Leaders of 28 countries plus dozens of other officials showed up in Beijing last weekend to explore Chinese leader Xi Jinping’s so-called “One Belt-One Road” initiative, his ambitious plan to make all roads lead to Beijing, as all roads led to Rome 2,100 years ago.
Xi wants to project China’s growing political and economic clout across the globe and make this his monument – $1 trillion worth of development in roads, ports, rail lines, pipelines and other infrastructure that would replicate the Ming Dynasty’s sway when the Muslim eunuch Admiral Zheng He steered huge sailing junks across the world.
The One Belt-One Road initiative is planned as the world’s biggest investment since the U.S. began the Marshall Plan, which saved Europe after World War II. The concomitant narrative is that the United States is in terminal eclipse.
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But while Xi’s plan is a breathtaking attempt to once again center the Middle Kingdom as the world’s dominant player, it is also fraught with peril, for China and for the countries on which he is lavishing development.
Xi’s modern Silk Road has been underway for several years throughout Asia. It includes a road and rail network, plus oil and gas pipelines, that not only ranges across Urumqi to Western Europe but is extending southwest to Laos, Cambodia, Thailand, Myanmar and Malaysia, all the way down to Indonesia. According to official figures, it encompasses 60 countries with 900 projects underway.
Behind those figures, however, are real concerns. One is China’s debt, public and private, which is now the highest of any major country in the world. Public debt of China’s state-owned enterprises is now 220 percent of its gross domestic product. Private debt to GDP has been trending up sharply since 2008 and is now around 170 percent of GDP.
At some point the carousel may have to stop. China’s rapid expansion is over. GDP growth, which peaked in 2007 at 14.2 percent, has since trended down to 6.9 percent, a figure many economists believe is simply manufactured and is much lower. Infrastructure investment, overall fixed-asset investment and real economic activity are expected to slow more notably toward the end of this year as authorities tighten credit to try to dry up debt expansion.
Few economists expect the economy to come to a stop. Authorities have sufficient tools to keep it going. But it does raise questions about how much expansion, domestically and internationally, China can afford. A 2016 Oxford University study titled “Does infrastructure investment lead to economic growth or economic fragility? Evidence from China,” said that more than half of the infrastructure projects completed in China during the past three decades have performed poorly, while only 28 percent can be considered economically productive.
The One Belt-One Road initiative began in 2009 with China’s huge credit expansion, which is credited with saving the global economy but which created lots of overcapacity in most of its industries, including steel, glass, cement and other construction materials. Going overseas was a way to dry up considerable debt of that expansion. And the best way to recoup was to convince other countries to borrow from China to afford new infrastructure.
Two examples stand out. One was Sri Lanka, where the corrupt Rajapaksa administration nearly bankrupted the country on a bet that the capital of Colombo could transform itself into an international financial and shipping outpost built on Chinese development.
During Mahinda Rajapaksa’s rule, when projects got underway that were funded via steep loans from China, many in Sri Lanka wondered where Colombo was going to get the money to pay them back. Chinese companies built the Hambantota Port, Mahinda Rajapaksa International Airport, railways and roads plus a cricket stadium. In 2013, the interest rate for the airport, which cost $209 million, was increased from 1.3 percent to 6.3 percent.
The story is largely the same for the Hambantota Port, built with a 306 million loan, 85 percent of which was provided by China’s Exim bank with a fixed interest rate of 6.3 percent. But Hambantota, well away from Sri Lanka’s major population centers, has not attracted significant investment.
Politicians have been calling the port a white elephant with considerable justification. Strapped by debt, the Sri Lankan government in December sold 80 percent of the Hambantota port to the state-owned China Merchants Group for $1.1 billion, giving China the strategic foothold it wanted on the Indian Ocean.
Pakistan is learning the same lesson. After the Singapore government backed away from building a huge port on the Indian Ocean coast at Gwadar in 2013, China took over the project. Called the China-Pakistan Economic Corridor, it was an ambitious $46 billion plan to expand and upgrade Pakistan’s infrastructure that was also billed as an integral part of the One Belt-One Road mosaic.
However, today some economists are concerned that the project, which not only includes the Gwadar port but rail and highway networks, energy projects and special economic zones, could bring down the Pakistan government. A 1,800-mile highway connects the port to Xinjiang in China. In November, the first cargo was transferred to the port from China for transshipment to Africa and West Asia. But disagreements have risen over tariff rates and other concerns, and many of the projects have stalled.
Pakistan has found itself unable to repay Chinese loans because of a soaring $28 billion trade deficit with China, and national and international debts mounting to $73 billion. China’s investment in the corridor has risen to $62 billion, generating concerns that China is turning Pakistan into a vassal state.
These are two of the most problematical of the stops on the new Silk Road. But they are hardly the only ones. There are others, where projects have failed or become mired in corruption. And what they demonstrate, as Pakistani academic Salman Rafi Sheikh wrote in Asia Sentinel last November, is that the problems “owe their existence primarily to the nature of the Chinese involvement, not only in Pakistan but in other target countries, where China develops them only to the extent where its own interests can be effectively protected and enhanced.”
The target countries, Salman wrote, “are finding they are sold only illusions of development as the projects completed with Chinese cooperation fail in a majority of the cases to yield the expected results.”
All roads are intended to lead to Beijing, not the other way around, and Beijing wants it that way.
John Berthelsen recently retired as editor of the Hong Kong-based Asia Sentinel, a regional news site covering 23 countries across Asia. He now divides his time between Sacramento and Asia, and can be contacted at email@example.com.