Road to Nowhere. Debts Mount with China’s Prestigious Silk Road Project

The Lotus Tower in Sri Lanka's largest city Colombo was built as a symbol of Beijing's friendship, but today it is a 350-meter tall white elephant.
The Lotus Tower in Sri Lanka’s largest city Colombo was built as a symbol of Beijing’s friendship, but today it is a 350-meter tall white elephant. Foto: Guo Lei / Xinhua News Agency / picture all

Road to Nowhere Debts Mount with China’s Prestigious Silk Road Project

Chinese leader Xi Jinping is hoping to create new markets for his country and establish his legacy with the New Silk Road project. But has he bitten off more than he can chew? Debts are mounting – and not only in China.

By Georg FahrionChristoph Giesen und Laura Höflinger in Beijing and Bangalore

24.08.2022,

The tower of Colombo can be seen from quite a distance. It’s dome is clad in pink glass shaped like petals, while the shaft is of green concrete. Chinese companies built the Lotus Tower in Sri Lanka’s biggest city as a symbol of Beijing’s friendship and Sri Lanka’s golden future: The island nation’s economy was to blossom like a lotus flower.

Today, the tower looms over the city like a 350-meter admonition. The premises are either empty or remain unfinished, 10 years after the start of construction. The lighting is switched off at night, and the Lotus Tower stands in darkness, as do many of the city’s streets. Sri Lanka has to save money.

The article you are reading originally appeared in German in issue 34/2022 (August 20th, 2022) of DER SPIEGEL.SPIEGEL International

The South Asian country is bankrupt, with the government declaring insolvency in May. Sri Lanka owes creditors abroad more than $50 billion, and because the country can no longer pay for all the imports it needs, it is suffering through shortages of fuel, food and medicines. What Sri Lanka does have in abundance, however, are the many “white elephants,” as they call the outsized construction projects that are neither economically productive nor necessary. Many were designed by Chinese companies, built by Chinese workers flown in and, above all, financed with Chinese loans – money from the Silk Road project.


Beijing Promised the World $1 Trillion in Investments

In 2013, Chinese leader Xi Jinping presented his vision of a “New Silk Road” for the first time. According to the propaganda, the whole world stands to benefit: New streets, ports and communications networks were to ensure more trade and prosperity. Officially, the program is somewhat clumsily called, “One Belt, One Road,” or referred to as the Belt and Road Initiative (BRI).

In May 2017, the Chinese leadership hosted the official launch event, the Belt and Road Forum, in Beijing. Authorities cordoned off large parts of the city center as representatives from 130 countries gathered at the National Convention Center. It was said that China intended to invest $1 trillion around the world. In his speech, Xi painted an image of a networked world. Afterwards, state guests sung their praises for the Chinese. “President Xi deserves thanks for this initiative, which is very promising and timely,” Vladimir Putin said. And Recep Tayyip Erdoğan of Turkey even described it as an “initiative that will put an end to terrorism.”

In truth, the initiative serves not least to salvage the Chinese economy. The growth model of the People’s Republic reached its limit years ago, and to ensure that economic growth increases year after year, the state itself invests in roads, new airports and in the dense high-speed rail network. The result is a significant mountain of debt. The national railway alone has accumulated debts of almost 1 trillion euros. One important aim of the New Silk Road is to create additional markets for Chinese corporations.

According to a survey by the American Enterprise Institute, projects valued at $838 billion were underway by the end of 2021. The trillion-dollar figure targeted by Xi isn’t far off. But numerous loans are at risk of default. A study by the analyst firm Rhodium Group estimates the total value of Chinese foreign loans that needed to be renegotiated in 2020 and 2021 at $52 billion. There have also been several reports about bridge loans that Chinese banks have granted to prevent payment defaults. Such emergency loans have been granted to Pakistan, Belarus, Mongolia, Argentina and Sri Lanka.

Those who have been granted a look at the books are shocked by the terms the government in Colombo has accepted.

For the leadership in Beijing, the threat of loan defaults comes at an inopportune time: The country’s strict zero-COVID policy is weighing heavily on China’s economy. And Xi is hoping to expand his power even further at the upcoming 20th party congress this fall. In such a politically sensitive phase, concerning economic news is even more unwelcome than usual, especially given that domestic debt is also becoming a problem. The real estate market is currently experiencing a severe crisis, and many construction companies are in the red. Thousands of Chinese are refusing to pay their monthly installments for apartments still under construction out of fear that the real estate companies will declare bankruptcy before the buildings are completed.

Sri Lanka owes between 10 and 20 percent of its outstanding debt to Chinese banks. These loans are not the sole reason for the country’s crisis, which is largely homemade. Yet the loans still play a significant role in Sri Lanka’s plight. The reason is that Chinese contracts differ considerably from those that the country has concluded with, for example, Japan or the World Bank.

Last year, researchers at the Kiel Institute for the World Economy in Germany succeeded in obtaining and evaluating secret BRI contracts from 24 countries. “China’s practices make it difficult for countries that are in financial distress, due to the corona pandemic, for example, to get their debt situation under control,” says Christoph Trebesch, the institute’s research director.

Such is the case in Sri Lanka. Those who have been granted a look at the books are shocked by the terms the government in Colombo has accepted. Asanga Abeyagoonasekera has read some of these agreements as a government adviser. He says that in some cases, the interest rates agreed to were twice as high as the market rate. In other cases, experts had advised against construction, he says, but the buildings went ahead anyway.


Rice Is Stored at Sri Lanka’s Ghost Airport

The best example is perhaps Mattala International Airport. The airport is located in Hambantota, a district, home to around 600,000 and a sizeable population of wild elephants. Unfortunately, the pachyderms have a habit of trampling the fence surrounding the tarmac.

Often, only one flight a day lands from the capital. Abeyagoonasekera, who has since joined the American think tank Millennium Project, describes it as a ghost airport. “At times, they stored rice there,” he says. In addition to the rice fields, Hambantota now also boasts a cricket stadium with a capacity of 35,000 spectators, a huge convention center and a container port that China leased for 99 years in 2017. In return, Sri Lank received $1.1 billion in fresh foreign exchange reserves.

The port of Hambantota, in particular, has been the subject of an international debate in recent years. The term “debt trap diplomacy” has made the rounds, referring to a practice in which China showers recipient countries with loans and acquires strategically important infrastructure as soon as the debtors slip into default.

“The Belt Road is still a healthy initiative.”

Victor Gao, Center for China and Globalization in Beijing

This hypothesis received significant attention in the Pentagon, but evidence for its veracity is rather thin. The original feasibility study for the report, after all, was prepared by a Canadian analyst who strongly recommended construction. Initially, Sri Lanka sought to bring India and the U.S. onboard as potential project partners. It was only when they declined that the Chinese emerged as a possibility. The Rhodium Group has also analyzed Chinese BRI loans in a series of studies. The conclusion: There are hardly any examples of Chinese corporations or banks simply taking over ports or rail lines. It is more frequently the case that renegotiation discussions are held, interest rates are reduced or loan periods are extended.

Now, new BRI projects have come under more intense scrutiny, as a recent study by Shanghai’s Fudan University shows. For this study, Christoph Nedopil, an assistant professor of economics, examined deals concluded in the first half of 2022. In the past, a large share of the loans went to infrastructure projects, which the recipient countries backed with government guarantees. “That’s not possible to the same extent now,” says Nedopil. “Many of the Belt-and-Road partner countries are heavily indebted and can no longer afford it.” As a result, not only the overall volume of orders that is shrinking. Also the nature of the projects is changing: Instead of building railroads or roads, loans are now more often used to natural gas or oil extraction.

“The Belt Road is still a sound initiative,” says Victor Gao, once an interpreter for reform patriarch Deng Xiaoping and now vice president of the think tank Center for China and Globalization, and as such Beijing’s favorite scholar on the issue. As evidence for BRI’s success, Gao cites the fact that the U.S. and the European Union have launched their own global infrastructure programs. “Imitation is the best form of flattery,” he says.

At most, he adds, problems are temporary. Because of the quarantine obligations associated with the coronavirus pandemic and the drastically reduced number of international flight connections, he notes that Chinese engineers and construction workers are no longer able to travel abroad so easily. “Many projects won’t resume until people-to-people exchanges return to normal,” he says. That could take years.

The fact that China is now recalibrating its initiative does not, however, answer the question of what will happen to the billions that are already on the brink of default. What if other recipient countries like Laos, Pakistan, Argentina or Egypt also slip into insolvency? These countries first suffered from the pandemic, and now they’re being hit by the price shock for oil and food caused by the war in Ukraine.

Debt haircuts would be a difficult sell domestically in China. The New Silk Road is Xi’s legacy. It has long since become part of the communist creed and has been enshrined in the party constitution since 2017. Also, the Chinese population isn’t particularly understanding when large sums of money are forgiven abroad. One year after the big BRI summit, Xi invited African leaders to Beijing for the China-Africa Summit in September 2018. Nearly 50 leaders traveled to the event. When Xi announced $60 billion in Chinese economic aid, the internet censors could barely keep up with deleting angry comments. The general tone: Why is the government distributing money abroad rather than giving it to the Chinese?

But the biggest test case is likely yet to come: In Pakistan, Chinese companies are building a $62-billion corridor to connect China’s west with the Arabian Sea. The project is considered the crown jewel of the Silk Road Initiative and would allow China to expand its influence in South Asia in the immediate vicinity of its rival India, at least in theory. In reality, many construction projects are now lying idle. Furthermore, two children were killed in a suicide attack aimed at Chinese workers in the port city of Gwadar last year.

Not only does Pakistan struggle with terrorism, but it is also an impoverished country that has repeatedly been on the verge of national bankruptcy. The country’s foreign currency reserves have also hit dangerous lows recently. In July, the International Monetary Fund approved a $1.2 billion rescue tranche. One month earlier, money flowed in from China, a new, $2.3-billion loan to prevent, or at least postpone, the next, arguably much larger, crisis in its immediate neighborhood.

source https://www.spiegel.de/international/world/road-to-nowhere-debts-mount-with-china-s-prestigious-silk-road-project-a-74d6c558-34b2-4bd7-baa8-da8577d75feb

Categories: Asia, China, Pakistan, Sri Lanka

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