China megatrends: Belt & Road Initiative raises spectre of ‘debt-trap finance’

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China’s increasingly assertive foreign economic policy manifested through its Belt and Road Initiative (BRI) has been criticised as neo-mercantilism and, more recently, as ‘debt-trap diplomacy’. The notion is that China is seeking to advance its economic and geopolitical influence by purposely ensnaring some developing countries in unsustainable loans-for-infrastructure deals.

The conventional wisdom is that the heavier the recipient country’s debt burden, the greater China’s leverage becomes when the country is being forced to sell to China stakes in Chinese-financed projects or hand over management to Chinese state-owned investors. Concerns about China’s debt-trap finance have found their way into some countries’ foreign policy circle, aggravating the geopolitical tensions.

Where are the gains for China?

Critics of China’s BRI assume that its economic interests are maximised when its lending partners are in financial distress. However, there is no reliable data for tracking the profit and loss of China’s BRI projects. But, as I have previously argued, we can use data on the difference between China’s new foreign contracts (as a proxy to BRI projects) and completed foreign projects (as a proxy to realised foreign revenues) to gauge the performance of the BRI projects. This data shows that the BRI projects do have difficulties in generating revenues. Chinese foreign engineering and construction projects enjoyed a decade of steady revenue growth until 2015 when Beijing started prioritising the BRI. Their revenue growth has since lagged significantly behind the growth of new foreign contracts (exhibit 1).

Exhibit 1: China’s foreign contracted and completed projects

Note: projects on 12-month rolling sums. New foreign revenues approximated by the value of completed projects. Source: CEIC, BNP Paribas Asset Management (Asia), as at 26/09/2018

Arguably, the fall in commodity prices in 2014 and 2015 helped explain the slowdown in this foreign income as most of China’s foreign projects were focused on resource extraction. But the rising gap between the contracted projects and realised revenues (see exhibit 1) raises the suspicion that:

  1. Many Chinese firms were probably responding to political pressure by rushing to sign phony deals and then letting them quietly rot away; and/or
  2. The newly signed projects simply failed to bring in revenues. More crucially, the gap has kept widening, casting doubt on the alleged profitability of the BRI projects.

Anecdotally, China’s lending to Venezuela has been the single most important evidence of its debt-trap finance backfiring. Venezuela is the largest recipient of ‘official’ finance from China, with the China Development Bank lending the bulk of more than USD 60 billion since 2007[1]. Since China is the world’s biggest oil importer and Venezuela has the world’s largest oil reserves, the commercial rationale for the loans was strong for financing a long-term oil partnership between the two countries.

In various BRI partner countries, it’s all going horribly wrong

Yet, with Venezuela in the depths of economic and political crises since 2013, the China-Venezuela loans-for-oil relationship has gone badly wrong. The collapse of Venezuela’s economy means that it has not been able to make loan repayments or even ship oil to China. In a nutshell, Venezuela has gone from being a geopolitical asset for China in Latin America to being a liability.

Some other BRI projects have also gone awry. For example, Sri Lanka’s Mattala Rajapaksa International Airport, which opened near Hambantota in 2013, is dubbed the emptiest airport in the world. Hambantota’s Magampura Mahinda Rajapaksa Port is largely idle, as is the multibillion-dollar Gwadar Port in Pakistan. Chinese lending and investment in other BRI countries, including Afghanistan, South Sudan and Angola, have also reportedly gone wrong.

All this shows that China’s debt-trap diplomacy has not achieved its intended purpose of gaining economic and geopolitical benefits through the BRI. China may well be following in the footsteps of Western governments, businesses and multilateral development finance institutions in the 1930s and 1970s, when they found themselves in unsustainable debt relationships that hurt debtors and creditors alike.

Pushback against the BRI is increasing

Resistance to BRI investment is rising. Notably, Malaysia has suspended all foreign direct investment (FDI) projects, since May 2018 when Dr. Mahathir took over as Prime Minister and sought to renegotiate all the projects signed by his predecessor. Most of the suspended projects (totalling some USD 23 billion) are BRI-related,

According to the US political risk consultancy, RWR Advisory Group, some 14% of BRI-related investment has hit trouble since 2013, mostly due to public opposition to projects, objections over labour policies and environmental damage, and concerns about national security. Chinese-financed projects often go ahead in spite of local opposition. The USD 4 billion Ituango dam in Colombia, which is partly funded by China, is a case in point. Despite a the dam’s environmental impact report stressing the area’s propensity for landslides, repeated warnings by local activists since 2010 were ignored. Heavy rain finally triggered a landslide in June 2018, putting the dam in imminent danger of collapse and forcing the evacuation of 26 000 inhabitants[2].

Domestic criticism of the BRI

It seems that these BRI problems have also sparked concerns within China. Since June 2018, there have been signs of discontent over President Xi’s ambitious policy agenda from policy advisors, academics and even government officials. One of the criticisms focuses on his excessive ‘foreign aid’ to countries in Africa and the Middle East, an obvious reference to the BRI projects.

The public airing of such criticisms may indicate the emergence of a consensus that Beijing should scale back on its BRI ambitions. RWR Advisory Group’s data shows that BRI investment and lending have begun to decline, with lending by Chinese policy banks falling by more than 80% since 2015 and lending by Chinese commercial banks dropping almost to zero in 2017.

While the RWR data may be anecdotal – there is no publicly available systematic data to track China’s BRI activities – the point is that with criticism and resistance on the BRI policy on the rise, forces may have emerged to slow down (although not completely halt) the BRI initiative.

To read more content written by Chi Lo, click here.


[1] According to data from the Carnegie-Tsinghua Centre for Global Policy.

[2] For more examples, please see “Demystifying China’s Mega Trends: The Driving Forces That Will Shake Up China and the World”, by Chi Lo, pp. 172-175, Emerald Publishing 2017.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.

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Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Chi Lo

Senior Economist for China

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