China is building ties to some of the world’s most authoritarian, financially opaque, and economically backward countries. Rather than exposing itself to massive risks, Chinese should instead seek to repair relations with the West

China is building ties to some of the world’s most authoritarian, financially opaque, and economically backward countries. Rather than exposing itself to massive risks, Chinese should instead seek to repair relations with the West

Critics often claim that China is using its massive “Belt and Road Initiative” as a form of coercive “debt-trap diplomacy” to exert control over the countries that join its transnational infrastructure investment scheme. This risk, as Deborah Brautigam of John Hopkins University recently noted, is often exaggerated by the media. In fact, the BRI may hold a different kind of risk – for China itself.

At the recent BRI summit in Beijing, Chinese President Xi Jinping seemed to acknowledge the “debt-trap” criticism. In his address, Xi said that “building high-quality, sustainable, risk-resistant, reasonably priced, and inclusive infrastructure will help countries to utilize fully their resource endowments.”

This is an encouraging signal, as it shows that China has become more aware of the debt implications of BRI. A study by the Center for Global Development concluded that eight of the 63 countries participating in the BRI are at risk of “debt distress.”

But as John Maynard Keynes memorably put it, “If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has.” In the context of the BRI, China may turn out to be the banker who is owed a million pounds.

In particular, China may fall victim to the “obsolescing bargain model,” which states that a foreign investor loses bargaining power as it invests more in a host country. Infrastructure projects like those under the BRI are a classic example, because they are bulky, bolted to the ground, and have zero economic value if left incomplete.

Unsurprisingly, some BRI partner countries are now demanding to renegotiate terms, and typically after the projects have started. China may be forced to offer ever more favorable concessions in order to keep the projects on track. In mid-April, for example, Malaysia announced that a major BRI rail project, put on hold by the government after last year’s election, would now go ahead “after renegotiation.” According to media reports, the costs of construction were reduced by as much as one-third. Other BRI countries will probably also ask for debt forgiveness and write-offs, the costs of which will ultimately be borne by Chinese savers.

The BRI may well have additional hidden costs for China down the road. For starters, it is extraordinarily difficult to make money on infrastructure projects. There is a widespread belief that infrastructure investment powers economic growth, but the evidence for this is weak. In fact, China itself built much of its current infrastructure after its growth had taken off. In the 1980s and 1990s, for example, China grew much faster than India despite having a shorter railway network. According to the World Bank, in 1996 China had 56,678 kilometers (35,218 miles) of rail lines, and India had 62,915 kilometers. Chinese growth was not jump-started by infrastructure, but by reforms and human capital investments. If growth fails to materialize in BRI countries, Chinese companies may end up bearing the costs.

Furthermore, many of China’s BRI partner countries are risky – including Pakistan, a major recipient of investments under the scheme. In addition to its high political, economic, and default risks, the country also scores poorly on education indicators. According to one report, Pakistan ranked 180th among 221 countries in literacy. This is a potential red flag for Chinese investments in Pakistan, because research suggests that investments in physical infrastructure promote growth only in countries with high levels of human capital. China itself benefited from its infrastructural investments because it had also invested heavily in education.

Nor should the BRI be compared to the Marshall Plan, the US aid program to help rebuild Western Europe after World War II, as an example of how large-scale investment projects can boost growth. The Marshall Plan was so successful – and at a fraction of the BRI’s cost – because it helped generally well-governed countries that had been temporarily disrupted by war. Aid acted as a stimulus that triggered growth. Several of the BRI countries, by contrast, are plagued by economic and governance problems and lack basic requirements for growth. Simply building up their infrastructure will not be enough.

Finally, the BRI will probably further strengthen China’s state sector, thereby increasing one of the long-term threats to its economy. According to a study by the American Enterprise Institute, private firms accounted for only 28% of BRI investments in the first half of 2018 (the latest data available), down by 12 percentage points from the same period of 2017.

The BRI’s massive scale, coupled with the lack of profitability of China’s state sector, means that projects under the scheme may need substantial support from Chinese banks. BRI investments would then inevitably compete for funds – and increasingly precious foreign-exchange resources – with China’s domestic private sector, which is already facing a high tax burden and the strains of the trade war with the US.

Moreover, Western firms, an important component of China’s private sector, are retreating from the country. Several US companies, including Amazon, Oracle, Seagate, and Uber – as well as South Korea’s Samsung and SK Hynix, and Toshiba, Mitsubishi, and Sony from Japan – have either scaled down their China operations or decided to leave altogether. Partly as a result, US foreign direct investment in China in 2017 was $2.6 billion, compared to $5.4 billion in 2002.

This is a worrisome development. Through the BRI, China is building ties to some of the world’s most authoritarian, financially opaque, and economically backward countries. At the same time, a trade war, an ever-stronger state sector, and protectionism are distancing China from the West.

China has grown and developed the capacity to undertake BRI projects precisely because it opened its economy to globalization, and to Western technology and knowhow. Compared to its engagements with the West, the BRI may entail risks and uncertainties that could become problematic for the Chinese economy. As the Chinese economy slows down, and its export prospects are increasingly clouded by geopolitical factors, it is worth rethinking the pace, scope, and scale of the BRI.


Yasheng Huang is International Program Professor in Chinese Economy and Business and Professor of Global Economics and Management at the MIT Sloan School of Management.  Copyright: Project Syndicate, 2019, and published here with permission.

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What the good Prof seems to have missed, if I have understood the article correctly, is that China is not much interested in the governance, culture or human capital of the Third World countries in which it is building infrastructure. The key part of Emperor Xi's sentence (presumably verbatim) is:

help countries to utilize fully their resource endowments.

Which to my cynical old eye, means 'We are gonna dig up and cart home all yer Useful Resources. Please say Thank You.'

Because bad governance, low human capital, and shocking human rights histories don't actually matter much if the 'full utilization of resources' is largely automated as to method, guarded over by one of the biggest armed services in the world, and carried out by a country with long and wide experience in handling fractious minorities. Ask a Uighur or a Tibetan if this sounds a leetle OTT.

So the allegation that the BRI extension is to countries with the unappealing qualities noted - authoritarian, financially opaque, and economically backward - in response to which revelation the author clearly intends the audience to reel back in horror and demand - well, something to make them feel a bit better, is not at all the Bug that the author perceives.

It's a key Feature.....

Exactly, as you say in respect of UBS Australia lending PNG $US 1.2 bn.

"They would have seen this as a scam, a real professional scam. Because everybody know of the state's financial vulnerability, and the lack of cash flow to pay for that loan. Yet they created a monster, so that within a matter of months it would fall into default, and then you foreclose on the asset, cover yourself. But what is the people of PNG left with? Nothing, except a debt of 3 billion kina."

Link

Breaking news: - Papua New Guinea's prime minister, Peter O’Neill, resigns

I see waymad's point but I was also intrigued by the author offering the idea that all that debt might bite China rather than givethem control.
Who is the tiger and who has the tail will be interesting to see. But always China plays the long game.

It could get interesting if some of these tin pot dictatorships decide not to pay and just nationalise the infrastructure. What is China going to do? Invade?

African nations have some experience in kicking out colonist, though usually to mutual detriment. I agree it could get interesting especially as the Islamification of Africa continues apace.

""China is using its massive 'Belt and Road Initiative' as a form of coercive 'debt-trap diplomacy' to exert control over the countries that join its transnational infrastructure investment scheme.""
and
"" the BRI countries, by contrast, are plagued by economic and governance problems and lack basic requirements for growth.""
and from the New Zealand China Council website
""In March 2017, New Zealand and China signed a non-binding Memorandum of Arrangement (MoA) under which the countries agreed to work together in specified areas including upgrading the FTA, expanding trade and investment and to develop a pathway for cooperation and exchanges to support the BRI.""

What does it all mean for Kiwis?

GUBO

Had to look that acronym up and now wish I hadn't. I don't disagree with you.

It's the scant regard for the environment that bothers me as much, if not much more, than anything else.

This author is really struggling to find ways that are in any way believable.
I do not believe that China is benevolent in this regard.
If countries nationalised the assets expect a tank or two to start rolling!

They would have no choice but to severely punish the first country that defaulted - make it an example for the others.

Kill the chicken - but make the Monkey watch.....

One Belt, One Straitjacket.

Meet the new aspiring empire on the block, same as the old ones.

China seems to be getting a bit of pushback from the neighbours, all of whom distrust them or hate them. In Vietnam they burned Chinese factories when the Chinese drilled for oil in Vietnamese waters (according to international convention, but not to China), evoking memories of the Chinese invasion in 1979. The Chinese burned Japanese factories over a disputed island between Taiwan and Japan. The Taiwanese live in fear of a Mainland invasion. Half of Korea is still in the hands of a Chinese puppet following China's invasion of the northern half of the country in 1950. People have long memories. As do the Japanese:
https://en.wikipedia.org/wiki/Kamikaze_(typhoon)

The Vietnamese I know are of the view the Vietnamese communist party has long been bought out by the Chinese communist party. Public criticism in Vietnam of China is not tolerated (unless permitted or sanctioned by the state). Chinese are buying up land all around Vietnam (land price inflation is a problem). Chinese are settling all around Vietnam - nobody seems to know how or why. Vietnam is flooded by cheap and unregulated Chinese food and other imports. Vietnamese who can afford to try avoiding Chinese food products due to health risks. Vietnamese fishermen are still periodically rammed and sometimes killed or injured in the south china sea by Chinese boats (Vietnamese language reports on social media). China appears to be working hard on its South East Asian hegemony. I would not be surprised if Laos and Cambodia are similar.

Far more a trap for China is their demographics. Dropping any child limits and a whole focus in family growth, support and nurturing , rather than pouring billions of Yuans /tonnes of concrete in distant lands?
Demographic decline is far more costly this century.

When digging trenches by spade was important then population mattered. Now every Kiwi uses 500 times the energy from fossil fuels that a single man could provide working 365 days per year. It was partly true in the past when Holland and England both with small populations conquered most of the world. As technology improves further and China's population begins to downturn then the average Chinese citizen will become wealthier. Compare with PNG where the population doubles every few years and they all get poorer. You may have noticed your friends with 1 or 2 kids are wealthier than those with 6 or more.

Wrong. Demographic decine is a winner - perhaps the best card in the pack. More resource per head versus less resources per head.

You weren't trained in conventional economics, were you? Ask for your money back - while it's worth something....

Demographic decline is probably the only thing that can save the human race, the climate and wild places, the ocean and other species. Vive la population decline say I.