China’s Silk Road: Inroad to World’s other economies?

The world is gradually awakening to the dark side of China’s Belt and Road Initiative, often called One Belt, One Road, or OBOR and designed to bring infrastructure development to a huge slice of the world. But a growing number of projects completed or in process, including the China-Pakistan Economic Corridor (CPEC), are beginning to demonstrate the grip that China has over the target countries’ economies.

The massive undertaking is increasing Chinese hegemony not only in Asia but elsewhere, causing concerns to grow in Europe and beyond. The AidData research lab at the College of William and Mary in Virginia in the United States found that only 21 percent of Chinese money channelled into development across 140 countries could be called traditional aid. The rest of the money is in commercial loans at stiff rates that must be repaid to Beijing with interest. The Beijing rate averages 6 percent and above. By contrast, the International Bank for Reconstruction and Development, a unit of the World Bank, charges roughly 1.5 percent above the London Interbank Offer Rate, currently standing at 2.04 percent on loans of 12 months and above for a total of about 3.5 percent

A French Senate delegation visited Pakistan last week to study CPEC has come away with reservations.

“France enjoys close ties with China, but we feel the project may have consequences on the geopolitical situation,” Pascal Allizard, the delegation’s leader, told local media. “We would be submitting our report (to the Senate) after analysing if this initiative is Chinese regional hegemonic agenda or a step towards greater regional connectivity.”

Questions for Eurozone

China’s financial and economic incursions into Europe have already raised questions, for instance, over one of its most ambitious projects, the Budapest-Belgrade high-speed rail track, which is under investigation for violation of EU laws regarding such large projects.

Ironically enough, during the delegation’s visit, significant cracks appeared in CPEC with reports that China is rolling back a number of projects over potential disagreements with Pakistan. Among other projects excluded recently from the CPEC vision is the US$14 billion Diamer-Basha Dam in Kashmir. According to Pakistani officials, it was excluded because “Chinese conditions for financing the dam were not doable and against our interests.”

With China being now blamed for not protecting Pakistan’s vital interests, the Pakistan-China ‘all-weather’ friendship seems to be on a slippery slope, spurring conflict and divergence rather than convergence of interests.

But Pakistan isn’t the only country in the region where blowback is occurring. Sri Lanka’s Mattala Rajapaksa International Airport in Hambantota, 250 km south from Colombo, was built with Chinese loans of US$190 million at 6.3 percent annual interest, covering more than 90 percent of the total cost.

Sri Lanka in hock

Today, Sri Lanka is finding it impossible to repay that loan and is reportedly considering handing over the airport to an Indian company willing to pump US$205 million into it for a 70 percent share for 40 years.

Sri Lanka is thus finding itself in a Chinese debt trap. Colombo owes China US$8.8 billion in loans. Significantly, the Indian proposal to run the airport won a favorable review in Sri Lanka within only a fortnight of Sri Lanka’s US$1.1 billion deal with China, which had given the state-run China Merchants Port Holdings 70 percent of the revenue in a joint venture to run the Hambantota port. That is very much identical to China’s 91 percent share for the next 40 years in Pakistan’s Gwadar port.

Malaysia too

While the Sri Lankan airport has already been branded the “world’s emptiest airport,” the condition of Malaysia’s Forest City is little different. Malaysia’s former premier, Mahathir Mohamad, has accused the incumbent government of selling the country’s most precious land to foreigners, it is coming clear that Forest City may end up nothing but a forest.

The first glimpse of the problems came in March when China imposed aggressive domestic measures to clamp down on capital outflows, resulting in cancellations by 60 major Chinese interests of their Forest City bookings and depriving Forest City’s access to its primary target market, leading some to predict that the project will become a giant white elephant.

There is also the East Coast Rail Line (ECRL). According to reports and claims raised from within Malaysia, it is to be constructed by a Chinese state-owned firm at allegedly inflated prices, using mostly Chinese labor and building materials and funded by soft loans from Chinese state banks. While this is again quite similar to the way China is building a number of CPEC projects, as we reported previously, it also raises the question of whether Chinese funded projects such as this one can truly be called “investments.”

This is already echoing in host countries, such as Malaysia, where political forces are questioning terms and conditions attached with loans, which the ruling elites continue to dub as “investment.”

"We do want Chinese investment," said one Malaysian parliamentarian from the opposition Democratic Action Party, "but the type of Chinese investments that are coming to Malaysia today are either dodgy or in reality are Malaysian-paid-for investments that are not really FDI."

Scenario unfolding in other countries

The scenario now unfolding in countries like Sri Lanka, Malaysia and Pakistan can be seen in dozens of small countries in Asia such as Thailand where disagreements and disputes over terms of business with China have appeared and greatly delayed the construction of Sino-Thai high speed train project.

The controversy has been caused by China demanding that it apply the same conditions agreed to by the Lao government for financing a high-speed rail linking that nation to southern China. According to the demands made by China, the Chinese government will be able to seize five mine assets if they fail to repay the debt. While the project has now received a go-ahead, it happened only when Bangkok decided not to rely on Chinese capital, contractors or operators, but to procure China-made rolling stock as a trade-off to mollify Beijing.

While this has also led to a project that is markedly different from the one originally planned, it also shows how some countries have already started to impose limits on what the Chinese can or can’t do with the so-called “investments.”

These developments are only proving correct the warnings made in a study of the UN Economic and Social Commission for Asia and the Pacific, which claimed that Chinese “investments” were going to increase financial risks in a host of countries in Asia where China was pumping more money than the relative size of the host country.

In this context, Chinese “investment” in Pakistan greatly outweighs the size of Pakistan’s economy. And, that explains why Pakistan has stopped agreeing to whatever China asks for in terms of giving loans.

Thus, the Silk Roads are already beginning to become Chinese inroads into other countries, aimed at altering the global economic order to its own advantage.

Salman Rafi Sheikh is a Pakistani academic and regular contributor to Asia Sentinel