China’s Belt and Road Gets a Reboot to Boost Its Image

(Bloomberg) --

By many measures, China’s Belt and Road Initiative has been a monumental success. Since 2013, when China launched the effort to expand trade links, more than 130 countries have signed deals or expressed interest. The World Bank estimates some $575 billion worth of energy plants, railways, roads, ports and other projects have been built or are in the works. But President Xi Jinping’s signature effort has also come in for criticism, including accusations that China is luring poor countries into debt traps for its own political and strategic gain. The mixed reviews abroad and worries at home about the cost have led China into something of a reboot as it tries to increase transparency, improve project quality and reduce financial risks.

1. Where are the problems?

Several countries have run into trouble with Belt and Road projects or had a rethink, often after a popular backlash, change of government or both. Complaints include corruption, padded contracts, heavy debt loads, environmental damage and a reliance on imported Chinese labor over local hires. Some examples:

  • Sri Lanka borrowed heavily to build a new port, couldn’t repay the loans, and then gave a state-owned Chinese company a 99-year lease in exchange for debt relief. The port has little business now but provides China a strategic berth along key shipping lanes.
  • China was set to lend Pakistan $8 billion to upgrade a railroad from Karachi to Peshawar, but a new government in Islamabad, struggling with long-standing debt problems, wants to cut the cost in half.
  • Myanmar drastically scaled back a port deal struck under its previous military regime, to $1.3 billion from $7.5 billion.
  • A new Malaysian government canceled $3 billion worth of pipelines and renegotiated a rail project in 2019, cutting that one’s cost by a third to $11 billion.
  • Leaders in the Maldives are seeking debt relief amid allegations of large-scale graft connected to BRI projects under the previous government.
  • In June 2019 a court in Kenya halted construction of a Chinese-backed power plant on Lamu Island, a major tourist destination, and ordered a new environmental impact assessment.
China’s Belt and Road Gets a Reboot to Boost Its Image

2. How is China responding?

At a high-profile forum in April 2019, Xi signaled that the Chinese government would exert more control over projects in the Belt and Road Initiative, or BRI, and tighten oversight. Rather than boasting about the initiative’s growth, as he had in years past, he urged “higher quality” and “greener” projects and vowed “zero tolerance” for corruption. State-owned-enterprises, by far the biggest investors in BRI projects, are being told to beef up auditing and increase supervision of their overseas units and personnel. The government also has been drafting rules for use of the BRI label to try to better protect its reputation. And the Communist Party’s propaganda machine has turned down the volume. The People’s Daily, a party mouthpiece, launched two new columns and a special edition in the run-up to the first BRI forum in 2017. One government official described that campaign as having been too aggressive. Around the 2019 forum, the paper ran only about 10 articles in its regular pages.

China’s Belt and Road Gets a Reboot to Boost Its Image

3. Is China serious about change?

Signs of a more cautious approach have emerged -- at least around its debt exposure. China has withheld some $4.9 billion in new loans for a major rail project it had been building in eastern Africa, amid concerns about Kenya’s finances. The line was supposed to run from the Kenyan port city of Mombasa to Uganda and beyond, but only the stretch from the coast to Nairobi is done. Revenue from the railway is supposed to repay the initial $3.6 billion loan, but critics say it won’t turn a profit for a long time. In Zimbabwe, the Export-Import Bank of China backed out of providing financing for a giant solar project due to the legacy debts of the government there, according to RWR Advisory Group, a Washington-based consulting firm.

4. Is the reboot convincing anyone?

Italy in 2019 became the first Group of Seven country to sign a memorandum to join the BRI, despite pressure from many of its European Union partners and the U.S., providing a public relations coup for Beijing. After six years of wrangling, Russia quietly approved its first project designed specifically for the BRI: a toll road linking China’s western neighbor Kazakhstan with Belarus, which borders Poland and two other EU members. The second BRI forum attracted about three dozen world leaders, more than the first. Still, Asian powerhouses Japan and South Korea stayed away, as did the U.S. and the three biggest European economies: Germany, the U.K. and France.

5. What else is China trying?

It’s offering skeptical countries a framework dubbed third-party market cooperation, which is basically an agreement to consider working together on specific projects without actually endorsing the whole BRI. China hopes such partnerships will give it access to Western technology and expertise, reduce financial risks and dispel allegations about its motives. Japan, Australia, France, Singapore, Spain, the Netherlands, Belgium and Austria are among those that have signed up. Even so, a 2018 report by the Center for Strategic and International Studies found that of all the contractors participating in Chinese-funded infrastructure projects, 89% were Chinese companies, 7.6% local and just 3.4% foreign, “third-party” companies. Obstacles include the absence of open tenders, standardized contracts, transparent procurement rules and anti-corruption safeguards.

6. What’s the bigger picture?

Compared to 2013 when the BRI was first introduced, China is facing a more difficult economic environment. Its growth has slowed to the weakest pace since at least 1992 as trade tensions with the U.S. persist. To stimulate the economy, policy makers are leaning toward more spending on domestic projects, potentially limiting funds available for lending abroad. But China has other reasons for pressing ahead, including a desire to better integrate and develop its remote western provinces, and to diversify routes for energy imports.

7. How much has been spent?

It’s difficult to pinpoint, even for authorities in Beijing. Chinese companies had directly invested more than $80 billion in Belt and Road countries through the end of 2018, according to an official tally. But that doesn’t include money from China’s policy banks and other state-owned institutions such as the Silk Road Fund, which focuses on equity investments, or from other partners. The World Bank in 2019 counted $575 billion worth of BRI investments, most of which were still in the construction or planning phase. Almost half the total was in energy and a quarter in transport.

The Reference Shelf

  • Bloomberg Opinion’s Mihir Sharma on why the world shouldn’t pitch in on Belt and Road, and the flaws exposed by Pakistan’s bailout, while Andy Mukherjee has examined China’s new focus on growth.
  • Bloomberg Opinion’s Shuli Ren says emerging countries are signing on again.
  • Why Putin rode to Xi’s rescue.
  • China’s intentions are questioned as it keeps lending to tiny Djibouti.
  • The World Bank report: Belt and Road Economics; and a working paper on debt sustainability.
  • The Asia Society Policy Institute report: Navigating the Belt and Road Initiative.
  • The Institut Montaigne blogs about difficulties with China’s cooperation agreements.

©2019 Bloomberg L.P.

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