The Beginning of the End

China’s One Belt One Road Initiative

A general view of the port facility at Hambantota, Sri Lanka, on Feb. 10, 2015.
A general view of the port facility at Hambantota, Sri Lanka, on Feb. 10, 2015.
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By Sebastian Lee

Since late 2013, the term “One Belt One Road” (B&R) has broken into the financial industry on a massive scale. Out of nowhere, almost every available major conference centre in the world’s most influential financial districts started to hold multilateral discussions on B&R. When you bumped into someone in the business world who didn’t know this term, he was considered outdated and would potentially lose chances of making money. In less than a year, even people not in the industry began to feel the impact: B&R was shown on TV and newspapers almost every day. It sounded like a giant infrastructure plan promoted by China to bring prosperity to the world. We all welcomed the ‘make-us-great-again’ moment.

Several years later, the reputation of B&R has taken a drastic turn due to scandalous debt crises emerging from some B&R recipient countries. Since then, it has faced significant headwinds. Around the globe, many countries have gradually shifted their policies from welcoming, doubting, to rejecting this initiative eventually. Not only do the countries’ leaders have to confront stronger scrutiny when they constantly grant domestic infrastructure projects to Chinese companies, but the projects’ over-leveraging (i.e. excessive level of borrowing to finance the projects) and the countries’ incapability to repay debt have also raised questions about the real agenda behind the B&R. Malaysia, the Philippines, Sri Lanka and many other countries from South and Southeast Asia have been under the spotlight in the new order of geo-economic and political structure pressed on them by the Chinese Communist Party (CCP).

Malaysia: Against ‘New Version of Colonialism’

Tun Dr Mahathir bin Mohamad, the newly elected Prime Minister of Malaysia, criticised the deals made with China by the former Prime Minister Datuk Seri Najib Tun Razak. At the press conference held with China’s premier Li Keqiang in Beijing this August, Mahathir called for fair trade and warned against a new form of colonialism. After a five-day tour in China, Mahathir publicly announced that three large projects will be cancelled. One of them is the East Coast Rail Link (ECRL) project undertaken by China Communications Construction Co Ltd (CCCC), with a potential $20 billion funding from China. Sarawak Report, an investigative journalism online resource, ran a story in 2016 with leaked documents showing a select deal inflating the cost of the ECRL project backed by incentives paid to Najib. The Star published an article on Nov 11 revealing that Najib and two former ministers are among six people facing corruption charges.

Back in March 2017, Mahathir also voiced out against the Melaka Gateway Port and Industrial Zone mega project that cost $11 billion. As the existing facilities in Melaka have not reached their full capacity, the new project’s necessity is called into question. Debtbook Diplomacy, a paper published by Harvard Kennedy School, pointed out that the enthusiasm surrounding the two mega project locations can be explained by two strategic access points: Malaysia’s east coast on the South China Sea and the west coast along the Strait of Malacca. The presence of China firms in Melaka Port could “eventually provide China with direct power projection capability across the Strait of Malacca, challenging US-Singaporean military predominance over the strait”. Controlling strategic locations in Malaysia could help China gain foothold in the South China Sea negotiation in opposition to ASEAN cohesion.

Philippines: End of Honeymoon

As one of the most active challengers over the South China Sea issue, the Philippines is the least likely to befriend China, among all the countries claiming rights over the disputed waters. Nevertheless, President of the Philippines Rodrigo Duterte has cast a series of unthinkable actions to distance himself from the US, a long-time ally, and started shaking hands with China since 2016. He made unprecedentedly frequent trips to China after he was elected. He did not come home empty-handed: China pledged to invest $24 billion in the Philippines with 27 signed deals. However, Bloomberg reported in July 2018 that the Philippines has, since October 2016, only completed one loan agreement with China worth $73 million to fund an irrigation project in Manila. Another two bridges in Manila, which are to be funded up to $75 million by China, are barely inaugurated. Gradually, the feeling of being “used by China” was widespread and Duterte was accused of undermining the country’s sovereignty, particularly by muting the government’s voice in the South China Sea issue during the period of China making blank investment promises.

Probably as a result of the humiliation and realisation of the CCP’s true intent, Duterte in August stood up against China’s aircraft and boats passing by the artificial islands in the disputed waterway. The sign of high tension between the two countries is palpable again. After a two-year attempt of extending the olive branch, the prosperous picture drawn by inviting China’s B&R to the Philippines has faded. After the honeymoon, it’s back to business as usual.

Sri Lanka: Brotherhood or Blood-borne

When Sri Lanka is in deep need for infrastructure development, a fierce fight within the government will unfold. One of the most critical subjects of discussion is whose money Sri Lanka should take to fund those projects and on what terms. Sri Lanka’s Prime Minister, who vigorously sought support from Japan and India instead of China, was fired in October in the name of involvement in an assassination plot.

Sri Lanka has already been drowning in debt piles offered by CCP’s B&R initiative. The New York Times ran an extensive analysis titled ‘How China Got Sri Lanka to Cough Up a Port’. According to the report, by the end of 2017, Sri Lanka was owing China a little more than $5 billion and it had no way to repay this debt. After heavy negotiations, the government handed over the port and 15,000 acres of land around it for 99 years. China’s control over the port, a few hundreds of miles off the shore of India, is considered a strategic threat over the commercial and military waterway.

It is noteworthy that Sri Lanka turned to India for help to develop Hambantota Port before China stepped in. India rejected the proposal by saying it was not economically viable. China then pulled huge resources into the project without sound economic ground. It also created Sri Lanka’s unforgivable level of indebtedness to China because such projects are typically financed by China’s policy banks, e.g. China Development Bank (CDB) or Export-Import (EXIM) Bank of China. Decisions that concern cost analysis, as well as the ultimate financing amount, are left to the Chinese banks. For a country with foreign reserves totalling $9.9 billion by April 2018, the principle and interest payment to foreign debt would reach $2.84 billion in 2018 followed by a big surge to $4.28 billion in 2019, according to Sri Lanka’s Finance Minister Mangala Samaraweera.

Sarawak Report, an investigative journalism online resource, ran a story in 2016 with leaked documents showing a select deal inflating the cost of the ECRL project backed by incentives paid to Najib.
Sarawak Report, an investigative journalism online resource, ran a story in 2016 with leaked documents showing a select deal inflating the cost of the ECRL project backed by incentives paid to Najib.

Far from escaping the debt trap, Sri Lanka’s debt toll is snowballing. A $1.4 billion development of a massive Colombo Port City is underway followed by a $3 billion oil refinery.

Deeply sinking in the hole, Sri Lanka could not seem to get enough from China because it simply could not repay loans without borrowing more.

It does not take a seasoned banker to do the math here, but it would be difficult to explain why Chinese banks keep throwing money that will never return. Similar to other countries that hold strategically important assets, the catch is Sri Lanka’s critical location in the Indian Ocean that could be exploited by China’s navy, posing a serious threat to the frequent trade routes of Asian countries as well as US naval monopoly in the region. Debtbook Diplomacy concluded that economic need, diplomatic isolation, and valuable assets make Sri Lanka a prime target.

Behind the Scenes: A Hidden Agenda

Developing and under-developed countries are desperate for infrastructure investment to create long-term economic growth. Typically, financing for infrastructure projects is challenging to come by. After all, these projects are built for public benefit while generating limited and uncertain revenue. It is therefore not difficult to explain the hardship of attracting private investment. To tackle this common problem, governments often create Public-Private Partnerships (PPP) to woo a variety of sources of funding to help governments ease their fiscal burden. Yet in these countries, state governments are incapable of extending financial support and private parties are not interested. The B&R’s generous offer thus seems particularly tempting.

B&R came in to offer loans, not Foreign Direct Investment (FDI) that holds ownership and takes project risks by the investor. It tends to show “support and help” to needy countries’ infrastructure development by carrying Chinese policy banks and credit insurance agencies’ endorsement. The loan terms normally come with demands to hire Chinese companies, recruit Chinese workers, and purchase China-made equipment. It effectively leaves little benefit to local societies.

More often than not, the projects could not generate sufficient income to meet debt repayment obligations due to lack of economic viability. South China Morning Post reported in October that a major railway project in Africa has cost China Export and Credit Insurance Corporation, known as Sinosure, nearly $1 billion in losses. This is partly a result of poor feasibility studies run by inexperienced local firms or Chinese banks who lack incentives to scrutinise the process according to international standards that typically focus on environment impacts, human rights, supply/output sustainability and economic return. On one hand, local politicians from weak economies are able to access China’s financing with an unusually long grace period and few covenants. With appealing personal gains in the opaque deals, the politicians would have expected to be out of office long before the bills were due. On the other hand, the Chinese banks have no interest to go through proper due diligence because the loan is a mere exercise of imposing predatory debt to countries that have no viable economy to repay such debts. When the inevitable outcome comes knocking, China would claim ownership of or exercise their right to these assets following legal procedures and market standards.

Under B&R’s radar, forcing economic dependence on China and acquiring strategic assets from willing or unwilling countries have reinforced China’s aim to secure energy sources and transportation, break geo-economic and political balances, and challenge US-led international order. The rules of fair game are torn down by the deployment of China’s entire state power. Although China’s domestic debt has grown to 256 percent of its GDP, it does not seem to bother the CCP because their one-party dominance offers a convenient handle to abuse its own domestic resources. It has become evident that China will not hesitate to mobilise its debt toolkit to advance its national interest without any consideration of cost.

The World: Lesson Learned

The drama goes on in more countries infected by the B&R virus. However, the hard-learned lessons from the early recipients of B&R money have served as a wake-up call to many others. The anger of Maldives voters towards their president’s corruption and his close ties with China’s B&R collaboration has led to a newly elected president who has vowed to revisit B&R projects. Myanmar has scaled back the Chinese-backed Kyaukpyu Port project from $7.3 billion to $1.3 billion. Even Kenya has cracked down on local official corruption related to a B&R associated railroad connecting Nairobi and Mombasa. One after another, B&R recipient countries are becoming wary of China’s growing influence.

When the very core of the B&R initiative grows into a form of debt diplomacy, when the true agenda of China puts weak economies in jeopardy, when helping hands turn to plunder of strategically important assets, more and more countries are waking up to say no. The governments are desperate to put a stop to their soaring debt, calm their displeased voters, and search for sustainable means to grow their economy. China is facing a spreading backlash in its global B&R push. What we are seeing is probably the beginning of the end.

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