Bumps Along The New Silk Road: Are They As Big As We Think?

President Xi Jinping wasn’t exaggerating when he hailed it the “project of the century” at a Beijing summit in 2017. China’s Belt and Road Initiative (BRI) involves multi-trillion dollar investments in infrastructure development spanning 68 countries throughout Europe, Asia, and Africa, with the aim of promoting regional connectivity and economic growth. Given the diminishing hegemony of the US in the geopolitical sphere, China’s ambitious undertaking has major implications for China as well as the rest of the globe. Since its bold take-off in 2013, however, BRI’s image has begun to wane in the face of accusations made under international scrutiny, particularly by the West.

Sources: For External Government Debt Stocks by Official and Private Creditors: International Debt Statistics, World Bank, https://data.worldbank.org/products/ids. For External Government Debt Stocks by Chinese Creditors: Lucas Atkins, Deborah Brautigam, Yunnan Chen, and Jyhjong Hwang 2017. “China-Africa Economic Bulletin #1: Challenges of and opportunities from the commodity price slump,” CARI Economic Bulletin #1. China Africa Research Initiative, Johns Hopkins, http://www.sais-cari.org/data-chinese-loans-and-aid-to-africa/.

One of the most contentious subjects of debate surrounding BRI is “debt-trap diplomacy.” With many of BRI’s loan recipients succumbing to soaring debt in recent years, Western powers are keen to warn that this stems from a grand Chinese scheme to capitalize on debt-based relations with developing countries. While these countries are certainly mired in debt, it’s a stretch to lay the blame for such issues on China under the “debt-trap” label, particularly when Western institutions are themselves culpable for the very behavior they condemn. Take the case of Zambia’s mounting national debt, which a September 2018 report by the British specialist publication Africa Confidential ascribes to allegedly unsustainable Chinese loans. This claim grossly exaggerates the extent of China’s impact on Zambia’s debt crisis, especially given that China accounts for a small part of sub-Saharan Africa’s aggregate debt sources (see chart below). According to statistics presented in The Economist in the same month, China likely holds a quarter to a third of Zambia’s external debt; while these figures aren’t small, they’re comparable to other creditors such as the US, World Bank, and the IMF, which for decades have been providing unsustainable loans to countries, plunging them into debt, and opening up their economies to international investors (primarily from Western countries). The Africa Confidential report further claims that Zesco—Zambia’s state-owned national power company—has been in talks regarding repossession by a Chinese company. The Zambian government refuted such allegations and denied the existence of any plans for Zesco’s privatization. It’s a tragic irony that the IMF and World Bank pushed for the privatization of the very same company in the 1990s and early 2000s.

Regardless of China’s contribution to the debt equation, it certainly hasn’t been profiting from such economic quandaries. According a March 2018 report released by the Center for Global Development, from 2001 to 2017, China restructured or waived loans for 51 debtor nations—the overwhelming majority of BRI participants—without taking possession of state assets, and a significant number have already undergone multiple restructurings. In fact, even in Venezuela—the single largest Chinese debtor country—a Chinese takeover of state flagship assets still hasn’t occurred, despite the fact China has become a victim of its lending: since the collapse of oil prices in 2014 and subsequent extreme oil-price volatility, Venezuela’s oil sector has floundered, which has not only hampered Venezuela’s ability to make loan repayments, but led to significant increases in China’s massive oil import bill. Conversely, for BRI countries like Sri Lanka that have experienced Chinese takeover of state assets, the process was reported to be peaceful and even carried out voluntarily. When critics denounced China’s repossession of Sri Lanka’s Hambantota Port as part of a debt-trap conspiracy, Karunasena Kodituwakku, the Sri Lankan ambassador to China shot down such accusations and emphasized that the proposal for handing over the port came not from Chinese government, but the Sri Lankan government; as other Sri Lankan representatives have noted, it made sense for Sri Lanka to welcome Chinese investment in the port, given that the vast majority of commercial shipping arriving into it was from China. Kodituwakku even conveyed his optimism about the port’s long-term prospects as a launchpad for Sri Lanka’s role in an emerging Asia.

Through the Western lens, another major allegation increasingly made against BRI is the “String of Pearls” theory. The term originated in a 2005 US study by defense contractor Booz Allen Hamilton, asserting that China’s increased control of ports—“pearls”—along the Indian Ocean is a maneuver to militarily dominate the region. The assumption is that China would develop commercial facilities to support later military use, with the ultimate objective of carrying out major combat operations against India. Given the Indian Ocean’s rising global significance, geopolitical motivations are not inconceivable, but a consideration of available information suggests otherwise. As concluded in a 2014 report by a team of analysts at the US National Defense University, the current operations of the People’s Liberation Army Navy (PLAN) are characterized by its “light footprint” and emphasis on providing logistics support to overseas security missions. None of the suspected “pearl” sites, including Hambantota Port, have become military bases or facilities; according to Ambassador Kodituwakku, Sri Lanka has made it very clear to China that the port is simply an economic venture, and China has never asked to use it for anything else. Furthermore, the ports are subject to an international legal framework mandating that they remain under the sovereignty of the coastal state, as opposed to the port operator. All facts considered, PLAN’s behavior is not consistent with that of a country preparing a platform for massive conflict in the Indian Ocean. As indicated in the 2014 report by the National Defense University, even if China were to harbor such ideas, the “String of Pearls” model lacks the robust logistics infrastructure to support the needs of a large Chinese air and naval force focused on combat operations.

Given that China is addressing economic gaps that many traditional powers have failed to fill over the centuries, it perhaps deserves more credit and recognition for its ambitions with BRI. That said, China must understand the limitations to BRI’s potential if it lacks the endorsement of other major economic powers, especially now that China’s economy is showing signs of slowing: in the fall of 2018, China’s GDP growth decelerated to 6.5 percent, its slowest pace since 2009. Aside from trade friction with the US, China is struggling to tackle domestic debt problems; according to 2018 estimates by the Institute of International Finance (IIF), China’s debt to GDP ratio currently sits at 300 percent, which is nearly three times that of the US. An international lending spree certainly doesn’t relieve China’s difficulties, and at some point down the line, collaboration with other global powers may become the only economically viable option for realizing China’s BRI vision. If China co-lends with Western institutions and offers competitive tenders to all comers, BRI projects would likely benefit not only from increased financial security, but greater transparency and reduced risks for misappropriation of funds.

No matter how you slice BRI, the campaign is far from perfect. Since its outset, more protests have erupted, biodiversity in affected regions has plummeted, and in some areas, entire communities have lost their homes or traditional livelihoods. We might thank BRI critics for highlighting these sorts of issues and helping foster constructive improvements. However, one mustn’t lose sight of the countless new jobs, modes of enhanced transportation, and improved access to basic utilities that BRI has brought along with its development. Perhaps most importantly, we should be mindful of China’s demonstrated efforts to address its understood problems. For instance, after receiving criticism internationally for the financially unsustainable nature of certain BRI projects, China has demanded a study on the commercial viability of various projects, such as Kenya’s Standard Gauge Railway project, before providing further funding. For our part as observers, we should acknowledge and welcome this progress, rather than simply probe for shortcomings.

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