IMF sees the upside of China’s massive Belt and Road project
As part of the project China has dispersed tens of billions of dollars in loans, often to highly indebted countries
China’s massive Belt and Road Initiative building push may create debt risks but is also responding to major infrastructure gaps in Asia and could boost global trade, World Bank officials say.
The relatively upbeat assessment of a sometimes controversial programme comes despite the debt crisis now faced by Pakistan, a recipient of massive Chinese loans.
China launched the ambitious plan in 2013 under President Xi Jinping, seeking to link Asia, Europe and Africa with a network of ports, highways and railways. It has dispersed tens of billions of dollars in loans, often to highly indebted countries, sparking criticism of Beijing for everything from "debt entrapment" to excluding local labour from projects funded.
But meeting in Bali at the weekend, officials from the World Bank and IMF said the initiative filled important gaps, while acknowledging concerns.
"There are huge opportunities: improved infrastructure means more trade, more investments, higher growth, bringing in landlocked regions," said Caroline Freund, the bank’s director of trade, regional integration and investment climate.
"But there are challenges as well;... There are environmental and social risks, there are issues to do with public procurement. Sustaining public debt becomes an issue because these projects are expensive," she said.
The World Bank estimates that initiative-funded infrastructure could boost trade among countries involved by 3.6%, and global trade by 2.4%.
And officials say it offers funding in areas where it is sorely needed.
"Several countries, especially in Central Asia and Caucasus have benefited ... in order to improve their infrastructure as well as to promote additional interregional trade," said Jihad Azour, the IMF’s director of the Middle East and Central Asia.
"Central Asia will benefit from any additional investment that leads to greater integration."
He called, however, for "careful" spending, urged "transparent" procurement processes and warned countries should maintain "debt sustainability."
In the past five years China’s direct investment under the initiative has surpassed $60bn, leaving recipients vulnerable.
The Centre for Global Development, a think-tank, says the initiative’s investments have "significantly" increased the risk of debt crises in eight countries: Mongolia, Laos, Maldives, Montenegro, Pakistan, Djibouti, Tajikistan and Kyrgyzstan.
But Freund said they were the exception and Chinese loans were a relatively small part of the total debt burdens of most countries in the initiative.
"Most of the countries borrowing from China in this initiative are in a pretty sound fiscal condition and are not in great risk of debt distress," said David Dollar, senior fellow at the Brookings Institution and a former World Bank official.
But for a small number of countries, there are "serious concerns", he acknowledged.
Among them is Pakistan, which relied heavily on initiative funding for a $54bn project linking its Gwadar port to China.
It now faces a balance of payments crisis and sent its finance minister to Bali seeking an IMF bailout.
Rising US interest rates are likely to make the situation worse for many countries, because the initiative’s loans are mostly denominated in dollars.
Loan recipients who fail to meet their obligations can face serious consequences, with Sri Lanka forced to cede control of a deepwater port financed by the initiative to Beijing.
In August Malaysia acted preemptively, shelving three China-backed projects, including a $20bn railway line, that it said it could no longer afford.
"We fully respect Malaysia’s decision-making, based on their sustainability situation," Chinese finance vice-minister Zou Jiayi told a panel at the Bali meeting.
"The Chinese government attaches great importance to the sustainability, we are the creditor," she added. But she emphasised that the initiative is not an aid programme.
"It’s not like the Marshall Plan. It’s a development initiative based on the market mechanisms and driven by market forces," she said.
Beijing’s commitment to market forces has been questioned by some, however, with most projects financed with initiative money awarded to Chinese companies and built with Chinese labour.
A French treasury report released last week praised the initiative for contributing to areas with serious infrastructure shortfalls but noted that just 3.4% of the projects financed by China were awarded to foreign companies. And in Pakistan, it said, 91% of the revenue that will be generated by the Gwadar port project over the next 40 years will benefit China.
Zou said the overwhelming reliance on Chinese labour was simply "cost effective" but acknowledged Beijing could encourage Chinese companies to "take more advantage of the local labour".
The programme has also been criticised for funding politically driven white elephants that are structurally unsound or largely useless.
Speaking in Beijing earlier this year, IMF MD Christine Lagarde praised the "early indications of progress" under the initiative but also warned of the need to ensure "that Belt and Road only travels where it is needed".