Beware vast Chinese state-owned enterprises bearing the gift of debt. That’s the new rule smaller countries along the route of China’s world-spanning “Belt and Road” initiative are finally learning, as the examples of Pakistan and other early participants show that one of the main “benefits” of the initiative is a mountain of debt owed to Chinese lenders, with scant rewards in the way of local employment or sourcing. That’s in large part because much of the materials and labor comes from – you guessed it – China! Sensing an opening, the U.S., Western European countries and Japan are piling on, offering alternative funding schemes for infrastructure projects.
- In Djibouti, the small East African country strategically located along the critical Bab-el-Mandab strait, the southern entrance to the Red Sea, China has been investing in projects including the Doraleh Multi-Purpose Port, the Doraleh Container Terminal, and the Djibouti International Industrial Parks Operation. The $12.4 billion program has been funded largely through loans from China’s Export-Import Bank. But now the government is canceling a planned airport that was to be funded by the China Civil Engineering Construction Corp., and a consortium of European banks is in talks to back the project.
- While being careful not to openly antagonize China, Japan is quietly pushing its own infrastructure program (presented as complementary, not competitive with China’s) focused on smaller, pragmatic projects with less onerous debt requirements. The program focuses on “quality infrastructure,” meaning relatively modest projects with proven utility, and “quality investment” that takes account of environmental impacts and financial sustainability. So far Japan has promised to invest $116 billion in projects for the “Partnership for Quality Infrastructure” from 2016-2030, a figure that puts it in the same order of magnitude as the half-trillion-dollar Belt and Road Initiative. The next big proving ground will be multiple projects with India, already wooed by China due to its strategic position astride the Indian Ocean sea lanes to East Asia.
- The U.S. led the pushback against Belt and Road in Myanmar, where the government drastically scaled down a large port complex that would have, among other things, offered China an alternative transshipment route (together with new rail connections) skirting the maritime chokepoint at the Strait of Moluccas to the southeast. Although the terms of the project were renegotiated and it is still going forward, it is on a considerably smaller scale that should allow the Myanmar government to shrug off Chinese tutelage.
- Italy’s much-publicized decision to join the Belt and Road initiative on a bilateral basis carries considerable geopolitical and financial risks, warns Paola Subacchi in the Globe and Mail. For one thing, Italy already carries public debt that’s 133% of GDP. Meanwhile Italy faces its own problems with corruption and transparency, meaning it will not be in a position to demand accountability from Chinese partners. However participation in the initiative is as much a snub to the EU by Italy’s populist government as it is a positive decision to align with China, meaning Italy’s long-term interests are being sacrificed to short-term political considerations.
