China’s Belt and Road tempts states, but comes with risks

Gulf Times Business - - BUSINESS -

China’s mas­sive “Belt and Road Ini­tia­tive” build­ing push may cre­ate debt risks but is also re­spond­ing to ma­jor in­fra­struc­ture gaps in Asia and could boost global trade, World Bank of­fi­cials say.

The rel­a­tively up­beat assess­ment of a some­times con­tro­ver­sial pro­gramme comes de­spite the debt cri­sis now faced by Pak­istan, a re­cip­i­ent of mas­sive Chi­nese loans.

China launched the am­bi­tious plan in 2013 un­der Pres­i­dent Xi Jin­ping, seek­ing to link Asia, Europe and Africa with a net­work of ports, high­ways and rail­ways.

It has dis­persed tens of bil­lions of dol­lars in loans, of­ten to highly in­debted coun­tries, spark­ing crit­i­cism of Bei­jing for ev­ery­thing from “debt en­trap­ment” to ex­clud­ing lo­cal labour from projects funded by the plan.

But, meet­ing in Bali this week, of­fi­cials from the World Bank and In­ter­na­tional Mone­tary Fund said the BRI filled im­por­tant gaps, while ac­knowl­edg­ing con­cerns.

“There are huge op­por­tu­ni­ties: im­proved in­fra­struc­ture means more trade, more in­vest­ments, higher growth, bring­ing in land­locked re­gions,” said Caro­line Freund, the Bank’s di­rec­tor of trade, re­gional in­te­gra­tion and in­vest­ment cli­mate.

“But there are chal­lenges as well... There are en­vi­ron­men­tal and so­cial risks, there are is­sues to do with pub­lic pro­cure­ment, and sus­tain­ing pub­lic debt be­comes an is­sue be­cause these projects are ex­pen­sive,” she added.

The World Bank es­ti­mates that BRI-funded in­fra­struc­ture could boost trade among coun­tries in­volved by 3.6%, and global trade some 2.4%.

And of­fi­cials say it is of­fer­ing fund­ing in ar­eas where it is sorely needed.

“Sev­eral coun­tries, es­pe­cially in Cen­tral Asia and Cau­ca­sus have ben­e­fit­ted... in or- der to im­prove their in­fra­struc­ture as well as also to pro­mote ad­di­tional in­ter­re­gional trade,” said Ji­had Azour, the IMF’s di­rec­tor of the Mid­dle East and Cen­tral Asia depart­ment.

“Cen­tral Asia will ben­e­fit from any ad­di­tional in­vest­ment that will lead to greater in­te­gra­tion.”

He called how­ever for “care­ful” spend­ing, urged “trans­par­ent” pro­cure­ment pro­cesses, and warned that coun­tries should main­tain “their debt sus­tain­abil­ity”.

In the last five years, China’s di­rect in­vest­ment un­der BRI has sur­passed $60bn, leav­ing sev­eral re­cip­i­ents vul­ner­a­ble.

The Cen­tre for Global De­vel­op­ment, a think-tank, says BRI in­vest­ments have “sig­nif­i­cantly” in­creased the risk of debt crises in eight coun­tries: Mon­go­lia, Laos, Mal­dives, Mon­tene­gro, Pak­istan, Dji­bouti, Ta­jik­istan and Kyr­gyzs­tan.

But Freund said they were the ex­cep­tion, and Chi­nese loans re­mained a rel­a­tively small part of the to­tal debt bur­dens of most coun­tries in­volved in the BRI.

“Most of the coun­tries bor­row­ing from China in this BRI are in a pretty sound fis­cal con­di­tion and are not in great risk of debt dis­tress,” said David Dol­lar, se­nior fel­low at the Brook­ings In­sti­tu­tion and a for­mer World Bank of­fi­cial.

But for a small num­ber of coun­tries, there are “se­ri­ous con­cerns,” he ac­knowl­edged.

Among them is Pak­istan, which re­lied heav­ily on BRI fund­ing for a $54bn project link­ing its Gwadar port to China.

It now faces a bal­ance-of-pay­ments cri­sis and sent its fi­nance min­is­ter to Bali this week seek­ing an IMF bailout.

Ris­ing US in­ter­est rates are likely to make the sit­u­a­tion worse for many coun­tries, be­cause BRI loans are mostly de­nom­i­nated in US dol­lars.

Loan re­cip­i­ents who fail to meet their obli­ga­tions can face se­ri­ous con­se­quences, with Sri Lanka forced to cede con­trol of a deep- wa­ter port fi­nanced by the BRI to Bei­jing. In Au­gust, Malaysia acted pre-emp­tively, shelv­ing three China-backed projects, in­clud­ing a $20-bil­lion rail­way line, that it said it could no longer af­ford.

“We fully re­spect Malaysia’s de­ci­sion­mak­ing, based on their sus­tain­abil­ity sit­u­a­tion,” Chi­nese Fi­nance vice-min­is­ter Zou Ji­ayi told a panel at the Bali meet­ing.

“The Chi­nese govern­ment at­taches great im­por­tance to the sus­tain­abil­ity, we are the cred­i­tor,” she added.

But, she em­pha­sised, the ini­tia­tive is not an aid pro­gramme.

“It’s not like the Mar­shall plan, it’s a de­vel­op­ment ini­tia­tive based on the mar­ket mech­a­nisms, and driven by mar­ket forces,” she said.

Bei­jing’s com­mit­ment to mar­ket forces has been ques­tioned by some how­ever, with most projects fi­nanced with BRI money awarded to Chi­nese com­pa­nies and built with Chi­nese labour.

A French trea­sury re­port re­leased this week praised the BRI for con­tribut­ing to ar­eas with se­ri­ous in­fra­struc­ture short­falls, but noted just 3.4% of projects fi­nanced by China were awarded to for­eign com­pa­nies.

And in Pak­istan, it said, 91% of the rev­enue gen­er­ated by the Gwadar port project over the next 40 years will ben­e­fit China.

Zou said the over­whelm­ing re­liance on Chi­nese labour was sim­ply “cost-ef­fec­tive,” but ac­knowl­edged Bei­jing could en­cour­age Chi­nese com­pa­nies to “take more ad­van­tage of the lo­cal labour.”

The pro­gramme has also been crit­i­cised for fund­ing po­lit­i­cally-driven “white ele­phants” that are struc­turally un­sound or largely use­less.

Speak­ing in Bei­jing ear­lier this year, IMF Chief Chris­tine La­garde praised the “early in­di­ca­tions of progress” un­der the ini­tia­tive, but also warned of the need to en­sure “that Belt and Road only trav­els where it is needed.”

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