fixer: Rs. 1,800 dailyAccount clerk: Rs. 2,200 dailyCarpenter: Rs. 1,700 dailyLight duty driver: Rs. 1,700 dailyLabour: Rs. 900 dailyPara Engine mechanic: Rs. 1,700 dailyPipe fitter: Rs. 1,700 dailyStorekeeper: Rs. 1,700 dailyOffice boy: Rs. 1,200 dailyExcavator operator: Rs. 2,200 dailyShovel operator: Rs. 2,200 dailyComputer operator: Rs. 2,200 dailySecurity Supervisor: Rs. 2,200 dailyCook for Chinese food: Rs. 2,000 dailyCook…

The Rise of China-Europe Railways

The Rise of China-Europe RailwaysMarch 6, 2018The Dawn of a New Commercial Era?For over two millennia, technology and politics have shaped trade across the Eurasian supercontinent. The compass and domesticated camels helped the “silk routes” emerge between 200 and 400 CE, and peaceful interactions between the Han and Hellenic empires allowed overland trade to flourish. A major shift occurred in the late fifteenth century, when the invention of large ocean-going vessels and new navigation methods made maritime trade more competitive. Mercantilism and competition among Europe’s colonial powers helped pull commerce to the coastlines. Since then, commerce between Asia and Europe has traveled primarily by sea.1Against this historical backdrop, new railway services between China and Europe have emerged rapidly. Just 10 years ago, regular direct freight services from China to Europe did not exist.2 Today, they connect roughly 35 Chinese…