• Belt and Road Initiative’s geopolitical nature could lead China and its host countries to take on too much debt
• Fitch’s Kalai Pillay believes the dearth of equity investment from the Chinese SOEs involved in the construction of these projects is telling 
• Developing countries will need to be careful about the terms of the debt that China is promising 

The scope of China’s Belt and Road Initiative (BRI) is ambitious to say the least. The proposed network to repave the ancient Silk Road and establish a new maritime route is tied to $900 billion worth of projects. The project will pass through 65 countries, influence 4.4 billion of the world’s population and affect a third of the global economy. It’s no wonder the project is met with a degree of scepticism or a roar of approval depending on whom you speak to.

From improving interconnectivity to exporting overcapacity and strengthening its diplomatic relations, China’s Belt and Road Initiative is pitched as the overarching remedy. Yet, some of these incentives run at loggerheads to each other. 

Balancing strategic and economic values

"China is in two minds," said David Kelly, head of research at China Policy, a Beijing-based strategic advisory firm. "On the one hand, they have to keep pushing their 'going global' strategy but on the other hand they have to watch their return on investments. And these two policies do not always sit well together."

One example is the $46 billion China-Pakistan Economic Corridor (CPEC), which hopes to reduce the journey for Middle Eastern oil and lessen dependency on the South China Sea. Some analysts with links to China’s Ministry of Commerce, however, have doubts about the strategic and economic value of the Gwadar project, a deep-sea port in Pakistan’s Balochistan province that is the key to establishing the CPEC.

Mei Xinyu at the Chinese Academy of International Trade and Economic Cooperation (CAITEC) wrote that there is no economic value in the Gwadar project, referring to it as a "hallucination”. Oil arriving through Gwadar to central and eastern China would be costlier after travelling through the mountain ranges and China’s vast lands, Mei noted.

Furthermore, security challenges are an expensive and constant threat in Balochistan, Pakistan’s poorest region, where Pakistani separatists, Islamic State militants and the Taliban all operate. In May, separatists gunned down 13 Pakistani labourers working on CPEC-linked projects and the Islamic State militants abducted and killed two Chinese nationals.

While the troubles in Balochistan will not be mirrored everywhere, "inconsistencies in regulatory regimes and underdeveloped credit markets, together with weak existing infrastructure…. all combine to add further complexity" for the BRI projects, said a PWC study entitled Repaving The Ancient Silk Routes in June 2017.

The geopolitical nature of many of the planned projects have observers worried that BRI could add to the debt burden of China and many of its under-developed host countries that China is lending to.

"I would say that a lot of the projects are not commercially driven," said Kalai Pillay, senior director and head of North Asia industrials, consumers & property ratings at ratings agency Fitch, who states that the plan is also about buying political and economic goodwill.

"The dearth of equity investment from the Chinese SOEs involved in the construction of these projects is telling," said Pillay. "If they were truly viable and interesting you would see a lot more equity stakes being taken by the construction companies themselves."

Fitch wrote a report in January highlighting that the lack of commercial objectives behind BRI makes it highly uncertain whether future project returns will be sufficient to fully cover repayments to Chinese creditors.
Atif Ansar, programme director at University of Oxford’s Saïd Business School, says that developing countries need to be careful about the terms of the debt that China is promising.

"Loans should not be in a foreign currency but in a local currency, or adequately hedged," he said. "And they should work very hard with the Chinese on the debt terms. Because this could turn into a massive debt crisis for sovereigns whereby China becomes a big creditor."

While Fitch’s Pillay stated it’s unlikely that anyone would lend to these countries in their local currency, he echoes concerns about whether recipient states "know what they are going into".

The biggest risk

For China, the biggest risk is that many of these loans don’t get repaid, adding to China’s fast-growing debt burden, now standing at around 300% of GDP.

"BRI will have a very dubious economic impact on China," said China Policy’s Kelly. "Many of the BRI projects are about strategic considerations rather than economic ones. China needs to have diversity of supply rather than just being dependent on the trade route via the Straits of Malacca, which is at a choke point."

News reports claiming that India may soon be allowed into the Malacca Straits Patrol could be worrying China, as the route is used for over 80% of the country’s oil and the two nations have historically suffered a prickly relationship.

A study by Ansar, co-authored with Flyvbjerg, Budzier and Lunn, pointed out that China’s approach to land acquisition and population resettlement can be heavy-handed.

Yet, "in democracies, land acquisitions are controversial and require more consent," said Ansar.

What this means is that China may not fully understand the legal context of the places they are sailing into through BRI. Often they do not comprehend the rights that various actors, local governments or civil society in general have.

As a result of these oversights, as well as a lack of centralised leadership overlooking BRI projects, several domestic scholars seem to be "managing expectations downward in anticipation of growing challenges" and "rescuing viable parts of the initiative while fencing off the more vulnerable hostages to fortune," said a China Policy report titled ’Belt and Road Rising Risks’ in August.

Such an immense project with overarching ambitions deserves a higher degree of planning, with better financial scrutiny and more international participation. Otherwise, it may just add up to be a road to nowhere.