Belt and Road, Trade and industry, International relations, Law | Asia, East Asia, The World

27 July 2021

Until there is more transparency in the Belt and Road Initiative’s operation, the democratic nations of Asia and the Pacific must be wary of its influence on the region’s norms, Adam Bartley writes.

There has always been a significant level of suspicion among democratic nations when it comes to China’s Belt and Road Initiative (BRI), and for good reason.

Powerful democratic states in Asia have long sought to influence regional neighbourhoods to bolster support for, and adoption of, liberal economic policies, aiming to reward transparent economic and financial relationships while contributing to more sustainable and mutually beneficial relations among states. The BRI, to be sure, poses a threat to this.

If current international norms have explicitly discouraged and delegitimised autocratic behaviour, it would make sense for autocratic nations such as China to seek to influence their neighbourhoods to counter liberal trends and remake them in their own image.

Outwardly at least, the BRI does just this. While scholars have been right to point out that some governments have been too quick and unthinking in their criticism of the project, there are still valid concerns that need addressing.

In particular, the emergence of relationships of dependence between participating states and Chinese funders, notwithstanding the notable lack of transparency surrounding the BRI’s many agreements, has clouded BRI projects, strengthening accusations that Chinese loans are in some cases predatory or have primarily geopolitical ends.

In fact, it has often been the case that only after a change in government in participating states that the true circumstances of some of these opaque deals are revealed.

For instance, when the new government of Mahathir Mohamad in Malaysia undertook a feasibility study of the East Coast Railway Link (ECRL), a multi-billion-dollar BRI project, it found giant gaps in spending justifications. This caused the new Minister for Finance Lim Guan Eng to call on the China Communication Construction Company to explain the costs and ultimately reduce them by a drastic amount.

More on this: The future of the Belt and Road Initiative in Australia

The ECRL was later caught up in the investigations into the infamous 1Malaysia Development Berhad scandal, and was even threatened with cancellation.

From a good governance perspective, where voice and accountability, rule of law, regulatory quality, political stability, and government effectiveness are considered integral to positive project outcomes, the results have been more broadly problematic.

In Sri Lanka in 2015, for example, the new government of Prime Minister Ranil Wickremesinghe was voted into office following a campaign to examine the former government’s opaque deals with China, which had led to a domestic balance of payments crisis over the Hambantota Port development project.

By 2016, Wickremesinghe was forced to extend the government’s financial outreach to Beijing to service the debt from non-performing loans, having no alternative option.

Elsewhere, guarantees that projects meet their broader justifications have often run aground. In Pakistan, for instance, the China-Pakistan Economic Corridor has caused considerable dilemmas for the government in Islamabad. Soaring debt, unprofitable projects, and unfavourable equity stakes to Chinese firms have discredited the rationale for partnership.

Many projects have employed Chinese labour and machinery, creating as a result few local jobs, while most of the profits are repatriated to China. Excess costs in the billions are often incurred as a result of insufficient planning.

More on this: Australia, China and the Belt and Road Initiative with Jane Golley

The Qasim and Sahiwal power plants, for example, have cost a further $1.8 billion than was projected due to tariffs, and further examination of the flagship projects in Pakistan (Gwadar Port and Gwadar Free Zone) reveals significant fluctuations in loan rates, in some cases exceeding 13 per cent.

Meanwhile, special privileges for the China Overseas Port Holding Company of a 40-year lease with a 91 per cent share in profits and a 23-year exemption from most taxes, have caused further headaches.

Clearly, the rationale for these projects – to establish a base for Pakistan’s industrial growth – has not been achieved, thanks in part to exorbitant tariffs, high electricity prices, and generous tax breaks for Chinese companies.

As these examples illustrate, non-transparency has often led to an abandonment of responsible credit lending principles, as established by the OECD and the Paris Club of global creditors. The United Nations’ Principles of Promoting Responsible Sovereign Lending and Borrowing, to which China is committed, has been similarly neglected.

In more tangible terms, this means a loss of evaluation and reporting mechanisms, post-disbursement audits, stated borrowing objectives, and a loosening of accounting norms, all of which have contributed to BRI project troubles and the erosion of democratic governance mechanisms more broadly.

And what does this mean for the region’s norms? In short, the splintering of aid and development into bilateral relationships has undermined regulatory bodies and left governments dependent on powerful neighbours. If the BRI continues to expand, it could lead to the further adoption of authoritarian control in the region, impacting countries where minor reductions in liberal norms are registered the most.

At the very least, these trends in BRI practice have strengthened some nations’ obligations to and dependencies on China, and it can now actively pull strings to exploit disagreements, weaken democratic institutions, and divide voices on key national priorities.

Until such issues are addressed more broadly, international repudiation of Chinese President Xi Jinping’s signature foreign policy will continue.

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