Speed Bumps on the Silk Road

posted by Karim Pakravan on September 15, 2018 - 3:53pm

President Xi JinPing of China recently celebrated the fifth anniversary of the Belt & Road Initiative (BRI), the centerpiece of China’s global projection of economic, political and financial power.  However, the BRI project is meeting significant obstacles and seems in urgent need of a reboot.  Significantly, the main sources of criticism and reevaluation come from some of the major beneficiaries of the project.

The BRI, aka Silk Road project is one without precedent, covering 68 countries in four continents (45 in the Eurasian landmass alone), with an estimated investment of $1 trillion-plus over the next few years.  The focus will be South East, Central and South Asia. Moreover, the project is as much political and strategic as it is economic/financial, designed to consolidate the position of China as a superpower co-equal to the United States. In addition, many of the transportation infrastructure projects, in particular ports, are dual use and can be used to project Chinese military force in the Indian Ocean.

The main issues facing the BRI are as follows:

The BRI projects are financed mainly through loans from Chinese banks, and have led to unsustainable levels of debt in the recipient countries. Moreover, many of these countries were already considered to be high-risk from a country risk point of view, a situation made worse by the BRI-related borrowing. 
The impact on the Chinese banking system is unclear, since the banks have not released any information regarding their exposure to the projects, Nevertheless, there is evidence that much of the financing is coming from the Chinese policy banks.  Chinese banks are already saddled with massive non-performing loans, and the BRI project only adds to a difficult position.

The projects are poorly designed.  A recent study by RWR Advisory Group, a Washington DC consultancy, found that projects worth $419 billion (or one-third of the total by value) are facing operational or financial problems. The projects are organized along six major “economic corridors” in Eurasia. A recent CSIS study showed that for most of the corridors, projects are unrelated to the strategic aims for that corridor. There are two reasons for this state of affairs. First, within China itself, interest groups and provincial governments are repackaging existing projects under the BRI rubric to participate in the bonanza and build political capital.  Second, there is a lack of control and coordination in the multi-country economic corridors, where projects area also driven by local economic interests.

The BRI is vulnerable to political changes.  In two recent examples, Pakistan and Malaysia.

In Malaysia, most projects are significantly overbudget, with few benefits for the local companies or population. Furthermore, they are under a cloud of corruption and mismanagement, having being awarded under the previous Prime Minister Najib Razak, who is currently being prosecuted on massive corruption charges. The new Malaysian Prime Minister, Mahathir, has cancelled three major pipeline projects worth almost $3 billion, and the East Coast Rail Link, the BRI flagship project in Malaysia, is being reviewed.  A major tourism/residential hub is also being nixed.
The new populist Prime Minister of Pakistan, Imran Khan, has announced that it plans to review or renegotiate agreements made under the $62 billion China Pakistan Economic Corridor, which has left the country under the burden of a crippling debt.  Currently, Pakistan is facing yet another financial crisis, and is negotiating its thirteenth IMF program. The IMF is adamant that monies from an IMF deal cannot be used to service Pakistan’s Chinese debt.

All in all, China is learning in a very predictable way that building an empire is not easy. In 1421, a Chinese armada under Admiral Zeng He sailed to Africa and established the first Chinese global presence. After his return, the new Chinese emperor nixed China’sglobal ambitions by ordering the ships burned.While we don’t predict the same fate for the BRI, it is still the case that the Chinese ambitious global push is in need of a major rethink. Scaling back or cancelling projects, and improving transparency increased by bringing in multilateral financial institutions with a long project management history could be the first steps in this direction.