U.S. Seeks to Avoid a Pakistan Bailout That Would Repay China

A new government in Islamabad faces a financial crisis, but Pompeo says IMF bailout funds shouldn’t help China
By Saeed Shah and Bill Spindle

A pile of coal at a Chinese-owned power plant in Sahiwal, Pakistan, last year. 

Pakistan’s growing debt to China is emerging as a point of contention with the U.S., with Islamabad rejecting Washington’s concerns Tuesday as the South Asian nation’s incoming leaders prepare to possibly seek an international financial bailout in the coming weeks.
U.S. Secretary of State Mike Pompeo was asked on Monday about the issue of Chinese loans to Pakistan as part of China’s “Belt and Road” infrastructure program, if Pakistan approaches the International Monetary Fund for a bailout. 

The U.S. is the largest shareholder and contributor to the IMF, a multilateral international organization that loans money to governments to help them manage financial difficulties.
“There’s no rationale for IMF tax dollars—and associated with that, American dollars that are part of the IMF funding—for those to go to bail out Chinese bondholders or—or China itself,” Mr. Pompeo said in an interview on CNBC.
IMF funds generally go directly to a country’s central bank for use in managing foreign exchange shortfalls and stabilizing government finances.
China has a $62 billion infrastructure building program for Pakistan, known as the China Pakistan Economic Corridor, of which some $19 billion, mostly in roads and power plants, is under way or completed. 

The projects are either financed by loans from China or, in the case of power stations, an obligation to buy the electricity produced for the next 30 years at a price that covers the financing of the plants and a return on the investment.
“First and foremost it is totally wrong to link IMF package with CPEC. It is affirmed that Pakistan Government is fully committed to undertake and complete CPEC projects in their totality,” Pakistan’s Ministry of Finance said in response to Mr. Pompeo. 

“Third parties cannot weaken our collective resolve to make CPEC a success story.”
Pakistani and Chinese officials have long suspected the U.S. of trying to undermine CPEC and other Belt and Road projects, which seek to extend Beijing’s influence through economic ties. 

Pakistan is increasingly reliant on China. 

While the U.S. has said it supports the Chinese program in Pakistan, it has also warned of “debt trap diplomacy” from the Belt and Road initiative more broadly.
Mr. Pompeo’s comments came after he delivered a major speech to the U.S. Chamber of Commerce that touted the U.S.’s commitment to invest heavily in Asia through U.S. companies as an answer to Belt and Road.
Mr. Pompeo stressed that U.S. investment would generate commercially profitable returns both for U.S. companies and the countries they invest in, compared with what he said were Chinese projects that are skewed toward benefiting China.

U.S. Secretary of State Mike Pompeo spoke in Washington on Monday. 

Coming off an election last week won by political outsider Imran Khan, who is expected to be sworn in as prime minister within a few weeks, Pakistan faces a growing fiscal and balance-of-payments crisis and will almost certainly need a bailout from one or more countries and international financial institutions. 

The country has received more than a dozen past bailouts from the IMF.
A senior Pakistani official recently told The Wall Street Journal that the country needed a $8 billion to $10 billion bailout, adding that there are “few options” other than the IMF.
The Chinese projects are providing some infrastructure for Pakistan, particularly power plants that have helped ease shortages and allowed manufacturers to grow production. 

But Pakistan has to repay the Chinese loans, the details of which haven’t been made public.
When the new Pakistani government is formed in the coming weeks, tackling the fiscal problems will be its first priority, according to economists and politicians. 

Asad Umar, a lawmaker just re-elected for the victorious Pakistan Tehreek-e-Insaf party who is tipped to become finance minister, has said that the government will likely need a bailout.
Possible sources of emergency funds include not only the IMF but also Saudi Arabia, which has helped Pakistan in past crises, and China, either in conjunction with the IMF or not.
Beijing has provided Pakistan with more than $3 billion in short term loans in recent months, in addition to the infrastructure funding, and some Pakistani officials have suggested that it could provide a large rescue package for the country. 

The Chinese ambassador met Mr. Khan on Monday in Islamabad.
“We will be evaluating all our options. At this stage we have not even decided to go to the IMF,” Mr. Umar said, after Mr. Pompeo’s comments.
Senior officials from Mr. Khan’s party said they are eager to maintain relations with China while rebuilding economic ties with the U.S. that have been strained in recent years.
Chinese officials said that if Pakistan chose to seek an IMF bailout, those discussions wouldn’t involve China.
“I believe IMF has its own standards and operating rules in cooperating with relevant countries,” Geng Shuang, a Chinese foreign ministry spokesman, said Tuesday when asked about Mr. Pompeo’s remarks on a potential Pakistan bailout. 

“I believe they will properly handle the relevant issues.”

The Big Problem With China’s Bridge and Tunnel Addiction

Public-private partnerships are in vogue in Beijing—and unstable.

By Bruce Einhorn

Beijing is eyeing a 50 percent expansion of China’s high-speed train network.

With a global portfolio that includes Club Med and Cirque du Soleil, as well as assets in real estate, insurance, and pharmaceuticals, Fosun Group is one of China’s most active dealmakers. 

Still, the 46.2 billion-yuan ($6.7 billion) railway project it unveiled in September was noteworthy. The Shanghai-based conglomerate announced it was taking a controlling stake in a proposed 270-kilometer (168-mile) high-speed rail line linking the eastern cities of Hangzhou and Taizhou. 

The deal, which also attracted investment from two Chinese automakers, is part of a new government strategy to have private companies take the lead in major infrastructure projects.
China spent more than $10.8 trillion on infrastructure from 2006 to 2015, according to Bloomberg calculations. 

Outlays for roads, airports, ports, railways, and the like rose 17.4 percent last year, far outpacing the country’s 6.7 percent expansion in gross domestic product.
With economic growth projected to fall to 6.5 percent this year, the lowest rate since 1990, Xi Jinping’s government is ever more dependent on the stimulus infrastructure projects provide. 

Beijing will invest 3.5 trillion yuan in railways by 2020, which among other things will pay for a more than 50 percent expansion of the country’s high-speed network, the State Council Information Office said in late December. 

The central government also has pledged 3.4 trillion yuan for rural water, road, electricity, and communication projects through 2020, the official Xinhua News Agency reported on Feb. 17. “There’s just an absolute boatload of infrastructure investment going on,” says Tom Orlik, chief Asia economist at Bloomberg Intelligence. 

“In some respects, it’s almost like the classic Keynesian example of paying someone to dig a hole and paying someone to fill it up.”
The relentless spending on new construction is weighing on China's public balance sheets.

Total debt was about 260 percent of GDP in 2016, up from about 160 percent in 2008, according to calculations by Bloomberg Intelligence. 

“The pace at which China has taken on debt rings alarm bells,” Orlik and fellow Bloomberg Intelligence economist Justin Jimenez wrote in a report published on Feb. 23, noting that precipitous increases in debt in other countries have been a prelude to a financial crisis.
China’s central and local governments “need more help so they’re not only funding projects by themselves,” says Gabriel Wong, head of the China corporate finance practice in Shanghai for PwC. That’s why the country has begun experimenting with public-private partnerships (PPPs) in which private investors supply a large portion of the financing for a project in exchange for a promised stream of payments, either from the government or from users. 

China’s National Development and Reform Commission announced PPPs worth 4.23 trillion yuan from May 2015 to October 2016, Xinhua reported in October. 

The Finance Ministry announced a roster of more than 500 projects valued at 1.2 trillion yuan in October, according to China Daily.
Whether the new model will alleviate the stress on government finances is uncertain. 

Persuading private investors to join PPPs is a challenge: At least 40 percent of the companies involved in PPPs are state-owned, according to a Dec. 16 report by BMI Research, “making the projects less of a public-private partnership and more of a mostly public partnership.” 

With returns on Chinese projects typically ranging from 5 percent to 8 percent, most PPPs are not appealing to private investors, according to Fitch Ratings. 

Also, companies need to be wary of teaming up with debt-ridden local governments that may not be able to make their promised contributions. 

“We are concerned about local governments’ fiscal strength as the economy slows,” says Li Chuan, vice president of China Railway (Shanghai) Investment Co., a unit of publicly traded construction company China Railway Group Ltd. 

“If development of regional economies isn’t sustainable, PPP models won’t be sustainable.”
Investors in PPPs also run the risk that public entities will alter the terms of an existing partnership, exposing them to losses. 

That’s a particular concern in China, where the combination of a weak legal system and single-party rule discourages many investors from seeking redress through the courts. 

“There isn’t enough legal protection to ensure stability of government policy,” says China Railway Investment’s Li. 

“Government ministries have announced a lot of measures to support PPP development, but there hasn’t been legislation for PPP.”
Economists say the effort is misguided, because the payoff from these projects is limited. Researchers at the University of Oxford’s Saïd Business School examined 95 large-scale road and rail projects in China and found that more than half destroyed—rather than created—economic value.

“Overinvesting in unproductive projects results in the build-up of debt, monetary expansion [and] instability in financial markets,” according to the report. 

It also diverts government resources from other important needs, such as education and health care, says Atif Ansar, one of the authors. 

“China has really become addicted to infrastructure investment,” he says. 

“Every time the business cycle slows down, the government has tended to press down the accelerator.”
Moreover, many projects are in remote regions where there’s not enough demand to support them, making them unattractive to would-be investors, Ansar says.
China is making the same mistake as Japan, which spent trillions of yen on infrastructure projects that did little to reverse economic stagnation after the collapse of the 1980s property bubble. 

Many of the proposed projects in Central and Western China “are not going to make money for five years or even 10 years,” says Matthew Li, China economist with consulting firm IMA Asia in Sydney. 

“All of the low-hanging fruit has already been picked, so in the future more and more projects will tend to be nonprofitable, bad projects.”