With a projected cost of more than US$1 trillion, it may be the most ambitious infrastructure project undertaken in human history. The country hopes it will all be completed by 2049, the 100th anniversary of the founding of the People’s Republic of China. My research in international economics with particular reference to China shows that Beijing has both economic and political plans for how these investments will pay off.
A rapidly growing China needs reliable access to energy. The Belt and Road Initiative includes pipeline construction and other building projects in oil- and gas-rich central Asia.
As these countries get more closely tied to the Chinese economy, they also shift into the range of its political efforts, sparking several concerns about the country’s motivations. Navy analysts have called China’s growing control of ports in Asia – including Hambantota, Sri Lanka; and Gwadar, Pakistan – an effort to assemble a “string of pearls” with which it can dominate much of Asia.
Recent reports suggest that Chinese investment in the Belt and Road Initiative – and international interest in Chinese funding – is slowing. In part that may be because, predictions and analysis aside, nobody knows for certain what China is aiming for – except to boost its own side in its rivalry with the U.S.
Victoria’s Labor government stole a march on the rest of the country last month becoming the first (and only) state government to sign a memorandum of understanding with China under China’s Belt and Road Initiative.
Belt and Road is China’s ambitious plan to lend money to improve infrastructure and other links between it and about 70 other nations that together make up more than 60% of world’s population.
The Australian government has refused to sign at the federal level where it could have used Belt and Road money to help develop the north. It did this in part because of concerns about China’s strategic intentions. Labor says it is more open to signing.
At first glance, there isn’t much in it, apart from a series of motherhood statements espousing cooperation:
The parties will work together within the Belt and Road Initiative, with the aim of promoting connectivity of policy, infrastructure, trade, finance and people, so as to seek new opportunities in cooperation and inject new momentum to achieve common development to strive to develop an open global economy, jointly combat global challenges and promote the building of a common future.
Also, the agreement makes clear it is not legally binding.
There are risks nonetheless
But the memorandum itself is the equivalent of hanging out a sign saying Chinese infrastructure investment is welcome.
On signing it, Premier Dan Andrews boasted that in four years he had “more than tripled Victoria’s share of Chinese investment in Australia, and nearly doubled our exports to China”. He sees Victoria as leading the development of closer links between the Australian and Chinese economies.
One risk is that Victoria will get projects that don’t pass cost-benefit analysis, a concern overseas.
In August the current Prime Minister of Malaysia, Mohathir Mohamed cancelled a US$27 billion East Coast Rail Link project and two other pipeline projects that his predecessor had signed as part of the Belt and Road Initiative.
He did so partly on the grounds that the awarding of these projects was linked to corruption in the previous administration and partly on the grounds that they would lead Malaysia to become excessively indebted to China.
He went further, speaking of “a new version of colonialism”.
And they mightn’t be our workers
Another concern is the large scale use of imported Chinese labour.
When read alongside an earlier memorandum of understanding signed as part of the China Australia Free Trade Agreement over the use of Chinese labour on infrastructure projects funded by Chinese partners, it would appear to allow the employment of an unlimited number of Chinese workers.
This memorandum signed between the Commonwealth government and China as part of the free trade agreement is lax. It includes no requirement for labour market testing.
Because of the difference in wage rates paid to Chinese and Australian infrastructure workers that would remain even after the imposition of the minimum wages required by the memorandum, the Chinese partner would have a strong incentive to employ Chinese workers.
China’s Belt and Road Initiative (BRI) has ambitions to reshape the global economy by connecting more than 60 countries across Asia, Europe and Africa through trade and infrastructure projects. All told, it’s envisioned that nearly two-thirds of the world’s population will in some way be connected through BRI projects in the future. Some economists estimate BRI could increase global trade by 12%.
Despite these benefits, many questions have been raised about China’s motivations for the initiative, and whether Beijing can afford the US$1 trillion it has committed to infrastructure projects and its partners can afford the debt they are taking on. Some fear BRI could be a Trojan horse for global domination through debt traps.
We had to take a decision to get out of this debt trap.
Nepal takes the plunge
Despite fears over loans they can’t pay back, many small countries have accepted BRI as an alternative pathway to economic prosperity. Nepal is one of them – it entered into BRI last year with great enthusiasm.
Then in June of this year, Nepali Prime Minister K.P. Sharma Oli travelled to China to sign agreements worth US$2.4 billion on everything from infrastructure and energy projects to post-disaster reconstruction efforts.
The highlight of the deals is an audacious plan to build a railway line through the Himalayas. The line will link the Tibetan border town of Kerung with the Nepali capital, Kathmandu, and tourist towns of Pokhara and Lumbini (Buddha’s birthplace). The railway is being trumpeted as a potential windfall for Nepal’s tourism industry, with some 2.5 million Chinese tourists expected to visit annually.
If the rail line is developed as proposed, Nepal would also be well placed as a major transit hub for trade between China and its rival, India. One study estimates Nepal’s trade could be boosted by 35% to 45% when the rail line and other BRI infrastructure projects are completed.
The Chinese government has already conducted a pre-feasibility study on the Kerung-Kathmandu railway. It estimated the 72.25km line from the Chinese border to Kathmandu would cost US$2.25 billion. (Other estimates say the cost might be much more.) Nepali railway officials say an incredible 98.5% of the line would run through tunnels and across bridges due to the forbidding, mountainous terrain.
Is Nepal falling into a debt trap?
The main debate in Kathmandu now is whether this proposed rail line is technically and financially feasible, and if it is someday completed, whether it’s destined to become a white elephant – an expensive but vastly underutilised transportation line.
Then there is the question of cost. Besides Sri Lanka’s struggles to pay back the US$8 billion in total it now owes Chinese firms, many other countries are in similar straits.
Economists worry that Laos, which has seen its debt reach 68% of GDP, will have difficulty paying off its share of a US$6 billion rail line being built by China. And in the Maldives, the opposition claims the country is facing a looming debt trap, with US$92 million in annual payments due to China to pay off an airport upgrade and bridge project – roughly 10% of the entire budget.
In Nepal, the burning question has been whether the trans-Himalayan rail line and other infrastructure projects would be built with similar loans, or if the government would be able to secure grants from China instead.
Economists and planners in Nepal believe the rail line would be beneficial to the country’s development, particularly because it would end Nepal’s reliance on its traditional ally, India, for trade, fuel, food and medical supplies.
But given the debt problems in Sri Lanka and other countries, the previous Nepali government was initially hesitant to follow the same path in its dealings with China. Last year, it pulled the plug on a US$2.5 billion hydropower plant being built by a Chinese firm because of the lack of a competitive bidding process.
But since Oli returned to power in February, he has pursued much more Beijing-friendly policies. Last month, he reinstated the hydroelectric plant contract. And though Nepal is still seeking grants from China to build the trans-Himalayan railway, it’s unclear whether Oli will make this a precondition to starting construction.
Thus far, Nepal and China have not come to an agreement on the funding question over the BRI projects and construction has yet to start.
Thinking beyond debt traps
Indian politicians and media outlets have been sceptical of China’s efforts to woo Nepal, raising fears that BRI is a masquerade for Chinese domination through debt-swap arrangements. But India’s real concern is losing its long-standing influence over Nepal, with which it enjoys a US$5 billion trade surplus.
For Nepal and other small countries in the region, however, the benefits that BRI can bring – namely improved infrastructure and greater connectivity to the world – do appear to be too good to pass up. After all, Nepal’s main concern is economic growth, development and improved livelihoods for its people.
For the country to truly benefit from these projects, it needs to enter into them cautiously, with the right funding plans in place. The government views these projects as potentially massive political victories and could overlook concerns over safety issues and financing when signing deals with China.
But Nepal must not fall into the same debt trap as Sri Lanka; otherwise, its aspirations of a brighter future could turn into a mirage.