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

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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.

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