China’s Belt and Road: Bigger than the Marshall Plan?

China’s Belt and Road Initiative should promote economic and political integration with countries associated with the projects. Money certainly helps - with deeper economic integration there should be money-making opportunities. The Chinese government has gained status regionally and internationally, as it continues to lead the BRI.

We see the initiative as more than a Marshall Plan 2.0. Its objective is not stability after a war but rather to speed the economic growth cycle in the Eurasia and Asia-Pacific regions. This has encouraged smaller countries to get involved in the programme when the BRI was launched.

In theory, one way to help Belt and Road economies grow is to equip them with infrastructure. Investment here should boost economic activity, particularly for those countries with poor infrastructure. Transportation and energy grid infrastructure, in theory, is essential to boost economic activity, leading to more manufacturing activity, trade flows, jobs, higher salaries and consumption. In other words, economies with better infrastructure should grow at a faster pace and enjoy a longer growth cycle.

Between 2013, when the BRI was first mooted, and 2016, most investment from China was in the area of transportation.

But the theory is valid only if the infrastructure projects are in need, and money spent on project financing are used efficiently. We are concerned that money borrowed to build some infrastructure projects would yield low returns that limits BRI economies' repayment ability.

It is well known that an element of funding for BRI investment projects has come from China and funds participating in China. But it is less well known that most of the lending facilities have come from the China Development Bank and a group of Chinese banks.

The first well-known source of funds for the BRI is the Silk Road Fund. The Chinese government will make an estimated $40 billion of equity investments through its Silk Road Fund and is eager to earn a return on its investments. As of August 2017, the committed investment in the Silk Road Fund was $680 million, with equity investment accounting for nearly 80%.

The Asian Infrastructure Investment Bank (AIIB) will also be a major investor. While it was originally proposed by China, the bank has 56 member states and is renowned for its robust corporate governance. The creditworthiness of its investments will be thoroughly scrutinised. Such tight credit screening explains why the AIIB has only announced financing amounting to $3.7 billion for the BRI thus far.

Apart from the Silk Road Fund and AIIB, the China Development Bank had lent out $110 billion in loans to Belt and Road projects as of January 2018. On top of that, the China Development Bank and China Export Import Bank announced separate BRI funds, worth $36.2 billion and 18.8 billion, respectively, at the 2017 Belt and Road Summit.

Because China is the main creditor for BRI projects, there is growing concern that countries that are part of the plan could incur significant debt to the Chinese government and Chinese enterprises. If unable to service that debt, China’s leverage over these countries will increase further, both economically and politically.

This has hit a nerve at the IMF.

On 21 May 2018, an IMF report pointed out that Montenegro, although having a relatively strong economy, has growing debt pressure. In early 2018, IMF managing director Christine Lagarde warned that the Belt and Road should "travel only where it is needed".

China appears to be becoming increasingly careful when it invests in the BRI. Restrictions on investments flowing into the real estate sector in Belt and Road economies have been in place since early 2017, and its restricted cross-border insurance policies at the beginning of 2018.

We agree that the process of building infrastructure could result in higher debt loads if the projects don't operate efficiently. Though some Chinese enterprises seek profit from their investments, some projects may not generate enough cash flows when the projects are completed. This would create debt problem of BRI economies.

And as the key lender, China could impose conditions when it comes to write-off of debts. These conditions could materialise in economic and political benefits for China, and could strengthen China's geopolitical power along the Belt and Road. But this may happen near the final stage of completing the BRI, which we believe 10-20 years from now.

From now to 10-20 years later, China does not want to build up a reputation as a political lead of Belt and Road countries at this early stage of pushing the BRI. Chinese lenders would either extend more loans or roll it over at lower interest rates when some projects would not pay off.