Covid-19 Unmakes China’s Belt and Road Initiative

Pandemic’s tide recedes to uncover wide range of existing problems across the world

By: Salman Rafi Sheikh

China’s flagship global projects under the banner of Belt & Road Initiative (BRI) are coming under increasing scrutiny worldwide, including even in countries such as Pakistan where worth billions of dollars of ventures under the China-Pakistan Economic Corridor (CPEC), have already become fully functional.

The economic impact of the pandemic has further debilitated a number of other countries’ ability to pay back Chinese loans. As it stands, the China Development Bank recently confirmed that they have been flooded with requests for renegotiating and relaxing the payback terms and conditions.

With China having already become a bigger lender than the World Bank and even the IMF, and with Chinese-funded and loaned projects consistently running into troubles – “malpractices and corruption” – there is strong reason for China’s emerging partners, such as Europe, to re-evaluate their approach and learn from these countries’ experiences to avoid the so-called ‘debt trap.’

Sri Lanka, Kyrgyzstan and many African countries are already asking China to delay and restructure or even write off billions of dollars of loans due this year, indicating how China’s bid to become the world’s leading ‘debt-lending economic power’ is massively backfiring, forcing dozens of countries to do a massive rethink of their engagement with China.

As Asia Sentinel has reported in a number stories since 2017, the BRI is a trillion-dollar complex of projects designed to bring infrastructure development to a huge slice of the world and to in effect guarantee that all roads lead to Beijing. The massive undertaking throws road and rail lines through 140 countries, with at least 35 ports built on Chinese funds in Asia, Africa, Europe and even Cuba, increasing Chinese hegemony across the globe, often at interest rates twice those of the World Bank and International Fund.

Pakistan has made similar requests for debt relief to China. These requests, however, aren’t just rooted in the existing poor economic conditions driven by the coronavirus but mainly in the previously unseen and unsettled high and continuously rising cost of the CPEC projects.

As a recent investigation by a Pakistani parliamentary committee showed that a number of CPEC projects, such as Huaneng Shandong Ruyi (Pakistan) Energy and Port Qasim Electric Power Company, were overcharging by billions of rupees due to what the report calls “inflated setup costs” and “misrepresentation” of interest payments. The report has listed what it describes as “malpractices” of up to US$625 million.

With the report becoming public at this particular time, Pakistan is left with little to no argument to any longer project the CPEC as a what it earlier called a game changer. Instead, the fact that China’s economic practices have a strong predatory element has become even more prominent.

As it stands, the two core projects examined by the Pakistani committee were worth US$3.8 billion. The committee has found over­payments to the tune of US$ 3 billion; hence, the committee’s recommendation to deduct US$ 204 million from the project cost and adjust repayment formula accordingly.

Under the existing repayment formulas, the Chinese companies, the report shows, have already recovered 35 to 70 per cent of their original equity in the very first year of operation, meaning thereby that the Chinese, going by the existing arrangements---where interest deduction was apparently allowed for 48 months but the plants were actually completed within 27-29 months leading to excess payments---and adding the companies’ legitimate profits, will have piled up mountains of money by the time Pakistan would make full repayments.

The report further says that the China controlled power plants are earning an unbelievable 50-70 percent annual profits in contrast to the 15 percent limit set by the National Electric Power Regulatory Authority (NEPRA). This earning is one reason why Pakistan’s circular debt has ballooned to Rs1.8 trillion (US$10.851 billion). Hence, Pakistan’s request for a thorough renegotiation of the debt repayments.

Pakistan is not the only and an exceptional case where Chinese projects have come under scrutiny. An inquiry commission was formed in Maldives in November 2018 to probe the free trade agreement signed with China.

Not only is this an attempt to check China’s previously unchecked and masked entry into the country’s political economy, but also a means to find out a way to re-balance the country’s foreign relations to reduce an overdependence on China. The free-trade agreement “is a thousand-page document and the process (of the free-trade deal passing through parliament) took something like five minutes”, said Abdulla Shahid, Maldives’ foreign minister.

Sri Lanka’s secretary to the treasury, S.R. Attygalle, confirmed in an interview that ‘China Development Bank had widened a credit line by $700 million ….lowered the interest rate and delayed the repayment timeline by two years.’

Kyrgyzstan announced in April this year that China has agreed to reschedule US$1.7 billion of debt repayments, although it did not still disclose details of the new arrangement.

Many states in Africa have also turned to China for debt relief. While details of individual requests are not yet fully known, a recent piece written by the deputy director at the Ministry of Commerce's Chinese Academy of International Trade and Economic Cooperation showed that China already is facing an ‘Africa debt problem’, although the official narrative pins the responsibility for the crisis solely on the pandemic.

However, China’s aggressiveness in the South China Sea and its decisive trampling on Hong Kong’s freedoms as well as widespread publicity over oppression of its Uighur minority, which many European critics have characterized as ‘genocide,’ have severely damaged its diplomatic relations with western nations, not just the United States. The Covid-19 situation has added to those tensions, according to an analysis by Fitch Solutions, the international risk management firm:

“The inroads the BRI has made into Europe are likely to stop in Eastern Europe, Switzerland, Italy and Greece for years to come,” the report notes, “as existing tensions between the EU and China have been further flamed by China’s response to the Covid-19 outbreak, as well as tensions caused by Beijing’s ‘mask diplomacy’ and the promulgation of the National Security Law on behalf of Hong Kong.”

That probably means China will cut back its ambitious efforts to woo the west and instead concentrate its efforts on Africa and Asia, although Southeast Asian nations especially are increasingly uneasy over Beijing’s moves to build islets into armed outposts.

A pushback against Chinese “malpractices” would also force China to change its predatory policies; for if left unchanged, Xi’s mantra of ‘win-win for all’ will unleash forces of massive economic disruption across the globe, changing the global economic and political equation to Beijing’s disadvantage.

Supporting Asia Sentinel with subscriptions will help us continue holding governments to account, investigating, and providing the most thoughtful coverage of Asia in the English language. See what you’ll get when you subscribe.

Subscribe now