Critics call China’s Belt and Road Initiative (BRI) a “debt trap,” risking the financial systems of participating developing nations, including China’s own. It has also been criticized for wasting money on building “useless houses” and “roads to nowhere.”
Below is an analysis of how the opinion makers assess the BRI to see if the critics are right.
‘Debt trap’ and systematic financial risk
Harvard economist Patrick Mendis and defense analyst Joey Wang have said that such countries as Sri Lanka and Pakistan have been trapped into investing billions of dollars that they do not have and cannot afford to repay, “forcing” them to surrender their sovereignty to China. That view was based on the reason behind the US-based Fitch’s downgrading of China’s rating. According to an April 9, 2013, Financial Times article by Josh Noble and Simon Rabinovitch, Fitch downgraded China’s credit rating in 2013 from “AA-” to “A+” in part because of rapid credit expansion.
Fitch suggested that China’s banks did not think through the loans they handed out, resulting in a potential bad-debt issue. Based on this logic, the US credit rating agency suggested that there is no reason to believe that the US$900 plus billion earmarked for the BRI would be any more efficient. It is probably for this reason that Mendis and Wang concluded that the BRI is a “debt trap” for countries like Sri Lanka and Pakistan.
Time will tell whether the Harvard scholars’ conclusion will materialize. However, neither the Sri Lankan nor Pakistani governments seem too worried about the “debt trap” scenario.
Sri Lanka granted a Chinese company a 99-year lease on the Hambantota port because it believes the company has the expertise and capital to reverse the port’s losses and enhance the country’s economic prospects. Pakistan held a “party” to celebrate the completion of the China-Pakistan Economic Corridor’s first phase at Gwadar Port on January 28-29, proclaiming the CPEC will improve the country’s economy.
It is unclear whether the BRI would put the financial systems of China and the participating countries at risk.
According to former finance minister Lou Jiwei, China’s M2, the amount of money in circulation plus deposits, was US$23.6 trillion or 184% of gross domestic product of $12.8 trillion in 2017, a figure higher than that of the US. Additionally, more financial channels – Ponzi schemes, shadow banks, private banks – are surfacing. Because of the increases of lending institutions, the potential of a financial bubble exists if not controlled and regulated.
However, the Chinese government recognizes the danger, resulting in tighter financial-system controls. What’s more, the vast majority of the M2 money supply consists of deposits, estimated at more than $21 trillion in 2017.
Moreover, Chinese banks appear no less efficient or at risk than their Western or Japanese counterparts. According to the US-based consultancy Investopedia, Chinese banks occupy the four top spots of the world’s 10 largest banks. The China Banking Regulation Commission reported that bank profits exceeded $40 billion, the ratio of non-performing loans to total lending (NPL/TL) was steady at 1.7%, the loan-to-deposit ratio was 65%, and total deposits exceeded $21 trillion in 2016.
International Monetary Fund figures showed China’s NPL/TL ratio of 1.7% is comparable to those of the developed economies, estimated at between 0.5% (Canada) and 4.2% (France). That of the US was 1.5%. China’s loan-to-deposit ratio is certainly better because, that of Japan and the West is between 76% (US) and 111% (European Union).
‘Useless houses’ and ‘roads to nowhere’
Australia’s minister of international development, Concetta Fierravanti-Wells, commented in a January 9 Australian Broadcasting Corporation interview that China’s BRI investments were spent on building “useless houses” and “roads to nowhere” in the South Pacific. Her comments earned a swift and harsh rebuke from the governments of the South Pacific island countries. Tonga, for example, pointed out that it was Chinese investment that had led to the island nation’s economic growth. Vanuatu claimed that its Chinese-financed roads improved transportation efficiency.
What’s more, the Vanuatu government pointed out that an earlier Australian-built road on the island was the “butt of jokes,” suggesting it was poorly constructed and “lead to nowhere.” It also complained that Australia’s promise of building a government house did not materialize for lack of funds.
According to a January 22 People’s Daily Online report, Tonga, Samoa, Vanuatu and Fiji called Fierravanti-Wells’ comment “sour grapes” because Australia could not do what China did.
Developing nations need foreign investment
The fact of the matter is that cash-strapped developing nations require foreign investment to spur economic growth and pull people out of poverty. The issue is which nations should they approach.
China is the preferred choice, having invested hundreds of billions of US dollars in Africa, Latin America and other developing regions. First, China does not impose non-economic or financial conditions such as on human rights. Second, China “walks the talk,” fulfilling promises that have a positive impact on the recipients’ economies.
China’s building of infrastructures, schools and other facilities and investments in Africa, South America, Southeast Asia and Central Asia are largely responsible for those regions’ development. Had it not been for the railways and roads that China built in Africa, for example, the economies of nations like Nigeria would have remained underdeveloped. Similar stories are told in Central Asia, Southeast Asia and Latin America.
Climbing on the BRI train
In spite of criticisms ranging from neocolonialism to “land grab” from the West, more and more countries joining or expressing interest in participating, including France, the UK, Canada, Japan and even the US. During his recent visit to China, French President Emmanuel Macron stated that his country would be a cheerleader for the BRI in the EU, recognizing the economic and geopolitical benefits it has brought and will likely continue to bring to the world. British Prime Minister Theresa May sang a similar song during her recent visit to China, promoting “golden era” Sino-UK relations.
Two-way trade between China and the BRI participating nations exceeded $1.2 trillion in 2017, a more than 15% increase year on year. China has already invested nearly $10 billion in these countries, building infrastructure and updating industries. As indicated earlier, China plans to invest $900 billion in the BRI’s participating countries.
It seems that among the major economies, only India and Australia are refusing to join the BRI, but only for geopolitical or ideological reasons. Australia rejected an invitation to join because of domestic politics and perhaps pinches of ideology and racial bigotry. India did so because China blocked its bid to become a permanent member of the United Nations Security Council and the Nuclear Suppliers’ Group and because the China-Pakistan Economic Corridor (CPEC) is under dispute between India and Pakistan.
The ‘beauty’ of Belt and Road
The BRI is truly an “interconnected, inclusive, invigorated and innovative” global economic development architecture. Building sea and land routes would connect the world more closely, fostering not only trade but also geopolitical stability. It is inclusive because every participant benefits from it in terms of additional trade and investment opportunities. The BRI is invigorating because it is exciting to cooperate with one another for a shared future. Finally, it is innovative because the BRI recognizes that innovation is essential to improve productivity, efficiency and competitiveness.
No doubt conflicts and project failures will emerge because economic, financial and geopolitical conditions change. Conflicts between China and the participating countries may indeed be more frequent because the BRI can and has been be politicized. Opposition politicians such as Azmin Ali and Lim Guan Eng in Malaysia have criticized their governments for “selling” out the country to China.
Claims by exiled former Maldivian president Mohamed Nasheed Wahad that China’s BRI is a “land grab” appear unfair. Maldives President Abdulla Yameen invited a Chinese company to expand the country’s only airport to promote tourism, particularly from China and kicked out an Indian private firm to manage the airport. The 50-year lease of an island near the Malé airport to a Chinese firm was for tourism development. The small island nation has little to export except marine products. But that industry is encountering headwinds because the EU has revoked duty-free status for Maldivian seafoods.
It could be argued that criticisms against the BRI are more politically driven than based on economic reasoning.
The Western neocons do not like China’s rise, and will do all they can to sow doubts in the developing world against a rising China, to no avail.
1. China, once having been a developing land itseld, knows the dynamics full well, and did not go into giving debt with eyes closed.
2. When problems arise, the 2 partners will sit and solve them.
3. As the writer points out, none of the target govts seemed worried, despite the "experts" doomsday scenario.
4. What other use has China, sitting on a pile of cash, for this saving? Leave it in the banks to lose value? So Chinese know that even if they lose this all nothing is lost.
5. Investing in poor economies give higher returns. But even if the projects are not as profitable as expected, goodwill will be gained. Good deeds never go waste.
A win-win for China and its partners. Corporate Capitalist West go eat your heart out.
It is important to note that none of the BRI "beneficiaries" have
– issued any kind of detailed reports on what the cost benefit is
– It seems to be more of if we build, they will come, mentality
– most non EU investments are in countries with weak governance structures so no oversight of what is being proposed.
– Vanity projects – Sri Lankan port is a classic case and the port handover was widely criticized in the country
– pakistanis are still struggling to understand what they are getting into and the Govt refuses to clarify in meaningful detail. Those who question are dubbed anti national – witness the challenges being faced by DAWN.
– The European assets are mostly distressed assets from countries whose financial conditon and corruption levels are probably not much better than any third world country.
Lastly no competitive bidding so no one can say if they have got a fair cost.
Of course China can spend its money where and how it wants, who are we to tell them not to waste it, if indeed waste it is.
More wishful thinking gone mad. Good luck to S Koreans if they outsource the decision making
Sri lanka owns India a even more than it owns China. Chinese brought Sri lankan’s roads and ports, What did Indian brought Srilankans? civil wars:
From M.K. Bhadrakumar
"As for the Sri Lankan “debt trap”, the less said the better. The facts are as follows: In terms of donor-wise debt calcification, in the bilateral category, Japan ranks as the country to which Sri Lanka is indebted most – SL Rs. 486.8 billion; next comes India (SL Rs. 142.3 billion); and, China comes third (SL. Rs. 131.6 billion.) In fact, Japan and multilateral agencies (ADB, IDA and others) alone account for more than half of Sri Lanka’s total external debt. China’s share comes to less than 5 percent of the total external threat. Our pundits don’t even seem to be aware that Sri Lanka’s internal debt by far outstrips the country’s total foreign debt."
The primary reason of OBOB for China is to develop markets for its goods being the world’s biggest manufacturer of almost everything. This will not happen if it impoverish other countries included in this initiative. Conquest and colonization has long passed the world. We should all try to lift each other up.
Nothing pleases me more than an Indian downsizing China (or Pakistan for that matter).
They can not handle it, LOL. Ah only of closing eyes could make it disappear.
the neocon’s did the same in AFRICA when the CHINESE begun doing business ….ho ! they are colonizing ,exploiting ..this + that all lies …and every year the amount of trading with African countries double in $$$ !! Now they are trying to discredit the Belt+ Road I. …just can’t wait when the WORLD will destroy this EVIL mind set for ever …as they have a hiden agenda …bulling and WAR + WAR + WAR ??
Sharing – http://worldharmonyday.com/why-is-china-investing-in-the-world/
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Thank you for sharing your article and the links on China’ belt and Road with us, Sunny.
most criticisms is politically motivated. besides..as far as Beijing is concerned.. a throw of dice in a casino is still more preferable than to pile up more printed US ious.
Yes, I agree China’s financial help is good and benefitting the accepting countries. I wish to ask the author a question: Had China ever received financial help after 1979 from democratic countries?
I have met quite a few Chinese nationals on the net and all of them refused the idea that the Communist China had ever received any financial help from democractic countries. I went to the Chinese government online site to search. When I typed in "foreign aid to China", I got in return "China’s aid to foreign countries". These two phenomena testified to me that China had never received foreign financial help from democratic countries after 1979. Now I wish that, the author Mr Ken Moak or anyone else would answer my question above.
I am not aware of any foreign aid donated to China by the democratic countries after 1979. However, Japan, the US and Europe did sell China outdated and even useless technologies, but charged advanced technology prices. After China re-engineered the technologies, the democratic countries accused it of stealing.
Non-mainland Chinese in Hong Kong, Taiwan and to a lesser extent, those of Southeast Asia did invest in China, but only after having secured very attractive tax, labour and land cost incentives from China and markets in the West and Japan.
Ken Moak ….Thanks to Mr Moak. Your unawareness proved once again that many Chinese people do not believe that communist China had ever received foreign financial aid. But there is conflicting information in the West that Western democratic countries, including Japan, did give Communist China a lot of financial aid including free money and loans. For instance, such information is published here by the Japanese government: http://www.mofa.go.jp/policy/oda/region/e_asia/china/.
I believe other democratic countries have published the same kind of information. The information published by the UK says UK started giving financial aid to poor countries in 1960s, and in the year of 1980, started giving free money to communist China.
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