Belt Road Initiative (BRI) — Smart Strategy?
Following on from my previous post, here is the discussion of the five points.
What is China’s Objective with the BRI?
The objective of BRI is “to integrate global markets with Chinese production hubs”. Chinese government is investing heavily in network of roads / railways and ports in Asia and Africa.
In Asia, CPEC is the largest BRI initiative. It is a key road / infrastructure build project to connect the Chinese province of Xinjiang in China with Baluchistan port in Gwadar.
In similar fashion, China is developing ports, roads / railway infrastructure in Africa to improve easy access to growing markets in Africa.
China is also funding most of these projects.
One question arises from this — Why are countries availing Chinese funding (and join BRI) as opposed to IMF or other development bank funding (be independent)…?
Why do countries choose Chinese funding over IMF or ADB?
The answer to this question lies in the eligibility / terms and condition of the loan. To be eligible for IMF / ADB loan, the receiving country has to prove its ability to return back the money and have a certain credit rating. In addition to the above, the projects that are availing the funds has to follow the strict guidelines such as transparency, open tendering, close monitoring of funds usage etc.
Chinese funds, on the other hand, are easier to get and don’t have to follow strict terms and conditions and often exceeds the receiving country’s borrowing capacity. The loans are secured by the assets / Project itself.
With the global trade war, will BRI be helpful for China?
With the ongoing trade war (with political opposition and import tariffs), the demand for Chinese goods has definitely gone down. The current coronavirus pandemic has made the situation even worse. The lockdowns have not only inconvenienced people, but also have created huge job losses and economic downturns. Unless the Chinese continue selling their products globally, these projects become meaningless.
Let’s take the example of “Hambantota Port” project in Sri Lanka — The “China funded” project has not been able to keep its commitments since its completion and hence, China has “acquired ownership” the project on a 99 year lease. A mini China in Sri Lanka.
Many believe, most of the projects in Africa and the CPEC may fall in the same category. We will have to wait and see.
What is Chinese Investment / funding strategy for the BRI?
Major part of Chinese funding is in the form of debt at commercial rates through Chinese Development Corporation (CDC) or the Exim Bank of China (EBC).
One of the key observation for most of the projects is that, the Project Contracts are given to Chinese companies employing Chinese manpower. Very interesting isn’t it?
The first phase of Hambantota Project was funded by a loan of $360 million by EXIM Bank of China at 6.3% and the construction contract was given to China Harbour Engineering Company and Sinohydro Corporation.
Smart Investment / funding Strategy? — The funds are transferred from China to the Project in Sri Lanka, construction contractor is Chinese, and hence makes payments to them, takes all the funds back to china. And guess what, Sri Lanka still owes the money to China at 6.3%. Chinese not only get to sell their machinery but also generate employment for Chinese.
What does Today’s scenario look like?
Free Global trade is under threat with the imposition of trade tariff by US and rejection of Chinese products all around the world after the COVID pandemic. That is in addition to the ongoing trade friction between China and Japan / Korea. Some of the large companies (like Samsung, iphone) have decided to take manufacturing out of China. Japan has set up a $2.2 billion fund to help Japanese manufacturers to move out of China. It’s the beginning.
Assuming that all projects are completed and the projects don’t generate enough revenue to pay back the loans, China will take ownership. The basic purpose of the project will be defeated and China will be sitting with a huge portfolio of non-performing assets.
What actually happens remains to be seen! Hope the situation improves soon and some sort of understanding is reached between the China and countries that are in the trade war.
Partha Mazumdar
