China’s Belt and Road Initiative hits speed bump as ‘debt trap’ fears mount

A colossal infrastructure project, China’s Belt and Road Initiative (BRI) — aimed at connecting Asia with Africa and Europe via land and maritime networks — was launched as an umbrella mechanism to facilitate bilateral trade. 

Touted as the New Silk Road, it was described by Chinese President President Xi Jinping as the ‘project of the century,’ pivotal in regional integration, increasing trade and stimulating economic growth: The proposed Silk Road Economic Belt (SREB) would pass through regions that were part of the original Silk Road: Central Asia, West Asia, the Middle East, and Europe.

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The initiative, formerly known as One Belt One Road (OBOR), was incorporated into the Constitution of China in 2018 — five years after the Chinese President proposed it as the communist country’s global infrastructure development strategy to invest in nearly 150 countries and international organisations, with a clear aim to expand China’s economic and political influence. 

Dreams turn sour

It was hoped that the investments will usher in a new era of trade and growth for economies in Asia and beyond. But, in 2022, China’s audacious programme of lending, aid and infrastructure contracts — totaling over $880 billion — seems to be in a big mess. It is increasingly being seen as China’s first, and worst, overseas debt crisis.

While Xi is almost certain to secure his third term, the Communist country is showing clear signs of strategic overstretch on both foreign and domestic fronts. President Xi’s “Chinese Dream” for national rejuvenation faces serious challenges. Several countries in the Indian subcontinent and Africa have been squeezed by the BRI debt trap even as the Indo-Pacific region is rattled by PLA’s belligerence as evident in its skirmishes with India. 

To make matters worse, the pandemic has brought economic downturn and major global investment banks have cut their growth estimates, way below the Chinese government’s target of around 5.5 per cent. Furthermore, there are cracks in its bilateral relations with the US, which hit a new low after US House Speaker Nancy Pelosi’s visit to Taiwan last month.

The debt trap

According to new research, the “hidden debts” of the countries which have borrowed from China amount to a staggering $385 billion. They include several Asian countries. On August 19, China endorsed the decision by Shehbaz Sharif-led Pakistan government to scrap the China-Pakistan Economic Corridor (CPEC) Authority as the rift between the two accelerated over the tardy pace of the $60 billion project. Islamabad also failed to provide security to Chinese nationals working on a host of projects.

Launched in 2015, CPEC, which connects Gwadar Port in Pakistan’s Balochistan with China’s Xinjiang province, was BRI’s flagship project. Since CPEC is being laid through Pakistan-occupied Kashmir (PoK), India had refused to be a part of BRI, the only country in the eight-nation Shanghai Cooperation Organisation (SCO). China had spent about $28 billion on a clutch of CPEC projects, which seem to have gone down the drain as its future remains uncertain.

Pakistan was one of the many countries China has left in a constant loop of debt and dependency. Currently, China is present in several Asian countries and more than 30 African countries; it holds 14 per cent of Sub-Saharan Africa’s total stock. Analysts say that the purpose of China’s investments in poor and developing countries is to eventually take away the control they have over their assets, resources, infrastructure, and policies, as collateral.

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According to reports, only 10% of Chinese borrowers had some kind of liquidity crunch by the end of 2014. However, over 70% of them were defaulted officially by mid-2022. Besides Pakistan, they include Zambia, Laos, and Sri Lanka. 

World credit agencies, like Moody’s, have still not been able to find the exact details of the debt because the terms at which these heft loans were ‘opaque’, experts say. According to the World Bank, nearly 40 per cent of the debt which the poorest countries owe is due to China. Many of these countries have already surpassed their GDP in loans. In the past five years, China has made nearly $26 billion in short and medium-term loans to Pakistan and Sri Lanka alone.

Dipping investments?

In the first half of 2021, China’s BRI investments cumulatively stood at $84.2 billion, while for the same period in 2022, the figure has fallen to $74.74 billion, according to MOFCOM data. Furthermore, along with a dip in the investments in Pakistan, there were no investments in Russia. In the first half of 2022, Beijing’s spending and investment abroad through BRI dipped by 11.77 per cent.

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According to a July 2022 report from Fudan University’s Green Finance and Development Centre, while Saudi Arabia was the biggest recipient of funds under BRI, countries like Russia, Sri Lanka, and Egypt saw no investment in the first half of 2022; Pakistan saw a fall in funding by 56 per cent.

China vs America

The term ‘debt trap’ has been used extensively by the US to describe the precarious international financial crisis China has been hurtling towards. US Secretary of State Antony Blinken recently accused China of creating a ‘debt trap’ through BRI. The Chinese foreign ministry has always denied this. 

So far, China has worked with 150 countries and spent $1 trillion as part of BRI only after “cooperation documents,” Ministry of Foreign Affairs spokesman Wang Wenbin said on August 19. “The so-called Chinese debt trap is a lie made up by the US and some other Western countries to deflect responsibility and blame,” Wang said.

With China’s bilateral ties with the US hitting rock bottom, the G7 nations have decided to challenge China’s BRI. In June this year, they unveiled a new programme, Partnership for Global Infrastructure and Investment (PGII), to raise about $600 billion for global infrastructure projects in developing countries in the next five years.

India’s alternative to BRI

In recent years, even though the two countries have mutual business interests, China-India relations have been acrimonious: the recent border clashes in Ladakh’s Galwan valley have led to the growing mutual suspicion and distrust between Beijing and New Delhi. To add to all this, BRI, too, has been a bone of contention. India has been wary of the Chinese plan to keep enhancing its maritime power in the East China Sea and South China Sea to facilitate commercial traffic between the Pacific and Indian oceans. With the support of Washington and other Quad countries — Australia and Japan — India is all set to disrupt China’s plan to create a “Digital Silk Route.”

To counterbalance the BRI, it is in the process of establishing two parallel networks of connectivity, which includes both sea and land routes. Under its Look East Policy, it is aggressively trying to foster relations with the ASEAN countries. The India-Myanmar-Thailand Trilateral Highway, a 1,400 km-long project that will connect India’s northeastern states with the ASEAN region, is part of India’s plan to create an alternative to BRI. In future, this highway can be extended further eastward to Cambodia, Laos, and Vietnam. The Trilateral Highway is being seen as a “parallel” structure to the BRI in the ASEAN region.

Chabahar Port, located on Iran’s southern coast in the Sistan-Baluchistan province, is another ambitious project India has invested in. Functional now, the Chabahar Port — which includes a free trade zone, the 628-km Chabahar- Zahedan railway track, and a 1,000-km track — handles almost five million tonnes of cargo annually. 

The rise and rise of Gautam Adani has led to the speculation that Adani Group can lead India towards finding an alternative to China’s BRI, widely seen as an unsettling extension of the dragon’s rising power. The conglomerate may be vying with Beijing’s infrastructure groups for control over ports around the world, but it will a daunting task for India to match the scale and breadth of BRI. At the most, what India’s enhanced interconnectedness will do is provide a new theater for geopolitical competition with China in South Asia and the Indian Ocean, and present it with an opportunity to reestablish its regional primacy.