You’ll never believe it, but an economic-development scheme centrally planned by a communist party is backfiring.
China’s Belt and Road Initiative (BRI) was supposed to be a masterstroke of geopolitics. China financed and built infrastructure projects in the developing world, buying third-world countries’ loyalty while enriching itself. It made a total of about $1 trillion in loans for infrastructure in poor countries in the past ten years.
Now, while the country’s domestic economy faces its own slate of crises, the BRI is also in trouble. It doesn’t appear to have purchased the geopolitical loyalty that China had hoped. And it’s losing a bunch of money, too.
Signs of BRI troubles emerged a while ago, as I wrote last September. The BRI is one of Xi Jinping’s top policy achievements, so the Chinese government is unlikely to abandon it. But with rising interest rates worldwide, developing countries are facing increasingly severe debt problems. That includes BRI debts, which China has mostly not been willing to restructure.
The BRI presents a problem for the West, but not in the way many have envisioned. Rather than being a genius strategic move that demands a Western countermeasure, the BRI is presenting challenges to the lending system that developing countries use to help pay back their debts.
Michael Bennon and Francis Fukuyama write in Foreign Affairs that “debt trap diplomacy” hasn’t worked out for China. Many of the Chinese-financed infrastructure projects have underperformed, both from the developing country’s point of view as the one receiving the project and from China’s point of view as the financer.
It’s important to remember the primary objective of the BRI: feeding Chinese construction companies. Infrastructure projects became a major contributor to Chinese GDP after all the low-hanging fruit from export-oriented development had been picked. Pretty soon, all the low-hanging fruit from infrastructure at home had also been picked (and then some, as overbuilt vacant highways and airports now demonstrate), so China had to look abroad to keep things moving.
China insisted on constructing BRI projects with Chinese labor and Chinese companies. Many of these projects had no strategic significance. “The large number of marginal projects Beijing undertook hints at these motivations: Why else fund projects in countries with huge political risks, such as the Democratic Republic of the Congo or Venezuela?” Bennon and Fukuyama write.
The technical financial term to describe a lot of these loans is “really stupid.” Bennon and Fukuyama write:
Rather than deliberately miring borrowers in debt in order to extract geopolitical concessions, Chinese lenders most likely just did poor due diligence. BRI loans are made by Chinese state-owned banks through Chinese state-owned enterprises to state-owned enterprises in borrowing countries. The contracts are negotiated directly, rather than opened to the public for bidding, so they lack one of the benefits of private financing and open procurement: a transparent market mechanism for ensuring that projects are financially viable.
The results speak for themselves. In 2009, the government of Montenegro asked for bids on a contract to build a highway connecting its Adriatic port of Bar with Serbia. Two private contractors participated in two procurement processes, but neither was able to raise the necessary financing. As a result, Montenegro turned to the China Export-Import Bank, which did not share the market’s concerns, and now the highway is a major cause of Montenegro’s financial distress. According to a 2019 IMF estimate, the country’s debt-to-GDP ratio would have been just 59 percent had it not pursued the project. Instead, the ratio was forecast to rise to 89 percent that year.
China makes these problems worse by not being transparent about its loans (which is also a problem with its local-government finances). “According to a 2021 study in the Journal of International Economics, approximately half of China’s loans to the developing world are ‘hidden,’ meaning that they are not included in official debt statistics,” Bennon and Fukuyama write. That means it’s impossible to accurately assess credit risk before a crisis happens. Then, when the crisis comes and the hidden debts are revealed, there’s no trust in the restructuring process.
“China’s BRI does pose problems for Western countries, in other words, but the primary threat is not strategic,” they write. “Rather, the BRI creates pressures that can destabilize developing countries, which in turn creates problems for international institutions such as the IMF and the European Bank for Reconstruction and Development, to which those countries turn for assistance.”
Those international institutions exist to help developing countries struggling with debt, but if IMF money ends up going to pay back China, it will not be serving its intended purposes. Bennon and Fukuyama suggest a few different ideas to help, such as assisting borrower countries in negotiating debt restructuring with China as a group rather than individually, so they have more leverage and know what other countries are doing.
“China has claimed that some major BRI loans are commercial rather than official loans because they are priced at market rates, even though they come from state-owned lending institutions such as the China Development Bank,” Bennon and Fukuyama write. The IMF should set stricter criteria to define these terms, they write, so that China doesn’t game the system in this way.
They also argue that the IMF should require borrowing countries to include state-owned enterprise debts with sovereign debts when restructuring. Some borrowers have “continued to service BRI debts through their state-owned enterprises while receiving sovereign debt relief at the national level,” they write. That’s gaming the system, too, because “BRI lenders will simply pick and choose which state-owned enterprise loans they would like to include in restructurings based on whether they think they can get a better deal through restructuring or through a bilateral renegotiation on the side.”
Bennon and Fukuyama argue reforms are needed to protect Western institutions from the BRI debt crisis. Far from being a genius diplomatic move, the BRI is causing China and the countries it lent to plenty of problems. The West is not imperiled by the BRI’s success. Instead, it must protect itself from the fallout of its failure.