THE BELT & ROAD INITIATIVE: ECONOMIC &

GEO-POLITICAL ENDS

AKANSH BORA 20171038 ECONOMICS II

 INTRODUCTION
The Belt and Road Initiative (BRI) is President Xi’s most ambitious project. Its
materialization could eventually reshape the current international economic order and
cause China to become the kingpin of the ‘Asian century’.
The BRI aims to connect China with the rest of Eurasia and Africa through land
and sea networks passing through six corridors. The stated objective of this
infrastructural leviathan is “improving regional integration, increasing trade and
stimulating economic growth.”1 The project is commonly called the ‘Modern-Day Silk
Road’, as it bears an objective similarity to the ancient ‘Silk-Road’ trade routes whose
lasting impact on trade, culture and history resonate till today.
In the first part, we will highlight some pressing economic concerns that are the
driving force behind Xi’s grand plan. The launch of BRI has been tactically timed with
a simultaneous assertion of Chinas foreign policy. This has caused the project to be
often interpreted as having a geostrategic objective overarching the economic one. The
truth in this fact is evaluated in the second part, by examining certain developments of
Chinas bilateral relationships within the BRI circle.

A. THE GEO-ECONOMIC MOTIVATIONS OF CHINA

A.1 Excess industrial capacity:
China is a global behemoth in project development 2, so much so, that many of
its ventures are collectively called “mega-infrastructure.” This in in contrast to other
Asian economies, whose development policies have been more export-oriented with a
general underinvestment in infrastructure-based investment.3 Over the years, Chinas
investment-led growth policy has led to an overcapacity hang, becoming one of its most
serious economic issues today.
This ‘excess’ problem was made worse by the 2008 crisis. The governments
stimulus programs were heavily focused on fixed assets which led to a massive
enlargement of the domestic capacity in many sectors ranging from steel to cement.4
From 2008 to 2015, the steel industries production surged by 56%. To put things in
perspective, the said increase was larger than the total steel production of the European
Union and the United States, combined.5

1"Belt and Road Initiative (BRI)," European Bank for Reconstruction and Development (EBRD), , accessed May 04, 2019,
https://www.ebrd.com/what-we-do/belt-and-road/overview.html.

2 "Chinese Infrastructure: The Big Picture," McKinsey & Company, , accessed May 1, 2019, https://www.mckinsey.com/featured-
insights/winning-in-emerging-markets/chinese-infrastructure-the-big-picture.

3
M. Firzli and M. Firzli, "Forecasting the Future: The BRICs and the China Model," International Strategic Organization (USAK) Journal of
Turkish Weekly, , accessed May 01, 2019,
https://www.academia.edu/12319362/Forecasting_the_Future_The_BRICs_and_the_China_Model.

4"China's Response to the Global Financial Crisis," East Asia Forum, March 21, 2010, , accessed May 5, 2019,
https://www.eastasiaforum.org/2010/01/24/chinas-response-to-the-global-financial-crisis/.

5Willett, Zhang Thomas D., and Nan, "The Effects of the Global Financial Crisis on China's Financial Market and
Macroeconomy," Economics Research International, March 27, 2012, , accessed May 1, 2019,
https://www.hindawi.com/journals/ecri/2012/961694/.
 Excess capacity shrinks corporate profits, fuels debt levels and makes the
financial system more vulnerable.6 Beijing wants to use BRI to transfer production
facilities outside China. As a result, liabilities of the domestic sector would become
economic assets abroad.
A.2 Upgradation of the Chinese Manufacturing Sector.
China has developed a reputation of being the ‘worlds factory’ in the last 30
years. However, its comparative production advantages like cheap labour have recently
begun to disappear. Subsequently, Chinese leadership wants to recapture and multiply
Chinas territory in the global value chain.7 This object runs parallel with Xi’s broader
ambition to create an innovation-based market and make China a leader in research and
development.8
Using BRI, Chinese manufacturers will be expected to function in more
challenging markets and stricter regulatory environments. An expansion of the
domestic production would compel manufacturers to escalate in the value creation
chain. Major Chinese financers, (who are largely government owned)9 would reinforce
this process by urging credit recipients to purchase Chinese products as a rider for
extending loans.
A.3 Internationalization of Renminbi (RMB)
It has been four centuries since Chinese currency was an international medium
of exchange. China was a major trading giant with a nearly 30 percent share of global
GDP in PPP terms (twice its present level).10 With China surpassing the US to become
the largest trading nation in 2013 11, conditions seem ripe for Chinese policymakers to
consider the internationalization of the RMB.
Internationalization might destabilize the economy in the short term with spill
over effects and external shocks, but its long-term benefits are a key ingredient in
augmenting China’s geostrategic pull and expanding its ‘soft power’. Almost half of
Chinas global trade share involves processing parts and components that originate in
East Asian Countries. It makes little long-term sense to remain exposed to the exchange

6"Understanding China's Belt and Road Initiative," Lowy Institute, , accessed May 06, 2019,
https://www.lowyinstitute.org/publications/understanding-belt-and-road-initiative.

7"China's Industrial Upgrade | Insights," HSBC, , accessed May 04, 2019, https://www.gbm.hsbc.com/insights/global-
research/chinas-industrial-upgrade.

8 Dan Beznits and Michael Murphree, "The Rise of China in Technology Standards: New Norms in Old Institutions," IEEE
Standards University, , https://www.standardsuniversity.org/article/rise-china-technology-standards-new-norms-old-
institutions/.
9
"China's Big Four Banks Dominate The Top of The World's 100 Largest Banks," Proshare Intelligent Investing, , accessed May 01, 2019,
https://www.proshareng.com/news/Global Market /China-s-Big-Four-Banks-Dominate-The-Top-of-The-World’s-100-Largest-Banks/44797.

10Yukon Huang and Clare Lynch, "Does Internationalizing the RMB Make Sense for China?" Cato Journal 33, no.3 (December
2013): , https://carnegieendowment.org/files/Internationalizing_the_RMB.pdf.

11
Angela Monaghan, "China Surpasses US as World's Largest Trading Nation," The Guardian, January 10, 2014, , accessed
May 02, 2019, https://www.theguardian.com/business/2014/jan/10/china-surpasses-us-world-largest-trading-nation.
 rate risks and the seigniorage allied with the dollar.12 BRI nations are increasingly
transacting in RMB to facilitate trade and infrastructure projects. In 2017 alone, RMB-
denominated Assets held by foreign institutions grew more than 40 per cent.13 Chinses
institutions have identified BRI to be the biggest factor driving RMB’s
internationalization.14

B. GEO-POLITICAL INSPIRATIONS & THE DEBT TRAP DIPLOMACY.

The BRI initiative is largely motivated by crucial economic concerns.
However, the strategic benefits are rather evident when the programme is viewed from
a geopolitical lens. Officially speaking, Chinas principle aspirations with BRI are
purely economic and cultural in nature, but a deeper analysis of individual projects
under the Belt and Road umbrella, remove all doubt about Beijing’s attempts to gain
political leverage through its bilateral relations.
Recent developments of BRI in Sri Lanka, Pakistan and several African, Latin
American and Southern Pacific countries, hint at the use of geopolitical tools that are
turning bad debts into strategic deals. At the core of any bilateral relationship between
two countries, lies the mutual recognition of their sovereignty. China has been accused
of exploiting infrastructure-starved nations with neo-colonialist intentions in the name
of economic integration.15
Till date, China has invested over $210bn in infrastructure projects
internationally.16 Almost all of these loans have been made at below market-rate interest
to attract cash-strapped but resource-heavy developing nations. Many unsustainable
projects in countries with low sovereign credit ratings have already failed and begun to
show signs of exposure to Beijing’s geo-political aspirations.
Once the borrower nation defaults on a loan, Chinese access to resources and
local markets is secured as debt relief. This strategically targeted lending practice has
been infamously named ‘Chinas Debt-Trap Diplomacy’ and is largely associated with
projects under the BRI umbrella. The following instances of Sri-Lanka and Pakistan
make these allegations look ominously prescient.

12"ADBI Working Paper Series - Asian Development Bank," ,

https://www.adb.org/sites/default/files/publication/156336/adbi-wp481.pdf.

13"Belt and Road Boosts Global Use of Renminbi: Survey," GBTIMES, May 30, 2018, , accessed May 04, 2019,
https://gbtimes.com/belt-and-road-boosts-global-use-of-renminbi-survey.

14Mercy A. Kuo, "RMB Internationalization Outlook: Milestones and the BRI," The Diplomat, April 04, 2018, , accessed May
04, 2019, https://thediplomat.com/2018/04/rmb-internationalization-outlook-milestones-and-the-bri/.

15Bloomberg.com, , accessed May 04, 2019, https://www.bloomberg.com/news/articles/2018-08-20/mahathir-warns-

against-new-colonialism-during-visit-to-china.

16Lily Kuo and Niko Kommenda, "What Is China's Belt and Road Initiative?" The Guardian, , accessed May 05, 2019,
https://www.theguardian.com/cities/ng-interactive/2018/jul/30/what-china-belt-road-initiative-silk-road-explainer.
 B.1 Sri Lanka surrenders Hambantota.
China Harbour and Sinohydro Corporation, two state owned firms from China were
hired to build the Hambantota Port in Sri-Lanka. The project is a part of BRI and was
built at a cost of $361mn. 85 percent of this cost was funded by the state-owned EXIM
bank of China. Feasibility studies indicated towards an unsustainable interest coverage
ratio and potential underutilization of the port.17
Construction continued, and the port was set to be opened in the first quarter of
2011. The port sustained heavy losses since its opening. Although it is situated on a key
shipping route that is used by an estimated 36,000 ships annually,18 it only attracted 34
ships in 2012.19 The feasibility studies were blatantly overlooked by both parties and
repayment became a distant dream. Sri Lanka’s ignorance can be explained by certain
investigations that uncovered corrupt deals within the government as well as a general
hunger for infrastructure and financing.20 However, Chinas obliviousness towards
evident economic red-flags hint at strategic objectives behind the deal.
After months of negotiations and heavy pressure from the Chinese government,
Sri Lanka leased the port to China Merchants Port Holding Company for 99 years,
wiping off almost $1bn from its overall loans. Along with the port, Sri Lanka also
surrendered 15,000 acres of land around it.21 The transfer has given China a strategic
foothold along a vital trade and military waterway. This case is a vivid example of
Chinas use of loans to achieve its geo-political goals.
B.2 The Military tale of CPEC in Pakistan.
Pakistan is a nuclear-armed and strategically located neighbour of China. The
China-Pakistan Economic Corridor (CPEC) is BRI’s flagship project with investment
plans that exceed $62bn. When BRI was inaugurated in 2013, Nawaz Sharif saw it as
a solution for many problems. Terrorist attacks and a reputation for corruption had
driven away foreign investment over the years.
The first investment under CPEC, was a coal power plant, that Pakistan saw as
step towards solving its electricity shortages. The government has failed to fund even
the operation of the plant.22 The Gwadar port and a Special Economic Zone around it,
was the next major investment under CPEC.23 The port gives China a quicker route to

17
"China's Big Four Banks Dominate The Top of The World's 100 Largest Banks," Proshare Intelligent Investing, , accessed May 01, 2019,
https://www.proshareng.com/news/Global Market /China-s-Big-Four-Banks-Dominate-The-Top-of-The-World’s-100-Largest-Banks/44797.

18Shirajiv Sirimane, "Hambantota Port, Gateway to World," Features | Sundayobserver.lk - Sri Lanka, , accessed May 08,
2019, https://web.archive.org/web/20100224055824/http:/www.sundayobserver.lk/2010/02/21/fea20.asp.
19
Maria Abi-habib, "How China Got Sri Lanka to Cough Up a Port," The New York Times, June 25, 2018, , accessed May 01, 2019,
https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html.

20Maria Abi-habib, "How China Got Sri Lanka to Cough Up a Port," The New York Times, June 25, 2018, , accessed May 01, 2019,
https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html.

21Bloomberg.com, , accessed May 01, 2019, https://www.bloomberg.com/news/articles/2018-04-17/china-s-1-billion-white-elephant-the-

port-ships-don-t-use.

22Maria Abi-habib, "China's 'Belt and Road' Plan in Pakistan Takes a Military Turn," The New York Times, December 19, 2018, accessed May
01, 2019, https://www.nytimes.com/2018/12/19/world/asia/pakistan-china-belt-road-military.html?action=click&module=Top
Stories&pgtype=Homepage.

23
Hamza Shad, "Gwadar: Emerging Port City or Chinese Colony?" The Diplomat, October 06, 2018, , accessed May 01, 2019,
https://thediplomat.com/2018/10/gwadar-emerging-port-city-or-chinese-colony/.
 the Arabian Sea as well as a military trump card against the United States and India,
two powers it increasingly confronting at sea.24
In October 2018, Imran Khan, the new Prime Minister of Pakistan approached
the IMF, seeking an $8bn bailout package to “stabilize deteriorating finances.”25 One
of the prerequisites demanded by the IMF, was the disclosure of all details related to
Chinese debt. In an expected move in January 2019, Pakistan announced that it has
received a bailout from “Chinese friends” and would not require IMF’s support.
The CPEC has been cited as a major contributor to Pakistan Governments loan
problems and their burden of debt is piling up. It has been predicted that these debts
would keep rising if Pakistan fails to attract private investors.26 Keeping in mind the
current economic relationship between the two nations, and Chinas potential non-
economic benefits from controlling the CPEC, Pakistan must look at future deals with
strict scrutiny. Any default on their part will presumably lend credence to assertations
of “Debt Trap Diplomacy”.

CONCLUSION
There are many more allegations of Debt Trap Diplomacy on China apart from
the cases of Sri-Lanka and prospectively, Pakistan. Some of these include bilateral
relationships with large power imbalances that could presumably lead to geo-political
tools being triggered by Beijing.
China has characterized BRI as mutually beneficial for its own global ambitions
and infrastructure-hungry nations. But in reality, most developing countries under this
programme find themselves overwhelmed with debt. Lack of feasibility studies by
Chinese investors,27, evidence of non-competitive pricing and asymmetric information
about the sustainability of projects,28 steep concessions as debt relief, non-concessional
loans with high interest rates, secret negotiations29 and publicly undisclosed load
conditions are some unstated features of Chinese loans which suggest that Beijing is
looking beyond the bottom line. The debt book carries on.

24Steven Lee Myers, "With Ships and Missiles, China Is Ready to Challenge U.S. Navy in Pacific," The New York Times, August 29, 2018, ,
accessed May 01, 2019, https://www.nytimes.com/2018/08/29/world/asia/china-navy-aircraft-carrier-pacific.html?module=inline.

25Kamran Haider, "Pakistan Devalues Rupee as It Prepares to Seek 13th IMF Bailout," BloombergQuint, October 09, 2018, , accessed May
08, 2019, https://www.bloombergquint.com/global-economics/pakistan-to-seek-imf-bailout-to-stabilize-deteriorating-finances.

26
The Newspaper's Staff Reporter, "Reliance on Chinese Funding to Grow: Fitch," DAWN.COM, December 20, 2018, , accessed May 01,
2019, https://www.dawn.com/news/1452488.

27 Maria Abi-habib, "China's 'Belt and Road' Plan in Pakistan Takes a Military Turn," The New York Times, December 19, 2018,
, accessed May 1, 2019,
https://www.nytimes.com/2018/12/19/world/asia/pakistan-china-belt-road-military.html?action=click&module=Top
Stories&pgtype=Homepage.

28Mark Akpaninyie, "China's 'Debt Diplomacy' Is a Misnomer. Call It 'Crony Diplomacy.'," The Diplomat, March 12, 2019, ,
accessed May 1, 2019, https://thediplomat.com/2019/03/chinas-debt-diplomacy-is-a-misnomer-call-it-crony-diplomacy/.

29Hannah Beech, "'We Cannot Afford This': Malaysia Pushes Back Against China's Vision," The New York Times, August 20,
2018, , accessed May 05, 2019, https://www.nytimes.com/2018/08/20/world/asia/china-malaysia.html.