China’s Belt and Road: Growing Pains

China’s Belt and Road celebrated its fifth anniversary in September. More accurately, the Silk Road Economic Belt turned five, as that was the specific project President Xi Jinping announced during a September 2013 visit to Kazakhstan. Xi unveiled the 21st Century Maritime Silk Road nearly a month later, on October 3, 2013 in a speech before the People’s Representative Council of Indonesia.

Since then, the concept of the Belt and Road Initiative (BRI) has soared to heights unprecedented for a foreign policy strategy in modern China. The BRI features in nearly every speech given by a Chinese official abroad. Last fall, it was even enshrined in the Chinese Communist Party (CCP) constitution.

Despite – or perhaps because of – China’s heavy emphasis, however, the BRI has run into problems recently. China’s grand ambitions risk being overshadowed by a far more mundane worry: debt. 

In December 2017, Sri Lanka gave up on trying to repay loans it had taken out for the Chinese-built Hambantota port, which has yet to prove profitable. In lieu of handing over the cash, Colombo simply signed the port over to Chinese control on 99-year lease. That set off a firestorm of criticism overseas about China’s so-called “debt diplomacy” and sparked soul-searching in other Asian capitals, as governments weigh the cautionary tale of Hambantota against their need for infrastructure funding.

As Philippine Vice President Leni Robredo put it, “Our fear is we might get stuck in a debt trap like the one experienced by Sri Lanka.” She’s far from alone in explicitly citing Sri Lanka’s agreement with China as a direct cause for concern.

Those concerns are particularly acute when new governments come to power and take a hard look at deals forged by their predecessors. In Malaysia, new Prime Minister Mahathir Mohamad has made no secret of his opinions. Speaking from China during a visit in August, Mahathir issued a broadside against the unsustainable debt that comes with Chinese mega-projects. He warned China against pursuing “a new version of colonialism,” even while cleverly hinting that Beijing could prove its benign intentions by offering Malaysia a way out of its looming fiscal crisis. But first Mahathir began fixing the problem on his own – by cancelling projects worth over $20 billion, including the East Coast Rail Link, a key piece of China’s vision for an intraregional railway.

Far more surprising than Mahathir’s outspoken objections is the hesitancy coming from Pakistan. Not only is Islamabad an “iron brother” to Beijing, but the branch of the BRI known as the China-Pakistan Economic Corridor (CPEC) is the signature project of the entire endeavor so far. And yet, despite relentlessly upbeat government statements over the past few years, there have been whispers of concern from Pakistani economic analysts about the country’s ability to fund the reported $60 billion in projects.

So it made headlines when it seemed that one Pakistani minister – part of the newly installed Pakistan Tehreek-e-Insaf government – was in agreement with the critics. The Financial Times quoted Abdul Razak Dawood, the Pakistani member of cabinet responsible for commerce, textiles, industry, and investment as saying that “[t]he previous government did a bad job negotiating with China on CPEC – they didn’t do their homework correctly and didn’t negotiate correctly so they gave away a lot.”

Some caveats are needed here. First, the Pakistani government immediately downplayed the comments, saying it rejected the FT report. “CPEC is a national priority,” a Commerce Ministry statement said. “… There is complete unanimity on the future of CPEC.” And second, Dawood’s textiles portfolio is important to keep in mind. The Pakistani textile industry has been hard hit by the influx of cheaper Chinese imports, and thus that sector is a far greater critic of China-Pakistan trade deals than the business community or government as a whole.

Still, the fact that the comments from Dawood echoed similar questions often asked about CPEC – namely, is it really the best deal for Pakistan? – was telling.

Meanwhile, another crown jewel BRI project hit a snag recently in Myanmar. That country was an early dissenter when it comes to backtracking on Chinese mega-projects, famously suspending construction on the Myitsone Dam in 2011. But now Myanmar is backpedaling on a project far more crucial to China’s interests: Kyaukpyu port. Thanks to a pipeline already running from Kyaukpyu to Kunming in China’s Yunnan province, Beijing sees the expansion of the corresponding port in Myanmar as its ticket to energy security, as it would allow oil shipments from the Middle East to reach China without navigating the chokepoint of the Malacca Strait.

Yet even this project has come under fire recently for – you guessed it – financial reasons. Kyaukpyu port is expected to cost an eye-popping $7.3 billion, and an associated special economic zone will tack on another $2.7 billion. It’s not clear exactly what stake Myanmar’s government would have in each project, but by some estimates the investment required from Myanmar – likely to be funded by Chinese loans – could amount to 5 percent of its GDP.

With those concerns in mind, in June, Myanmar’s government announced it would review the Kyaukpyu projects. In August, Myanmar decided to downgrade plans for Kyaukpyu port. According to Deputy Finance Minister Set Aung, it will cut the port from a planned 10 berths to only two. Sean Turnell, an economic adviser to Myanmar’s State Counselor Aung San Suu Kyi, told the South China Morning Post that the new cost would be “around $1.3 billion, something that’s much more plausible for Myanmar’s use.”

How is China responding to the growing chorus of concerns regarding Xi’s signature foreign policy program? Even while Chinese officials vocally defend the merits of the BRI and deny accusations of “debt diplomacy,” there are signs that Beijing is shifting its approach, albeit subtly. China’s goal is to keep the broad outlines of the BRI intact, but make enough tweaks around the margin to fully convince potential partners of the merits.

Xi himself laid out the contours for an improved BRI while speaking at a high-profile Chinese government seminar on the Belt and Road on August 27. After looking back at the past five years, Xi emphasized that the BRI was ready to enter the next stage of its development. That stage, Xi said, should be “high quality,” marked by “healthy” development and balanced trade, and responsive to local needs.

“We need to pay attention to… prioritizing the needs of the other party and implementing projects that will benefit the local people,” Xi said. In other words, China should take care that its BRI projects are what host governments actually want and need. As an example of the new framing, in highlighting statistics on the BRI Xi spoke not only of China’s trade with ($5 trillion), and investment in ($60 billion) BRI countries, but also tallied the jobs created in countries hosting Chinese projects (over 200,000, according to Xi.)

When it comes to evaluating the Belt and Road, the example of Sri Lanka is indeed instructive – as long as we remember that the Hambantota contract is not the whole story. In some ways, Sri Lanka set the pattern now being followed by Malaysia and Pakistan: a new government came to power and immediately started rethinking previously signed deals with China. But pulling out of the BRI is easier said than done. Like Mahathir today, in 2015 new Sri Lankan President Maithripala Sirisena sought to backpedal on expensive deals with China, but a combination of diplomatic and financial pressure – including threatened penalties for delaying work after contracts had been signed – forced his hand.

As a sign of the Sirisena government’s internal deliberations, the Chinese-invested New Colombo Port project was suspended for nearly a year before construction was allowed to restart in 2016. Apparently, after taking a hard look, the Sirisena administration decided the $1.4 billion port project was worth pursuing after all – or at least that scrapping it was not worth the cost.

In accordance with that decision, Sri Lankan Prime Minister Ranil Wickremesinghe recently downplayed the threat posed by Chinese loans, saying he didn’t believe Sri Lanka was caught in a debt trap.

“We are dealing with China. There are a fair amount of Chinese investments,” Wickremesinghe told CNBC in September. “There are China loans… I can't see it as a threat.”