By Peter Zhang
It’s safe to assume that Milton Friedman, the 1976 Nobel laureate in economics, wasn’t kidding when he authored “There’s No Such Thing as a Free Lunch.” The book’s title sums up Friedman’s main point regarding a wide range of public policies, relevant still to this day.
If an offer, therefore, appears to be too good to be true, particularly when it comes from the Chinese communist regime with its abysmal track record of credibility, one should be suspicious.
Chinese Communist Party’s Motivation
In September 2013, Chinese Communist Party (CCP) General Secretary Xi Jinping proposed the Silk Road Economic Belt strategy during a state visit to Kazakhstan. In October 2013, in a speech at the People’s Consultative Assembly of the Republic of Indonesia, Xi brought forward the 21st-Century Maritime Silk Road venture.
The Silk Road Economic Belt and the 21st-Century Maritime Silk Road, also known as the Belt and Road Initiative (BRI), received $40 billion through the Silk Road Fund in November 2014, and an additional $14.76 billion, as announced by Xi in May 2017.
China’s banks, which have a record of funding white elephant infrastructure and ghost cities filled with empty apartment buildings, will be leveraging nearly $1 trillion toward constructing roads, rails, bridges, airports, and ports in some very poor countries. Such eye-catching funding has led to worldwide speculation about Beijing’s motives.
According to the Financial Times, the rating service “Fitch warns on expected returns from One Belt, One Road (OBOR).”
A Fitch Ratings report cast serious doubt on Beijing’s ability to conduct sound risk analysis for overseas investments, given its dismal record of identifying and managing profitable projects at home, particularly in light of mounting non-performing loans in recent years. In fact, this Fitch report suggests the BRI’s geopolitical interests outweigh any commercial benefits.
Unlike Beijing’s previous overseas investments, which focused primarily at procuring energy and natural resources, the BRI also allows Beijing to address its domestic excess capacity in virtually all industrial sectors, with some production facilities having moved to participating countries.
At the same time, the BRI, with the corridor to Central Asia and Europe, may help develop China’s Western regions.
Western policymakers also have concerns and misgivings about Beijing’s many prodigious operations around the world through its aggressive BRI. Financing infrastructure in more than 60 countries is quite an ambitious undertaking, while fraught with great financial risks.
China’s Debts Keep Growing
Those risks occur within a context of dangerous and increasing indebtedness.
Paul Krugman, the 2008 Nobel laureate in economics, mentioned Dornbusch’s Law when he described challenges that China’s economy faces. Krugman finds China’s excessive investment and spending, especially by state-owned enterprises, full of risks in the absence of sufficient domestic consumption.
Against the backdrop of punitive tariffs and a trade dispute with the United States, China’s market has been hit by an economic downturn these days. Over the years, China benefited tremendously from a trade surplus around the world and from piracy of Western technological know-how, but things are changing because of increasing protectionism in many countries, including the United States.
Last month, Beijing was forced to draw $116 billion from its central bank reserves in an effort to stabilize and stimulate its economy. According to a report from the Institute of International Finance, China’s total debt-to-GDP ratio has surpassed 300 percent while its corporate debt-to-GDP ratio is 160.3 percent.
The size of these debts—there is nothing comparable in the West—are alarming for a large economy where the government is both the lender and the borrower, and, oddly, the regulator as well.
With the amount of non-performing loans rising, the debts will mount to the stratosphere. China’s system of state banks as lenders and state-run enterprises as borrowers is no longer sustainable, and will end up creating more losses than what can be absorbed, leading to insolvency, possibly even another Greece-like financial crisis.
Despite its holding of $1.15 trillion in U.S. bonds, China won’t be able to reduce debt distress for very long, given inefficiencies in its centralized financial structure.
In fact, China’s foreign exchange reserves dropped to $3.073 trillion by December 2018 from $4 trillion in 2014. While $3 trillion may seem like a lot, it doesn’t leave much flexibility, given the demands of a modern-day monetary system like China’s. Their financial system has become very tight.
In the meantime, a declining birthrate and an aging population have given rise to additional concerns: a shrinking workforce and growing costs for an already strained health care system.
Beijing abolished the One Child Policy in 2016, but the measure might have come too late, as the demographics aren’t going to improve significantly for generations, resulting in a declining standard of living that will become a political liability for the CCP.
Domestic Dissenting Voices
Resources for the needs of China’s population are scarce, yet Beijing is currently tightening its belt to free up some cash for its overseas political adventures.
With GDP per capita under $9,000, both the World Bank and International Monetary Fund listed China in 71st place for their 2017 world rankings. World Bank’s data also shows that China’s health expenditure in 2015 is only 5.32 percent of GDP, while the world average is 9.90 percent.
In terms of the budget for basic education (elementary and high school), China’s Ministry of Education spent $2,634 per student in 2017. That pales in comparison with the global average of $10,759, according to data from the Organization for Economic Co-operation and Development (OECD) in 2017.
Xinhua News Agency, the CCP’s official mouthpiece, reported on Feb. 1, 2018, “There were still 30.46 million rural people living below the national poverty line at the end of 2017, according to the National Bureau of Statistics (NBS).”
Although independent China observers frequently find Beijing’s statistics too rosy and not believable, the CCP has, at least, admitted that severe poverty exists under its watch.
Not surprisingly, Chinese netizens, at some risk to themselves, express their dismay on the internet about the funneling of money abroad, as domestic needs are unmet.
One popular joke goes like this: A netizen described today’s China as the great “Song Dynasty,” a dynasty known for its traitorous acts. Since the Chinese word “giveaway” shares the same pronunciation as the word “Song,” the netizen could be understood as saying “the great giveaway dynasty.”
Then someone asked, “The Southern Song Dynasty or the Northern Song Dynasty?” The netizen replied, “Either one, as this dynasty is giving our things away to both East and West.”
Another netizen posted this sarcastic comment on Weibo, “Many people criticize our government for spending $650 billion in foreign aid each year instead of appropriating funding for the masses. That is actually not true, for the government invests $830 billion annually for policing social order—money used to keep an eye on us.”
Recently, Beijing canceled a portion ($78.4 million) of Cameroon’s debt of $5.5 billion in secrecy, fearing a backlash from the masses at home. Many Chinese equate these sorts of foreign aid to the idiom, “throwing a meat dumpling to a dog—with no returns.”
These days, despite the CCP’s draconian censorship, the internet has become perhaps the sole channel for Chinese citizens to voice their frustrations, particularly since corrupt officials and the privileged elite are taking advantage of the BRI for capital flight overseas in the name of overseas investment.
Debt Trap Diplomacy and Neo-Colonialism
Despite the frustrations of the masses at home and potential financial losses, Beijing’s BRI is all about political calculations.
The debt-trap diplomacy, with billions of dollars in infrastructure investments in participating countries in Central Asia, Europe, South Asia, and Africa, has purchased some friendship around the world. That has allowed the CCP, at least temporarily, to gain some relevance and to exert geopolitical influence.
But the recipients aren’t necessarily happy about the debts they can’t afford, and they feel trapped.
Sri Lanka’s Hambantota Port development project might be a crippling debt-trap example. Sri Lanka had to hand over the port to China, through a 99-year lease in exchange for clearing a $1.4 billion debt to China.
In Africa, similar situations face Kenya, where talks are underway to surrender its strategic assets to China as a result of debts owed to Beijing. These assets may include the lucrative port in Mombasa, and the Standard Gauge Railway, to name but a few.
Some African countries have privately complained that the BRI often assigns its overseas infrastructure construction projects to Chinese companies. So, the borrowed money goes back to Chinese pockets in the end.
With Chinese goods flooding into African markets, more than half of Beijing’s foreign aid goes to the African continent. But that comes as part of a well-designed foreign-policy package to voting member states of the United Nations, in order to acquire their support in global affairs.
In 2016, China began building its first overseas naval base in the Republic of Djibouti, which gives the Chinese military strategic access to the Indian Ocean and Red Sea. Unfortunately for the United States, the Chinese base is less than 10 miles from the U.S. Naval Expeditionary Base at Camp Lemonnier.
A photo from “China-Africa Friendship 2019,” an event held Jan. 9 at a Beijing hotel to celebrate BRI projects in Africa, went viral on the internet, as it seemed to blow the whistle on Beijing’s BRI. The event was hosted by Chinese officials and attended by envoys from some 60 countries.
The large video screen behind the stage displayed four English words: Innovation, Efficiency, Transcendence, and Exploitation. The Chinese word “Kaituo” should have been translated as Exploration instead of Exploitation—a parapraxis error, as netizens call it, otherwise known as a Freudian slip.
Critics accuse Beijing of engaging in neo-colonialism through the BRI projects in Africa. Beijing’s effort to build the “unbreakable China-Africa friendship” appears now to be shaky, as debts pile up rapidly, one country after another.
Astute Sinologists understand that every CCP policy or initiative comes with the sole purpose of maintaining its power, irrespective of economic and political costs.
The BRI is a classic example. The totalitarian Party doesn’t need to seek approval from its citizens for scattering money around the world, nor have the Chinese people benefited from these overseas adventures. Yet, the BRI has effectively disrupted the international order at the expense of U.S. influence and interests around the world.
Worse still, the BRI will end up harming the participating countries as well.
In dealing with the party state, one shouldn’t overlook these blunt words uttered by Mao Zedong, the founder of the CCP: “Political work is the life-blood of all economic work” and, “Communism is not love.”
Countries that are enticed by Beijing’s offer of cheap loans ought to think twice about the consequences of teaming up with this red dragon. History won’t look kindly at those who have partnered with a repressive regime, let alone those who feed an iniquitous beast such as the CCP.
As Confucius wisely advised many centuries ago, “The cautious seldom err.”
Peter Zhang contributed this article which was previously published for EET. Peter Zhang is a researcher on China's political economy and a graduate of Beijing International Studies University, Fletcher School of Law and Diplomacy, and Harvard Kennedy School.