China's Ambitious Road to Somewhere
Everything about China's "Belt and Road" project is big -- from the scale of its investments to the guest list for this weekend’s gathering to celebrate the initiative. To improve its odds of success, China would be wise to think smaller.
True, the initiative -- which envisions building energy and transportation infrastructure from Asia to Europe -- addresses real needs. The often-poor countries along the proposed routes need modern roads, rails, ports and power plants. China, meanwhile, has legitimate worries about the security of its energy supplies, as well as money, expertise and excess capacity in its construction industry.
The risk, for China no less than participating countries, is that vaulting ambitions could doom the project’s chances of success. What's held back infrastructure development in Asia isn't so much a lack of funding but a dearth of viable projects. Inevitably, as it has within China, politically motivated lending will produce more white elephants, burdening host countries with unsustainable debt burdens.
Strategists might rationalize these losses as the price for support and stability along China's periphery. But the costs may not be so easy to sustain. Fitch Ratings has already warned of the risk to banks' balance sheets as loans sour. Exporting China's investment-heavy development model will also ease pressure on inefficient state-owned enterprises to reform and slash overcapacity. And with China blocking capital outflows and holding onto reserves in order to bolster the yuan, there's simply less money to waste on bad projects.
Nor is there any reason to think that building more roads and pipelines will in itself achieve China's larger stated goals: to promote economic growth and hence political stability. Pouring money into development projects could just as easily encourage graft in countries along the route, fuel anti-Chinese fervor and encourage sabotage attacks. China’s historic preference for dealing with authoritarian governments -- and raising few questions about their governance -- can breed resentment among ordinary citizens, risking future problems.
China's experience with the Asian Infrastructure Investment Bank, one of the main Belt-and-Road funders, is instructive. The institution’s flashy launch in 2014 inspired fears that Chinese leaders were seeking to overturn the global financial order. These fears were misplaced. Run by a cadre of international professionals and adhering to high standards, the AIIB is, according to one estimate, unlikely to lend much more than $2 billion annually for its first five years. That will limit its influence, but also its losses.
China needs to apply the same rigor to Belt-and-Road projects, which should be scrutinized not only for their headline numbers but their long-term viability. Lenders need to be transparent about financing terms and considerate of borrowers’ ability to repay. Project officers should consult with local farmers, merchants and NGOs, not just bureaucrats, or worse, corrupt leaders; environmental concerns should be aired and addressed. And along with infrastructure, China should be promoting greater openness in economies along the route.
Most of all, China needs to treat the Belt and Road with care and a clear-eyed appreciation of risk. That will likely result in fewer, less high-profile projects. But they -- and China -- will be the stronger for it.
--Editors: Nisid Hajari, Michael Newman.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com .
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