China’s Belt and Road Initiative does not pose a military or strategic threat to the West so much as an economic one.
Is the Communist government of China scheming to use cranes and bulldozers to take over the world? Over the past five years, China’s newest packaging of its global economic expansion—the Belt and Road Initiative (BRI)—has fostered alarm and eagerness in nearly equal measures. How worried should the West be about this new stage of China’s outward march?
Beijing has portrayed the BRI as a “win-win” cross-border economic stimulus package: China’s outward march will spur economic growth in China and in other countries along the new Silk Road. China’s pledge to finance and invest in infrastructure, creating economic corridors that stretch across Central Asia and down to the seas of the Indo-Pacific, has been likened to a new Marshall Plan.
Yet others believe that China is predominately interested in the strategic payoffs of the BRI: using its economic muscle for political leverage, rewriting business rules and practices developed by the West, even military expansion.
China’s interest in overseas ports is central to many of these concerns. Investment by Chinese companies in ports in Greece and elsewhere in southern Europe is portrayed as a “Trojan Horse” entering through Europe’s “soft underbelly.” Though port investments with the potential for dual commercial and military use, China may be trying to “stealthily expand” its military presence along the ancient trading routes and vital shipping lanes.
In 2017, after a debt-saddled Sri Lanka turned over operational control of a loss-making port in Hambantota to a Chinese-dominated joint venture in return for $1.1 billion in investment from China Merchant Port Holdings (CMPort), an Indian security analyst came up with the now widely circulated meme: “Chinese debt-trap diplomacy.”
The U.S. government has jumped on this bandwagon. Top officials repeatedly warn that China has a deliberate strategy of entangling other developing countries in a web of debt, and then using this to exact unfair or strategic concessions. Our Johns Hopkins University research institute, the China Africa Research Initiative, and others at Boston University and William and Mary follow China’s overseas lending. Out of more than 3,000 projects of various kinds financed by Chinese banks, Hambantota is the only one that has ever been used as evidence for “debt-trap diplomacy.”
There are valid reasons for heightened concern about Chinese engagement. Most pressingly, in July 2017, the Chinese opened their first overseas military base in the strategic country of Djibouti on the Bab el-Mandeb Strait, the gateway to Egypt’s Suez Canal. Only seven miles from the U.S. base at Camp Lemonnier, the Chinese naval base has raised suspicions about whether China’s rise will remain peaceful.
Debt sustainability in a number of the BRI countries is also a concern. Speaking at a BRI conference in China, the IMF’s managing director Christine Lagarde warned that the sheer scale of the BRI posed risks of “potentially failed projects and the misuse of funds.” Although infrastructure could boost growth, she noted, incautious borrowing for BRI infrastructure could lead to balance of payments problems. Most of the countries currently borrowing from China have histories of IMF bailouts, and they nearly all—including China—have weak institutions.
However, the evidence so far shows little reason for alarm regarding the security implications of Chinese companies’ advance into maritime and associated infrastructure projects across the Belt and Road and beyond. With very few exceptions, the logic of China’s growing presence in this arena can be explained primarily as commercial activities, albeit with an East Asian twist of “crony capitalism” that is at the heart of the BRI’s actual risks.
Why Did China Launch the BRI?
In 2013, China surpassed the United States to become the world’s top trading nation. The BRI, launched that year, is Chinese President Xi Jinping’s branding of his predecessors’ “going global” strategy. China is moving out of low-end manufacturing, has overcapacity in the construction industry, and still holds foreign reserves of around $3 trillion.
At first, the BRI envisioned a new network of economic corridors patterned on historic trade routes. The Silk Route Economic Belt would link China and Europe overland via western China and Central Asia. The 21st Century Maritime Silk Road followed the ancient oceanic trade route to link East and South China to Europe and the Middle East via the Indian Ocean and the Suez Canal.
Yet five years after it became Xi Jinping’s signature program, BRI seems to be everywhere. The label has been pasted onto projects across Africa. In 2018, Latin America and the Caribbean were invited to join the BRI, and even Italy has now thrown in.
The reason, it seems, is that the BRI slots neatly into low-income countries’ development aspirations. China has excess foreign exchange, construction capacity, and mid-level manufacturing and needs to send all of these overseas. According to the Asian Development Bank, the developing countries of Asia alone require infrastructure investments of about $1.7 trillion per year to maintain growth, reduce poverty, and mitigate climate change. In Africa, on the periphery of the BRI, the African Development Bank estimates annual infrastructure requirements to be $130 to $170 billion. The World Bank and donors in wealthy countries are only tentatively restarting their funding for developing country infrastructure after decades of decline.
Infrastructure has important multiplier effects. It creates a temporary economic stimulus through the demand for goods and services as construction is underway. And if the investment is sound, infrastructure improvements can have a powerful effect on economic development, most centrally by reducing costs. A preliminary analysis by World Bank economists found that BRI investments did appear to be significantly cost-reducing. If accompanied by efficiency-boosting policy reforms, transport costs could fall by a quarter in some BRI countries. And many countries around the world are keen to capture some of the Chinese manufacturing firms that are moving to cheaper locations.
Ports and Economic Growth
Why is China so interested in building and buying ports? China’s own history provides insight here.
Port projects were one of China’s top priorities when the country began to turn away from Mao’s isolated communism. Between 1980 and 2000, China built more than 184 new ports to support its rapidly expanding economy. Most of these came to have industrial parks and special economic zones nearby, where manufacturers could cluster and easily export. Because new ports are usually capital-intensive and have low rates of return due to their lengthy start-up periods, China gave preference to joint ventures with foreign firms expected to bring in capital and operating efficiencies.
Since then, Chinese ports have hosted numerous foreign investors, including the Danish firm Maersk, British firms P&O and Swire, CSX World Terminals (once upon a time an American firm), and the Port of Singapore Authority. As early as 2001, the year that China joined the WTO, 25 container terminals in China were jointly owned, managed, or operated by transnational corporations.
Over the past several decades, ports in many nations have been privatized and globalized, so Chinese port business is not remotely an outlier in the present international environment. Even in the United States foreign companies operate most container terminals. Global shipping is increasingly concentrated. The Danish shipping firm Maersk and its subsidiary APM Terminals have investments in 172 ports and inland terminals in 57 countries. Switzerland’s Mediterranean Shipping Co (MSC) runs 54 terminals in 29 countries. Dubai’s DP World operates 77 ports in 40 countries. A French firm, Bolloré Ports, has 21 port concessions in Africa.
As growth slows in their home ports, Chinese shipping and port management corporations are looking abroad. One of the largest, China Merchants Port Holdings (CMPort), became a global company in 2012 through a joint venture—Terminal Link—with French firm CMA CGM, the world’s third largest container shipping company. Through its shares in Terminal Link, CMPort now has port investments in 15 countries. “Our growth engine will and must come from overseas,” CMPort observed in 2015.
Just as China needed to learn from foreign firms, other countries are now eager for Chinese capital and operational know-how. CMPort and other Chinese firms are now poised to be the foreign firms bringing this in. The Chinese group China Harbor Engineering Corporation (CHEC) has a joint venture with CMA CGM to operate a new container terminal in Kribi, Cameroon. And CMPort has partnered with another French firm—Bolloré Ports—to run Tin Can Island Port, the second busiest port in Nigeria. A Chinese company runs one of the terminals at the Port of Los Angeles, the busiest container port in the United States. Another Chinese firm owns a third of the largest container terminal in Taiwan.
In most cases, Chinese investors in European ports have minority positions in joint ventures with European and other firms. Rare exceptions include the Piraeus Container Terminal in Greece and the Zeebrugge Terminal in Belgium, both of which are 100 percent owned by the Chinese firm COSCO. It “makes good business sense for Chinese players to acquire overseas port assets,” Neil Davidson, a senior analyst at Drewry, a London-based maritime research consulting firm, told a reporter. “I don’t think European countries feel threatened because in almost all cases the landlord function remains in the hands of the local countries.”
Chinese investment in the Greek port of Piraeus is often cited as an example of the benefits countries can gain with a Chinese partnership. As part of its economic restructuring, Greece privatized the operation and modernization of two terminals of the Port of Piraeus in 2009. The Chinese shipping conglomerate COSCO was one of only two bidders at Piraeus. Yet their vertical integration strategy paid off. COSCO’s control of China’s largest shipping fleet meant that traffic in COSCO’s half of the port rose quickly. By 2018, COSCO’s management and new investments had made Piraeus the fastest growing port in the world.
Not all port investments will be profitable so quickly, or at all. “The port industry is about strong nerves,” The Economist has noted. A 2013 investment by CMPort in expanding Sri Lanka’s Colombo port was expected to take at least 15 years to become profitable. Global financial crises can put a brake on trade, and port revenues can plummet without warning. However, countries also need to be ready when trade begins to climb again. Building out ports ahead of demand makes business sense, according to the consulting firm Pricewaterhousecoopers. Their recent survey of Africa’s port business recommended that countries focus on building the “hub” ports of the future.
Yet as Sri Lanka found, when it comes to ports it’s not always clear that if you build it, the shipping will come.
Debt-Trap Diplomacy? The Sri Lanka Case
According to China’s Ministry of Transport, Chinese firms have been involved in the construction or operation of at least 42 ports in 34 countries along the Belt and Road. The idea that Chinese banks and companies are luring countries to borrow for unprofitable projects so that China can leverage these debts to extract concessions is now deeply embedded in discussions of China’s BRI program. Critics invariably point to a single case—the Chinese takeover of Sri Lanka’s Hambantota Port—as proof of this strategy. Yet the evidence for this project being part of a Chinese master plan is thin.
Located in an underdeveloped part of the island nation, a major port in Hambantota has been part of Sri Lanka’s official development plans for several decades. In 2002, the French company Port Autonome de Marseille offered to carry out a feasibility study without charge, commenting that they had been “highly impressed” by its location, with some 36,000 ships passing by annually.
In 2004, the Hambantota District was devastated by a major tsunami. The rebuilding of Hambantota’s fishing docks was contracted to a Chinese firm, China Harbor Engineering Company (CHEC), under China’s aid program. Learning of Sri Lanka’s ambitious plans for Hambantota, CHEC began working to position itself to be selected as the builder. If CHEC could assist Sri Lanka to obtain a loan from China Export Import Bank, a negotiated contract could be arranged rather than an open tender.
After the country’s long civil war ended in 2005, Sri Lanka’s plans to transform the country into an Indian Ocean hub for trade, investment, and services took off. The country’s only major port—Colombo—was cramped and stuffed with containers. In 2006, a feasibility study by the Danish engineering company Ramboll concluded that Hambantota could compete with Singapore’s vehicle transshipment and bulk cargo handling facilities. Ramboll prepared the port’s master plan. A 2006 WikiLeaks report noted fears of Sri Lankan business leaders that if the government did not go forward with the plan, “opportunities would be grabbed by other ports in the region.”
In 2007, after hard lobbying by CHEC and the Sri Lankan government, the China Eximbank agreed to finance Phase I of the port with a $307 million commercial buyer’s credit. CHEC got the contract.
For Sri Lanka, building a major new port was a leap of faith, just as China had constructed terminals before they were needed. Although Hambantota was only ten nautical miles from the main Indian Ocean shipping channels, it was an isolated backwater, lacking rail and highway links to Colombo. The business plan required ancillary investments in fuel bunkering, and an industrial zone. In 2010, the Sri Lankans launched a second phase, with a China Eximbank concessional loan package at a fixed interest rate of 2 percent.
Port traffic rose from 32 ships in 2012 to 335 in 2014, and the port handled over 100,000 vehicles that year, in line with the projections in the Ramboll feasibility study. Yet the port needed business partners with a strategic plan to attract shipping. Under management by the Sri Lankan Port Authority (SPLA), Hambantota began to accumulate significant losses.
In 2015, a new coalition government came to power in an election upset, in part because of public concerns about the country’s growing debt burden. By the end of 2016, Sri Lanka had an external debt of $46.5 billion; according to the IMF, the country’s $4.6 billion debt to China was about 10 percent of this.
The new government arranged a bailout from the IMF, and sought other options for raising foreign exchange to pay $4.4 billion in debt service due in 2016. The port at Hambantota had been a pet project of the opposition party and was not yet profitable. The new government decided to raise cash by privatizing state-owned assets, including a major stake in Hambantota.
Two Chinese firms bid on the project: CHEC and China Merchant Port Holdings. The government selected CMPort, which offered the government an upfront payment of $1.12 billion for 70 percent of the shares in a joint venture with SLPA. CMPort noted that they would need to invest an additional $600 million to create an industrial zone and transshipment hub for the South Asian and East African shipping business. The proceeds from the sale went to the Sri Lankan treasury, which used them to make payments on the Chinese loans and other debt service obligations. In return, the central government also took over the loan responsibility from SLPA.
Sri Lanka’s actions in selling a majority stake in the new Hambantota Port have some parallels with the Greek privatization of Piraeus. Both countries had borrowed heavily from a number of lenders and were in desperate need of foreign exchange. Inefficient state-owned companies ran both ports.
When Piraeus was privatized, Wei Jiafu, Cosco’s chief executive, said, “We have a saying in China, ‘Construct the eagle’s nest, and the eagle will come.’ We have constructed such a nest in your country to attract such Chinese eagles.” Sri Lanka is now hoping that CMPort will be able to construct an eagle’s nest in Hambantota, attracting other Chinese investors.
Djibouti: Singapore of Africa?
Indian concerns about Hambantota have spilled over into U.S. government concerns about China’s port investments in the small African country of Djibouti. In 2015, after nearly seven years of supporting anti-piracy operations along the trade routes off the coast of Somalia, China located its first overseas military installation in Djibouti, joining half a dozen other countries with military outposts in the strategically located nation.
While Djibouti has capitalized on its location to attract military tenants, China is the only country that also sees Djibouti (which is the outlet to the sea for land-locked Ethiopia) as a significant economic partner. As in Hambantota, Djibouti’s own aspirations to take advantage of its location to become “the Singapore of Africa” are at the heart of China’s lending and investment in Djibouti’s port and zone projects.
Djibouti began its port modernization program in 2006, giving the Dubai company DP World an exclusive 30-year concession. DP World built and operated the Doraleh Container Terminal but then balked at Djibouti’s plans for expanding its port investment. After a series of long-running disputes, the Djibouti government unilaterally terminated DP World’s concession in 2018.
Meanwhile, CMPort invested in the Port of Djibouti in 2013, and helped Djibouti access a loan from China to build the Doraleh Multipurpose Port, connected to the Djibouti-Ethiopia railway terminal. In 2018, Chinese companies launched the 240-hectare pilot phase of what they hope will become an 18-square-mile industrial and free trade zone with a focus on trade and logistics, export processing, and duty-free retail. By mid-2018, China had become the small nation’s largest creditor, with loans of around $1.3 billion. The IMF warned that Djibouti was “at risk of debt distress.”
CMPort is now a Fortune Global 500 company listed in Hong Kong. It is positioning Djibouti to be a showcase for its “port-park-city” development package. Yet this success is by no means certain. DP World has sued CMPort for what amounts to “alienation of affection”— luring Djibouti into breaking its exclusive contract with DP World.
Djibouti remains, as a recent report noted, “attractive but risky” as a maritime investment option. At the entrance to the Red Sea, the transit routes of Suez Canal shipping, and one of Africa’s most populous countries, Ethiopia, the new Djibouti zone is well located as a hub for transshipment, industrial processing, and duty-free wholesale. Yet CMPort will be competing with some of the savviest and most experienced free zone developers in the world. Dubai and 36 other free zones are located close by in the United Arab Emirates.
At the same time, despite its setback in Djibouti (and earlier, in Oman) the far more experienced DP World remains bullish on the commercial prospects in the region. The company has begun building a rival port in a far riskier location: the self-declared state of Somaliland. “The whole Horn of Africa is short of ports. It’s stifling,” DP World told The Economist. This suggests that CMPort is ahead of the game in the competition to run the primary hub in the Horn.
The Real Challenge: East Asian Model and Crony Capitalism
In infrastructure, today, the real challenge of the Chinese push is not military or strategic, and it is not really related to the Communist Party that still controls China. For the United States, the challenge is that China’s approach—investing in infrastructure—is, not surprisingly, quite attractive to many low-income countries and we do not have the tools to offer something better. But for the developing countries that borrow from China, the challenge is to overcome the rent-seeking and cronyism that is an integral part of the East Asian region’s economic history.
Governments in East Asia see the conquering of new markets as an important strategic goal. Businesses are the vanguard, but they are closely supported by the state. In global shipping and construction markets, Chinese firms and the Chinese state see themselves as playing catch-up where European firms have had a big head start, boosted by their own governments under earlier rules of engagement. China’s embassies are united in working hard to help secure new business for Chinese firms. The Ministry of Commerce has multiple funding tools to support Chinese advances in construction, natural resource exploration, and technology exports. This is a far cry from the “markets first” approach advocated today by Washington and its allies.
Chinese policy bank funding enables Chinese firms to gain business advantages in building economic infrastructure: ports, roads, telecoms, and power plants. The China Development Bank said that it had committed at least $110 billion to projects in BRI countries as of mid-2018. China’s Export Import Bank announced it had provided $90 billion. While the United States has relatively generous pockets, committing nearly $35 billion in economic assistance in 2017 alone, very little of this went to economic infrastructure. According to OECD data, only Japan has an outlook similar to China’s. In 2017, Japan provided developing countries over $10 billion in concessional funding for economic infrastructure. U.S. aid and capital markets supplied just over $1 billion.
In the United States, our bridges and roads are crumbling, but China’s relentless investment in shiny new ports, roads, railroads, and power projects at home and abroad is welcomed and admired in countries where the vast majority of people live without access to electricity.
The United States can’t easily counter China’s business diplomacy. Although the Trump Administration has proposed a new agency to compete with China, the details are vague and roll-out will be slow.
On the other hand, China’s control over banking, and the close ties between state and capital prized by the East Asian model, have their own significant weak spot. The system can encourage investment; but it can and usually does also lead to rent-seeking and cronyism. Just as the pen is proverbially mightier than the sword, the pens that sign warped economic arrangements can be as devastating to prosperity, and at times to peace, as military tension and conflict.
The Achilles Heel of China’s bank financing model is that it relies heavily on Chinese companies to develop projects together with host country officials. This creates strong incentives for kickbacks and inflated project costs. Particularly in election years, companies and public works ministers may collude to get projects approved. In 2018, Chinese President Xi Jinping warned that Chinese funding was unavailable for “vanity projects,” suggesting that banks will examine proposals more critically. That would be to the good.
China does present a challenge in its port and infrastructure investments, but this is not a new challenge. As IMF chief Lagarde noted, investments in major new infrastructure always need to be carefully managed. The West can help shape the BRI by being more closely involved. Multilateral partnerships can build capacity among borrowing governments and their civil societies to analyze the public-private partnerships that are evolving as key financing methods for BRI. So far, China has been relying on loan capital far more heavily than equity in BRI financing. Yet equity investments from China would shift more of the risks to Chinese investors, and away from borrowing country governments and their taxpayers. This should be encouraged.
As for transparency and the risks of corruption, these are very present. Support for watchdog organizations like the anti-corruption NGOs Transparency International and Global Witness can help expose malfeasance if and when it occurs. But here, the West will have to be careful lest its own national companies end up with egg on their faces. While many present “the West” as a group united in probity and good business practice compared with a nefarious China, a 2014 survey by NGO Transparency International found that only four OECD members (the United States, Germany, the United Kingdom, and Switzerland) were “actively” enforcing their own anti-corruption legislation, and that activity has not been very effective given the inherent jurisdictional problem of enforcing national law in a global business environment. The wealthy East Asian OECD countries Japan and Korea, along with the Netherlands and Spain, were among the countries with the weakest enforcement. It seems the Chinese may not be so different from “the West” after all.