Is China’s Belt and Road initiative positive or negative for recipient countries?

China’s Belt and Road initiative has been a key foreign policy tool for Chinese premier Xi Jinping ever since 2013, when he announced China’s intention of “building a community with a shared future for mankind." The Belt and Road initiative (BRI) is, in effect, a massive collection of programs whose goal is to construct key infrastructure in developing countries with Chinese investment.

While on the surface this seems like an overwhelmingly positive initiative based on a benign, inclusive and charitable philosophy, I will analyze the issues associated with the BRI by looking at the case study, of Sri Lanka in particular, in an attempt to try and ascertain whether the BRI is really a positive initiative with the intention of levelling up LICs, or a cunning scheme designed to spread Chinese influence around the globe.

The Belt and Road initiative tends to be focused on key infrastructure which has the potential to massively increase the economic potential of certain regions in a country, an economic force multiplier. Examples of this include airports such as the Gwadar International Airport in Pakistan and ports such as the Hambantota Port in Sri Lanka. The main benefit of the BRI tends to be the ability to commit massive amounts of funds for large scale projects in developing countries that the target country is usually unable to fund itself. For example, in the case of the Hambantota port in Sri Lanka, the total cost of the project is in the range of $1.5 billion. To put this in context, Sri Lanka’s entire GDP in 2020 was just $84.2 billion- meaning that the port would have cost nearly 2% of Sri Lanka’s GDP. This would be like the US committing to spending around $500 billion - just on one port. What is interesting to note is that, after all the time spent and all the debt funding provided by the Chinese, it so happened that because of defaults etc., a major Chinese government backed firm, , China Merchants Port Holdings (CMPort), took an 85% stake in the project in 2017, after the project had been operating for nearly a decade, having begun in 2008.

Some would argue that the benefits of the BRI are easily outweighed by the negatives. This claim tends to focus specifically on predatory lending, debt for equity swaps and geopolitical consequences. Predatory lending in a geopolitical context is the giving of loans by one nation to another, usually at high interest rates. The donor country is almost always more economically developed than the recipient country. The Hambantota Port is a perfect example of this as the loans were given with deliberately high interest rates to make it practically impossible for Sri Lanka to pay them back. When Sri Lanka inevitably couldn’t keep up with its loan repayments, China enacted what is known as a debt for equity swap. A debt for equity swap entails the giving up of property in exchange for debt forgiveness. A day to day example of this would be a bank repossessing one’s house or car due to falling behind on mortgage payments. However, unlike the relatively low interest rates of mortgages, China ensures its ultimate ownership of the strategic asset it funds by laying the basis for future default by its borrower by applying interest rates well above market rates. This puts to bed any notion of China acting simply out of a desire to help LICs with development. While in the short term these loans may even be seen as beneficial due to the potential for immediate profit from whatever infrastructure has been built, in the long term, these loans and the BRI are damaging as they will, in many cases, mean the loss of valuable national assets which would have been economically and strategically vital in the long term for the recipient country. In another scenario, China retains the right to loan forgiveness or a reduction in penal interest after de facto creating the basis for a default, thereby setting the stage to become the most important foreign actor in that country despite being responsible (at least partly) for the default in the first place.

Above: An infographic showing the projected increase in various country's debt to China as a share of external public debt

Overall, it is difficult to dispute that the Belt and Road initiative is a “wolf in sheep’s clothing.” It is easy to understand how the promised investment is appealing to developing countries who have little capital of their own. But the Belt and Road initiative’s long-term costs, which do, in effect, leave a country beholden to China’s will, means that developing countries must be very careful before accepting China’s offer of assistance, which, some would say, resembles a Trojan horse more than generous aid.

By Siddhant Patnaik