aving invited 29 world leaders to Beijing the other week to celebrate his Belt and Road Initiative, Chinese President Xi Jinping promised his audience more than $100 billion in new investment. Presidents and prime ministers from Russia’s Vladimir Putin to Turkey’s Recep Tayyip Erdogan were happy to jostle for photo ops with Xi as they sought to attract Chinese money for roads and bridges. But the initiative is a muddle—and not only because one clumsy translation (“one belt one road”) has been replaced, confusingly, by another (“Belt and Road Initiative”). The bigger problem is the substance.
There is a logic at the core of the Belt and Road—Asia needs more infrastructure—but thanks to jumbled strategic thinking and a suffocating amount of PR fluff, Xi’s flagship initiative looks set to disappoint. Asian and European countries lining up to attract Chinese investment in new roads and bridges will receive less money than the headline figures suggest. China itself will discover that lending money to its more poorly governed neighbors is not always a profitable business. And foreign policy analysts who see the Belt and Road as a Chinese-style Marshall Plan will be disappointed as the bubble of sky-high expectations pops. For the United States, there is little to fear in the Belt and Road. Asia may get some useful new roads, but the region will also see the limits of Chinese power projection, even in a sphere such as infrastructure where China has a comparative advantage.
The headline numbers associated with the Belt and Road are impressive, and purposefully so. Asia needs lots of infrastructure and an economic vision. China has an impressive track record building highways and high-speed trains across its own vast territory. With Washington distracted by domestic politics, Beijing rightly sees a chance to set the agenda in Asia. Hence the initiative, which was first launched in 2015, has been repeatedly expanded. Last weekend’s summit in Beijing demonstrated China’s ability to convene heads of state—at least when it is promising them vast sums of money.
But the gap between China’s promises and commitments are already being noticed. By some estimates, Chinese construction contracts with Belt and Road-related countries may decline in 2017. Already, officials in some neighboring countries are grumbling about not receiving money. Russia, for example, is miffed that that despite applying for funding for 40 different projects, it has yet to receive a dollar. This is despite the purported partnership between the two countries.
And Beijing’s mechanism for spending the money appears as likely to generate enemies as friends. For one thing, though small and medium-sized countries are lining up for cash, the region’s great powers are responding with counter initiatives. India, for example, boycotted the Belt and Road Forum and accused China’s lending program of benefitting Beijing more than its neighbors. Japan is pushing its own “quality infrastructure” initiative, emphasizing inadequacies in Chinese construction. Tokyo is also pushing to finalize the Trans-Pacific Partnership trade deal without the United States, which would give Japan a major role in writing Asia’s trade rules. And Russia, which itself hopes to participate in the Belt and Road, is eying Central Asia nervously. The Kremlin had long hoped it could divide the region, with Russia managing the politics and security, while China helped develop these countries’ economy. But as China’s role grows, that division of labor is looking more difficult to sustain.
Even in places where China’s influence is not being countered by other powers, Beijing’s massive cash infusions may still lead to headaches. Consider the over $20 billion Beijing has committed for the China-Pakistan Economic Corridor, much of it on projects in the transport and energy spheres that are already underway. For Pakistan, this is a big opportunity. The country needs investment, and even though the financing terms and thus the ultimate cost to Pakistan are not clear, Islamabad is desperate for cash today. For China, the payoff is primarily geopolitical. Thanks to the project, Beijing is deepening Pakistan’s dependence, while increasing China’s access to the Indian Ocean and its energy trade routes via Pakistan’s port of Gwadar.
But will China’s loans to countries such as Pakistan ever get repaid? The history of development lending to countries such as Pakistan is full of disasters, conflicts, and painful defaults. Decades of experience from Western countries and institutions such as the IMF show that making loans is the easy part. It is far harder to ensure that money is used effectively, and more difficult still to guarantee that loans are paid back. Many of the countries receiving Belt and Road financing are not known for performing well on these metrics. Sri Lanka is already struggling to deal with debt from Chinese-backed infrastructure projects. And in a worrisome irony, former Pakistani Prime Minister Shaukat Aziz spoke at the Belt and Road forum emphasizing his experience in office restructuring his country’s foreign debt. That default is unlikely to be Pakistan’s last.
Beijing’s foreign policy credibility now depends on extending as many loans as possible. But the more money it lends now, the larger the future cost will be. China already has had to deal with spendthrift client states, for example by repeatedly extending its loans to Venezuela, which is on the brink of bankruptcy. But as external lending expands, the likelihood that China swallows the cost of defaults, as it has done with Venezuela, will decline.
If China tries to force repayment, however, it will lose friends quickly. Consider the IMF, which is reviled in many developing countries for demanding austerity measures to enforce loan repayment. Whenever lenders try to force repayment, relations sour. When they forgive the loans, they incur a large cost. With Belt and Road-related promises reaching around $1 trillion, the sums are substantial. The losses—Chinese officials privately estimate that certain projects will lose 80% of the money invested—may be large, too. Thus China is setting itself up either for significant losses or for painful battles with its neighbors over debt repayments. Notably, only 1% of Belt and Road funding has been extended via institutions such as the Asian Infrastructure Investment Bank, which have credible lending criteria. The bulk of Belt and Road loans have come through the China Development Bank and the country’s big-four state-owned banks, which at times act as slush funds for Beijing’s foreign policy. The financial viability of much of this lending is dubious at best.
The already underwhelming implementation and the likelihood of unpaid debts is not the only reason to expect that the Belt and Road will disappoint Beijing’s geopolitical goals. China is using the Belt and Road to export its excess capacity in heavy industries and construction. Yet what the world outside of China needs is not more supply of Chinese industries, but more demand from Chinese consumers. If China were to spend more on its consumers, they would buy more from abroad, increasing demand—and thus employment—in other countries. Instead, China is looking to build roads and bridges that will increase demand for Chinese concrete and steel—and which will in many cases be built by Chinese workers. The Belt and Road is as much a welfare program for Chinese industry as for the country’s poorer neighbors.
Already, however, other countries are beginning to realize this. U.S. President Donald J. Trump is not the only world leader complaining about Chinese trade practices, even if he wrongly focuses on the bilateral trade deficit rather than more relevant multilateral dynamics. Kenya’s president was only the most recent world leader to demand that China buy his country’s products in addition to its raw materials. The more that the Belt and Road succeeds in its current form, the bigger this problem—and, likely, the political backlash—will become. Already, neighbors such as Kazakhstan are imposing restrictions on Chinese laborers and investment in their countries to ensure they benefit, too.
At their forum in Beijing, the Chinese presented an image of a new order of international trade and investment. But the Belt and Road looks likely to repeat and intensify existing problems. There is no evidence that Beijing has a special formula to make development lending effective. Its current plans will create plenty of waste followed, in a decade, by disputes over repayment. China’s vast plans are already worrying other regional powers. Meanwhile, its decision to double down on its industrial and construction sectors by exporting overcapacity abroad will deepen disagreements about China’s trade. Particularly after the U.S. withdrew from the Trans-Pacific Partnership, many observers have interpreted the Belt and Road as a geopolitical masterstroke that will rewrite the rules of Asia. But the foreign policy benefits that China gains from the project will come with a high price—and will be counteracted by nervous reactions from slighted or frightened neighbors.