China's massive 'Belt and Road' spending spree has caused concern around the world, and now it's China's turn to worry

• China's sprawling Belt and Road Initiative has spread development funding around Asia, Africa, and Europe.
• But foreign governments have warned the terms of BRI deals could pose risks to the countries signing them.
• Now officials in Beijing appear to be acting on their own concerns about unsustainable spending and unwieldy debt.

By Christopher Woody

Since announcing its Belt and Road Initiative five years ago, China has spread billions of dollars around Asia, Africa, and Eastern Europe, supporting a variety of infrastructure projects and stoking concern about Beijing's growing global sway.
But China appears to be pumping the brakes on lavish BRI-related spending, and it could be a sign it's worried about the scale of its commitments.
The Chinese government itself does not have a comprehensive picture of the investments involved, and sources close to Chinese economic policymaking told The New York Times in June that Beijing has started a sweeping review to determine the number of deals that have been signed, what their terms are, and with whom they've been made.
Official Chinese data also indicates that BRI spending is down, amounting to contracts worth $36.2 billion signed during the first five months of 2018 — 6% less than during the same period in 2017.
An airport construction site in an area developed by Chinese company Union Development Group at Botum Sakor in Koh Kong province, Cambodia, May 6, 2018.
Such activity was also down during the first five months of 2017 compared to the same period of 2016, and official figures show that Chinese firms are still finishing projects at close to the same rate that they're signing onto new ones, indicating the BRI push may just be falling into a more normal rhythm.
Concrete numbers for BRI projects are hard to pin down, according to Jonathan Hillman, a fellow at the Center for International and Strategic Studies in Washington, DC, but the decline reflected in the figures cited by The Times could be driven by several factors emerging both at home and abroad.

'Mushrooming payments and an unforgiving lender'
While the slowdown may reflect that "the lowest hanging fruit has been picked," leaving only riskier projects, it could also be caused by "concerns among potential borrowers," said Hillman, who runs CSIS' Reconnecting Asia Project.
"Sri Lanka's experience has become a cautionary tale," he added, referring to a development deal undertaken with Chinese financing that Colombo struggled to pay back, leading it to offer China a 99-year lease to operate the strategically valuable port of Hambantota.
"In Malaysia, the Maldives, Pakistan, and elsewhere, opposition parties are tapping into concerns about Chinese lending. EU leaders have become more vocal, too," Hillman said.
IMF chief Christine Legarde has cautioned China and its foreign partners about the potential for mounting debts. 

US officials have been more pointed. 

Navy Secretary Richard V. Spenser described Chinese lending as "weaponizing capital" and told lawmakers earlier this year that the trend kept him up at night.

A map of projects subsumed under China's Belt and Road Initiative as of March 2017.
The countries signing on to BRI-related deals are typically more vulnerable to the risks associated with them, Hillman added, as the loans are often made in currencies they can't control, like the US dollar or China's renminbi.
"As historically low interest rates rise, BRI borrowers could be caught between mushrooming payments and an unforgiving lender," Hillman said.

'It may come back to haunt the Chinese economy'
The risks may cut both ways.
China has made long-term loans, often to countries with natural resources or other assets that could be used to repay them, a factor that has led critics to call the initiative "debt-trap diplomacy."
But Beijing and its BRI partners are likely "mutually vulnerable," Herve Lemahieu, director of the Asian Power and Diplomacy Program at Lowy Institute in Australia, said in May interview.

A map of China's so-called Belt and Road Initiative on display at the Asian Financial Forum in Hong Kong, January 18, 2016.

"At the end of the day, the countries that benefit from financing and loans from China can also default on those loans, and that would put China in a more risky economic position," Lemahieu added.
Some view China's lending as a potential "instrument of leverage," he said.
"That may be the case, but it also raises the stakes that smaller countries ... could ignore Beijing and default on the loan, in which case ... it may come back to haunt the Chinese economy."
Chinese officials themselves appear concerned about the extensive loans and sprawling projects becoming unwieldy, which could undermine the ability for Beijing to achieve its stated goals, as Hillman noted earlier this year.
In April, the new head of China's central bank said that "ensuring debt sustainability" was "very important." 

And the chairwoman of China's state-run Export-Import Bank, which is involved in BRI financing, said in June that uncertain international conditions could create financial difficulties for the countries that have received loans.
"There was also a government reorganization earlier this year, which shifted some power away from China's NDRC, the original BRI-planning group," Hillman said, referring to the National Development and Reform Commission.
That move, he said, "could be another indicator of the Chinese government concerns."

Australia lashes out at China’s useless Pacific projects

Canberra accuses Beijing of building roads to nowhere in developing nations 
By Mark Wembridge

Chinese labourers work on a project in East Timor 

Australia has launched a scathing attack on China’s efforts to build influence in the Pacific, accusing Beijing of currying favour with the region’s smaller nations by funnelling cash into little-used infrastructure projects. 
 “You’ve got the Pacific full of these useless buildings which nobody maintains, which are basically white elephants,” Concetta Fierravanti-Wells, Australia’s minister for international development and the Pacific, said on Wednesday.
 “We just don’t want to build a road that doesn’t go anywhere,” she told reporters.
“We want to ensure that the infrastructure that you do build is actually productive and is actually going to give some economic benefit or some sort of health benefit.”
 The comments threaten further strains in relations between the two countries, which deteriorated last month after Canberra proposed new laws designed to tackle growing espionage threats and Chinese interference in domestic politics.
 The laws — prompted by allegations of Chinese influence over MPs and fears of spying — would ban foreign political donations and force lobbyists to reveal when they are working for overseas entities.

 Ms Fierravanti-Wells, a Liberal party senator, on Wednesday also accused Beijing of providing loans to smaller Pacific countries on unfavourable terms. 
 “We encourage China to utilise its development assistance in a productive and effective manner. In other words, we just don’t want to build something for the heck of building it,” she said.
 China transferred $1.8bn in aid and loans to South Pacific nations between 2006 and 2016, according to research by the Lowy Institute, a think-tank.
Papua New Guinea, which has seen its relations with Australia strained over the problem of asylum seeker camps on Manus Island, is one of the region’s countries that has been drawn into the Chinese sphere of influence.
 In November the Pacific nation signed a series of infrastructure deals with China as part of Beijing’s Belt and Road initiative, covering agriculture, transport and the delivery of utilities to the mountainous country’s remote areas.
 Fears of Chinese spying have also prompted Canberra to consider axing a deal under which China’s Huawei was to run a seabed cable 4,000km from Sydney to the Solomon Islands, instead proposing to bankroll the A$100m (US$78m) project itself.
 Concerns over Chinese political meddling have been raised by Australian Prime Minister Malcolm Turnbull, who noted “disturbing reports about Chinese influence” in domestic politics.
 Such fears prompted the resignation of Sam Dastyari, an opposition Labor senator who received Chinese cash and then called for Australia to respect Beijing’s territorial claims in the South China Sea — a position contrary to that of his party.

China's Belt and Road to Nowhere

Beijing’s mixture of political and economic priorities may not result in an overall Belt and Road policy formula that is workable.
By Christopher Whalen

A great deal of attention is being paid by Western media to China’s ambitious Belt and Road Initiative, the most ambitious foreign-policy initiative yet for paramount leader Xi Jinping. 

Launched in 2013 under the slogan “One Belt, One Road,” the effort involves China spending billions of dollars on infrastructure projects in countries along the old Silk Road linking it with Europe.
The ambition of Xi is immense, but it is largely driven by insecurity. 

Western media parrots China’s propaganda about the Belt and Road Initiative. 

“Its ultimate aim is to make Eurasia (dominated by China) an economic and trading area to rival the transatlantic one (dominated by America),” reports the Economist.
But in fact the motivations for China are far more simple and direct than this grandiose vision suggests. 

Viewed through the prism of China’s economic progress over the past decade, the Belt and Road program is merely a continuation of China’s massive internal investment in infrastructure—only on a larger scale.
China is spending roughly $150 billion annually to build roads, rail lines and other infrastructure in sixty-plus countries that have signed up to the scheme. 

The obvious question is whether China can support such a gigantic effort.
In 1958, Mao announced the “great leap forward,” a program grounded upon the Marxian prescription for the advancement of industrial technology which ultimately resulted in the deaths of between twenty million and forty million Chinese. 

Christopher Balding, writing for Bloomberg View, questions the financial logic of Xi’s version of the “great leap forward” of the Maoist period:
China's just-completed conference touting its Belt and Road initiative certainly looked like a triumph, with Russian president Vladimir Putin playing the piano and Chinese leaders announcing a string of potential deals and massive financial pledges. 

Underneath all the heady talk about China positioning itself at the heart of a new global order, though, lies in uncomfortable question: Can it afford to do so?
Foreign analysts often try to understand Chinese thinking and priorities using the commercial and economic logic of the West, but, in fact, asking whether China can afford the Belt and Road effort is to ask the wrong question. 

In the minds of China’s leaders, who fear political instability above all else, the real question is whether China can afford not to spend more tens of billions on infrastructure projects to keep the country’s restive population under control.
Going back to Xi’s meeting with Donald Trump earlier this year and his carefully scripted defense of free trade, the Chinese leader is clearly focused on creating new channels to absorb China’s massive overcapacity. 

“Trade is the important engine of economic development,” Xi said at a summit of world leaders in Beijing that was largely ignored by the United States, European nations and India.
But, in fact, it is investment flows, not trade, that dominates the economic relationship between the United States and China. 

The key challenge facing China is not how to generate greater trade flows, especially away from its primary partner the United States, but how to allocate investment flows given the dearth of attractive investment opportunities in China.
Just as Germany channeled its surplus savings to the nations of Southern Europe, China has been allowing its citizens to invest trillions of dollars in the United States, Canada and other nations, often focused on direct investment in companies and real estate. 

Over the past five years, for example, Chinese nationals ploughed $1 trillion into foreign real estate and other assets.
“The most important economic truth to grasp about the U.S. trade deficit is that it has virtually nothing to do with trade policy,” noted Daniel Griswold of the Cato Institute in testimony before Congress two decades ago. 

“A nation’s trade deficit is determined by the flow of investment funds into or out of the country. And those flows are determined by how much the people of a nation save and invest—two variables that are only marginally affected by trade policy.”
Thus, when we look at China’s massive investment in infrastructure outside of its own borders, we see the imperative of the Chinese Communist Party (CCP), namely political stability. 

Measured in economic terms, many of China’s supposed “investments” along the Silk Road don’t make a great deal of sense.
But viewed from the political perspective of employing China’s people and the accumulation of unused capacity inside the Chinese economy, the Belt and Road makes perfect sense. 

Beijing’s mixture of political and economic priorities will not necessarily result in an overall policy formula that is actually workable. 

Note for example, the November 2016 decision to impose barriers on foreign investments by private individuals and companies.
The de facto currency controls are slowing the outward flow of investment—and dollars—from China, a change that has negative implications for the value of the U.S. currency, the United States real estate market and also implies a weaker Chinese renminbi (RMB).
As we have noted in previous articles for the National Interest, the Chinese RMB has been under pressure to depreciate against the dollar. 

China’s central bank sold over $1 trillion in U.S. Treasury bonds to provide the dollars to slow down the decline (by buying RMB). 

Indeed, over the past several years China’s massive foreign currency reserve shrank from $4 trillion to $3 trillion as the country’s nationals went on a spending spree acquiring real estate and commercial assets in the United States and other nations.
With the imposition of currency controls last year, however, China’s posture as a net investor around the world is changing. 

The propaganda headlines of the Belt and Road Initiative suggest a massive capital outflow to other nations, but, in fact, just the opposite is the case. 

Indeed, the South China Morning Post reports that Beijing's strict capital controls are delaying private investments that are part of the Belt and Road project.
First and foremost the importance of China’s Belt and Road Initiative is political, namely to show Xi Jinping in control of China’s command economy as he consolidates political power as dictator of China and the unquestioned leader of the CCP. 

Under Xi, the era of collective leadership in China is well and truly at an end.
But second—and more important—the continuing effort by China to “pump prime” internal economic activity via gargantuan infrastructure projects, both at home and abroad, reveals a basic flaw in the Chinese economy. 

Only when the political monopoly of the CCP has ended and China’s people are truly free to make economic and political choices will the country be able to provide sufficient investment opportunities at home so that desperate measures such as the Belt and Road spectacle will no longer be necessary.

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.”