In the face of the fear and mistrust that increasingly characterize Australia’s relations with China, the Belt and Road initiative looms large. Australian politicians from the two main parties rarely agree on much openly, but almost all agree that China is using the BIS to achieve geopolitical goals. Many commentators agree.
This is why Victoria’s recent BRI agreement with China was critical to activate “[Chinese leader] Xi’s strategic agenda ”. The Australian government’s announcement that it will legislate to give the Foreign Secretary the power to regulate agreements signed with foreign governments in Australia was aimed squarely at the Victoria BRI agreement.
Australian policymakers have also expressed concern over China’s use of BRI infrastructure funding to increase its influence in the Pacific Island region. China is often accused of “debt trap diplomacy” – strategically trapping recipient countries with loans they cannot repay. It is said to increase Chinese leverage, and when recipients fail, China can seize strategic assets. Chinese diplomacy claims of the Pacific debt trap abounded, leading Australia to establish a competitor to the BIS – the $ 2 billion Australian Pacific Infrastructure Finance Facility (AIFFP).
In our report, recently published by Chatham House, Lee Jones and I argue that the assumptions underlying Australia’s response to the BIS are wrong. China’s “debt trap diplomacy” is a myth.
Take the Port of Hambantota in Sri Lanka. It is presented as the case ultimate for Chinese debt trap diplomacy. The conventional account is that China loaned money to Sri Lanka to build the port, knowing that Colombo would experience debt distress and Beijing could then seize it in exchange for debt relief, allowing its use by the Chinese navy.
The Hambantota Port case shows little evidence of China’s strategy, but a lot of evidence of poor governance on the side of the beneficiaries.
This account is simply incorrect. The project was proposed by former Sri Lankan President Mahinda Rajapaksa, not Beijing, as part of his government’s corrupt and unsustainable development agenda. However, it quickly became a “white elephant”, creating vast excess capacity and exacerbating Sri Lanka’s financial woes. Sri Lanka’s over-indebtedness is not due to Chinese lending, but to excessive borrowing in Western-dominated capital markets.
This is not unique – China was also not the main cause of growing debt problems. When the US Federal Reserve began to scale back its quantitative easing program, Sri Lanka’s cost of borrowing suddenly increased, forcing it to seek help from the International Monetary Fund.
There was also no swap of debt for assets. Instead, after tough negotiations to protect its results, a Chinese state-owned enterprise (SOE) leased the port for $ 1.1 billion, which Sri Lanka used to repay debts to others. creditors and increase its foreign exchange reserves. The debt to China will still have to be fully repaid. Finally, Chinese Navy ships cannot use the port, which will instead house Sri Lanka’s own Southern Naval Command.
In short, the Hambantota Port case shows little evidence of Chinese strategy, but a lot of evidence of poor governance on the beneficiary side.
So how does the BRI really work?
The BIS emerged to externalize China’s massive debt and industrial overcapacity problems by stimulating external demand for Chinese goods, services and capital. The approved projects therefore obey an economic and not a geopolitical logic. Foreign investment does not correspond to the six “corridorsDescribed in the BIS policy documents. Chinese investments remain highly concentrated in East Asian and developed economies, with non-BRI investments grow faster than the BRI investment.
The institutions that provide China’s development finance are also fragmented, poorly coordinated, and ill-equipped to execute a top-down strategy. Senior leaders and central agencies attempt to shape the general direction of the BIS through broad, often vague, policy statements and commitments. But the detailed implementation is left to other agencies.
Of particular importance are the many state-owned enterprises that implement most BRI projects. Central agencies struggle to regulate The conduct of state-owned enterprises abroad and they often flout Chinese regulations. The heads of state-owned enterprises are appointed by the Communist Party, but their performance is primarily assessed against economic goals. Therefore, state-owned enterprises are primarily for-profit entities. They are trying to harness the BRI to expand their market share, secure future income streams, and move up the value-added ladder. SOEs also compete fiercely for projects. They even lobby recipient governments to seek Chinese funding for projects they would likely implement, a case of a wagging tail.
Australian policymakers should avoid treating the BIS as if it is strategically oriented.
Most importantly, as the Port of Hambantota demonstrates, recipient countries play a critical role in shaping the BRI. Funding for China’s development is determined by the recipients, and China simply cannot force other countries to accept projects on their territory. Unless grantees authorize Chinese state-owned enterprises to undertake projects, secure their operations, and approve loans to finance their works, BRI projects will not go ahead. The BRI is therefore built on an ad hoc basis thanks to bilateral interactions between China and the beneficiaries, and not from a Chinese model.
Naturally, beneficiaries want projects that serve their own interests, shaped by need, greed, or both. Many developing countries are in dire need of infrastructure investment but are struggling to find finance providers outside of China. Elites can also often use infrastructure projects to cultivate political support, fuel networks of patronage and obtain “bribes”.
As a result, the economic viability of BRI projects is often questionable and their political, social and environmental implications are negative. But rather than profit from it, China has often suffered a backlash, though rarely amounting to a total rejection of the BIS.
This is the reality of the BIS – messy and fragmented. It is also often problematic, but not because of China’s strategic planning. To paraphrase Hanlon’s razor: never attribute to wickedness what can be explained by incompetence.
In view of this, Australian policymakers should avoid treating the BIS as if it is strategically oriented. As the beneficiaries shape the BRI, the Victoria Accord is not in itself problematic, as long as the projects built under its banner are good. Pushing grantees to reject the BRI entirely will not work, as many will want to keep the option of securing Chinese funding. Instead, Australia and other countries should provide alternative development finance options to beneficiary countries, such as the AFFFP. They would also do well to involve both the beneficiaries and China to improve the governance of the BRI and the transparency of the megaprojects.