Chinese engineers are drilling their way through the green hills of Laos, clearing a path for a railway that one day may traverse South-East Asia. Each time they complete a tunnel—at least three times in the past month—they hold a brief ceremony, waving Chinese flags for the cameras. They are celebrating not just their engineering success but also the evidence before them that the Belt and Road Initiative (bri), China’s global infrastructure-building scheme, is making progress. The full railway is a long way off. Work has barely begun in Thailand, the next link. But the section in Laos should be in use by 2021.
It will be a test of what many see as a big economic danger of the bri: that it will saddle poor countries with unmanageable debts. China insists that its tens of billions of dollars in loans and investments are fostering global prosperity—a message that it is sure to repeat to foreign leaders attending the second Belt and Road Forum, which takes place from April 25th to 27th in Beijing (pictured is a floral display marking the event). But worries about the cost of the bri, a project closely linked with President Xi Jinping’s foreign policy, have become widespread. Malaysia, Pakistan and Sierra Leone are among a growing list of countries that have delayed or scrapped China-led projects.
There are three main concerns about the bri’s financial consequences. The most extreme is that the scheme involves what is pithily described as “debt-trap diplomacy”. In this view, China is deliberately overloading weak countries with loans; when they buckle, it seizes their assets and influences their politics. This idea has featured in speeches by some American officials, including the vice-president, Mike Pence, who see bri as an attempt to undermine America’s global influence.
Yet the investments funded by Chinese cash are not in China, so China has limited ability to grab assets when governments default. If it pushes too hard it may merely stoke antipathy. Instead, it usually responds by reducing the amount of money that debtors have to repay. Countries with longer records of lending to poor countries often do the same: the Paris Club of creditors was formed in 1956 to devise ways of reducing defaulters’ debt loads. The Centre for Global Development, a think-tank in Washington, has counted more than 80 cases between 2000 and 2017 in which China provided relief to its debtors overseas.
An oft-cited example of China’s supposedly predatory approach involves Hambantota, a Sri Lankan port which has flopped commercially. In 2017 Sri Lanka handed control of the port to a state-owned Chinese company on a 99-year lease. But Deborah Brautigam of Johns Hopkins University says that of more than 3,000 China-financed projects that she and others have tracked, Hambantota is the only one that is used in support of the debt-trap theory. It is the exception, not the rule.
What it lacks in malevolence, the bri may make up in clumsiness. This is the second concern: that China is lending to vulnerable states without sufficient caution. Take a group of 37 poor countries monitored by the imf. Loans from traditional bilateral lenders, including America and Japan, have declined from 7% of the debtors’ gdp to 2% over the past decade. Loans from China, by contrast, have soared from virtually nothing to 4%.
It is welcome that China is supporting hard-up nations. But its enthusiasm generates foolhardiness. David Dollar of the Brookings Institution in Washington has found that Chinese development lending appears indifferent to political and economic risks. The Centre for Global Development has identified eight countries drowning in red ink that could be further swamped by bri projects (see chart). A report in December released by Peking University ranked 94 bri countries based on measures such as the quality of their financial regulation and their openness to trade. Pakistan came second to last. That is awkward for China: Pakistan may receive as much as $60bn in bri loans, which would make it the biggest recipient of all.
There is truth to claims that bri credit can be ruinously expensive. Consider China Eximbank’s lending to Kenya for the Nairobi-Mombasa railway. Local reports say half the $3.6bn loan was priced 3.6 percentage points above a floating market interest-rate. That is high for a poor country. It is just one of many such loans by Eximbank, which said this week that its outstanding bri-related credit was more than 1trn yuan, or nearly $150bn.
The bri’s success will depend on whether Chinese lenders can tighten their procedures for assessing creditworthiness while making their loans more affordable. There are some promising signs. This week’s forum in Beijing is expected to stress the need for bri debt to be sustainable. In the case of the railway in Laos, caution is already evident. The project involves $6bn of Chinese lending, which is about one-third of the gdp of Laos. So a joint venture has been created. It draws 70% of its capital from China and 30% from Laos. To fund its portion, Laos took a $465m loan from Eximbank. The loan was generous, according to local reports: it matures in 35 years at a 2.3% annual interest rate, well below the commercial price of such debt. Laos has five years before it has to begin making repayments. That is the kind of concession that it might have got from the World Bank. China may offer such generous terms more frequently. Last year it set up an agency to oversee its foreign aid, in part to turn the bri into a more co-ordinated development programme.
But this points to another concern that will be harder for China to deal with because it relates to the very nature of the bri: its sheer ambition. Potential benefits look impressive. A recent study by the World Bank concluded that bri transportation projects could lift global gdp by 3%. That is larger than the benefits that are usually shown to be generated by free-trade agreements. It could yet bear out China’s notion that Westerners (save Donald Trump) just want to lower tariffs, whereas China is trying to build the roads that let trade happen.
This, though, is where the risks come in. The World Bank’s rosy analysis assumes that bri projects are completed and work efficiently. The scale of the effort is a huge challenge, and such projects are a magnet for graft. Vast sums are being spent quickly in badly run places. The railway in Laos ought to make the landlocked country more accessible. But for it to prove effective, much more will be needed: better roads to link it to existing transport, new urban centres around the stations and freer trade with other countries.
China cannot achieve this alone, but its often overweening approach to the bri has alienated potential partners. America, India and Japan want little to do with it. One reason is that China is, in effect, asking others not only to sign up to its infrastructure plans but also to endorse Mr Xi’s worldview. It does not help that China reveals so little about its lending and that contracts go mainly to Chinese firms.
Some analysts in China have started to express unease. Economists at the Chinese Academy of Social Sciences, a think-tank, argued in a paper last year that the government must entice other countries to back bri projects in order to share the risks. Otherwise, it could be China that finds itself trapped. Conservative estimates are that China will spend $1trn within the next decade on its monumental scheme—about as much as it holds today in American government bonds. Mr Xi would be wise not to let such an outlay turn sour.