Andreas Fulda on Twitter pointed out a useful new piece on China’s controversial Belt and Road Initiative by CSIS research Mark Akpaninyie. It seems that Mark and I have been thinking along similar lines, and the resulting online exchange helped me clarify my thinking.
It’s become increasingly clear that the “debt-trap diplomacy” meme started by Indian commentator Brahma Chellaney is not an accurate description of how the Belt and Road actually operates, despite the fervent embrace of this idea by China hawks. Basically, China is not actually organized enough to come up with such a clever and nefarious plan, and there is no evidence that there is a deliberate strategy to trap other countries in debt. A detailed examination of debt transactions by Rhodium Group also found that in many cases borrowers were able to get China to write off or renegotiate their loans.
The flaw in the debt-trap diplomacy theory, and with many other analyses, is that it mistakes the Belt and Road for a for a “highly centralized and coordinated” initiative. In reality, it is more of a slogan attached to the decentralized actions of state-owned enterprises and banks. Here is how Mark Akpaninyie describes it:
Little evidence actually suggests that Beijing coordinates a unified strategy to lure the developing world into unsustainable debt.
Instead of a state-led strategy, Chinese firms — motivated by profit and abetted by a toxic combination of bureaucratic disorganization, incompetence, and negligence at the state level — have exploited poor nations, which are dependent on cheap, and sometimes bad, loans. These companies, knowingly or unknowingly, persuade countries to pursue projects where benefits to the firms far outpace the benefits of the host nation. …
This practice does not trap recipient countries into taking on unsustainable debt. Instead, it allows Chinese companies to profit from often crooked deals building much-needed infrastructure in some of the world’s poorest countries, exploiting the undersupply of financing and these countries’ appetite for infrastructure projects.
The broader point here is that looking at the Belt and Road through the lens of “grand strategy” or “geopolitics,” as so many commentators do, or even portraying it as some kind of new philosophy of economic development, is quite misleading. All of these grand concepts are justifications invented after the fact for a pattern of actions that was already well underway before Xi Jinping made his 2013 speech about the Belt and Road.
The Belt and Road is really the expansion of a specific part of China’s domestic political economy to the rest of the world. That is the nexus between state-owned contractors and state-owned banks, which formed in the domestic infrastructure building spree construction that began after the 2008 global financial crisis (and has not yet ended).
Local governments discovered they could borrow basically without limit to fund infrastructure projects, and despite many predictions of doom, those debts have not yet collapsed. The lesson China has learned is that debt is free and that Western criticisms of excessive infrastructure investment are nonsense, so there is never any downside to borrowing to build more infrastructure. China’s infrastructure-building complex, facing diminishing returns domestically, is now applying that lesson to the whole world.
In Belt and Road projects, foreign countries simply take the place of Chinese local governments in this model (those who detect a neo-imperial vibe around the Belt and Road are, in this sense, onto something). Even the players are the same. In the 1990s, China Development Bank helped invent the local-government financing vehicle structure that underpinned the massive domestic infrastructure boom. Now, China Development Bank is one of the biggest lenders for overseas construction projects.
Those who defend the Belt and Road against the charge of debt-trap diplomacy are technically correct. But those same defenders also tend to portray the lack of competitive tenders and over-reliance on Chinese construction companies in Belt and Road projects as “problems” that detract from the initiative’s promise. They miss the central role of the SOE infrastructure-complex interest group in driving the Belt and Road. Structures that funnel projects funded by state banks to Chinese SOEs aren’t “problems” from China’s perspective–they are the whole point.
The fact that this model was dubbed the “Belt and Road Initiative” and turned into a national grand strategy by Xi Jinping effectively gave the SOE infrastructure complex carte blanche to pursue whatever projects they can get away with. These projects were no longer just money-makers for SOEs, but became a way to advance China’s national grand strategy–thereby immunizing them from criticism and scrutiny.
None of this means that the Belt and Road will not change or evolve. But I suspect that the trajectory it will follow will be similar to that followed by local-government infrastructure projects in recent years. The central government does actually worry about excess debt and bad projects, and so the building and funding of infrastructure have become gradually subject to more discipline and central scrutiny. But this has been done in a way that does not shock the entrenched domestic interest groups, and overall economic growth, too badly.
After last week’s forum, it does look like the Belt and Road is also on the way to becoming a bit more organized. But given the driving role that domestic interest groups have always played, hopes that it will be turn into a benevolent and technocratic global economic-development program are going to be disappointed.
Good piece, thanks. Although one big difference between BRI and the domestic infrastructure complex is that the former relies on USD loans, and so drains China’s currency reserves. By contrast, the only limit on domestic infrastructure spending is the inflation that may eventually be caused by unabated money printing and credit. This implies (potentially) a different dynamic at play, would you agree?
Absolutely, thanks. The problems that the Belt and Road projects are encountering now are mainly due to the fact that loans to other countries are not in fact loans to Chinese local governments.
sorry, we are making basically the same point, but I did not see your comment.
… and do we know Belt & Road loans are mostly in USD? I will bet dollars to donuts Belt & Road loans are being packaged within a strategy to expand CIPS… China’s alternative to SWIFT. And, facilitated with CIPS, being written in RMB? I have not seen data on this…but dollars to donuts…
Very interesting. On the bottom-up character of BRI and role of interest groups, see several excellent pieces by Lee Jones and colleagues.
Key point missing…Belt & Road debt is not in the domestic currency of the country building the project. Within China infrastructure spending is in the domestic currency of China. These are two very different paradigms, thus these two high debt scenarios are not equivalents.
Belt & Road debt is fundamentally being guaranteed by the West via the IMF & World Bank. If a small country with debts from various banks gets into trouble, who bails them out? With a haircut of course, but still. Chinese constructions companies and their bosses get rich… Western taxpayers picks up the tab (proportionate to their individual country participation in the World Band & IMF).
I believe otherwise. China was just selling her surplus construction capacity to whomever needs infrastructures for a profit. The money lent to a country is coming back to China through purchases of Chinese materials, renting construction machinery, wages paid to
Chinese employees and construction workers. And finally the borrower is still obliged to pay back the loan with interest. What a great strategy !
However you want to paint it BRI is one of the greatest lie ever told to the developing world in the new of supporting it economically. And that cannot be massaged academically as a so-so strategy
Andrew, you write that the OBOR initiative predates Xi’s 2013 announcement. Did the flow of or intensity of outbound SOE investments into OBOR countries change after the announcement? Do you have any data on this?