China’s economic model is going to be tough to beat. While the USSR’s dysfunctional communist system made it ultimately a paper tiger, China is building a state capitalist system that will prove more robust and competitive. But there is one way in which China’s model is already showing signs of weakness: It’s having difficulty investing overseas.
A recent Financial Times article noted that bilateral lending by Chinese state banks to countries involved in China’s “Belt and Road” project has fallen dramatically in recent years. As many were quick to point out, that’s not the whole story, as China engages in other types of lending as well. But it’s undeniable that the program has run into deep trouble, along with many of the associated loans.
The Belt and Road project was supposed to project Chinese influence throughout Asia and Africa, securing resources even as it laid the ground for potential strategic alliances. From its inception, the program began to run into difficulties. An ambitious Chinese port project at Hambantota in Sri Lanka is in trouble, as a new government is demanding to renegotiate the lease. A $62 billion transportation corridor through Pakistan became mired in delays and setbacks. Projects were canceled and terms renegotiated in Malaysia and Kenya. Asian countries soured on the lending program, and Chinese outbound investment fell.
In Africa, many African countries eagerly accepted the loans that China’s state-owned financial system offered.
But this turned out to be a poisoned chalice — many of the projects that China financed were not well-thought-out, leading to a predictable wave of defaults. Many countries in Africa and elsewhere are now asking for debt relief, and it looks like China is going to take significant losses.
This wouldn’t be such a bad thing if economics losses were the only cost of China’s Belt and Road failures. The program was probably not intended to turn a profit in the first place; if China had lost a bit of money while building its geopolitical influence, it would have felt more like a fair trade.
The problem is that in the process of causing economic disruption and disappointment, China has also angered both the citizens and the governments of many of the countries where it had hoped to gain clout. And that is exposing the ways that China’s government and state-owned companies are hampered by the country’s authoritarian system.
In China, when state-owned banks lend too much money to companies or local governments, the borrowers are generally grateful when the bad loans are mopped up by the government. But even if they are allowed to restructure the debt, developing countries resent the humiliating experience of being forced to go begging to China for relief, and defaults are highly disruptive to their own policy planning.
China’s authoritarian system means that the government can seize land to make way for infrastructure or factories. Although there are protests, in the end the government has its way. But in Belt and Road countries, when poor people and indigenous groups become angry at being kicked off of their land to make way for China-financed projects, the results can be more destabilizing and long-lasting.
China tends to trample on local ethnic sensitivities -- for example, when Chinese workers are imported to work on Belt and Road projects at the expense of African locals, it feels like a return of colonialism. And China simply can’t treat foreign governments like it treats its own local governments; when economic promises don’t pan out, there’s lingering resentment instead of shrugging acceptance.
The end result is that China’s authoritarian system has prevented it from learning how to balance the interests and sensibilities of a large number of actors.
And this is an important weakness in China’s vaunted economic model. China may not depend on Belt and Road loans to turn a profit, but with protectionism rising in rich nations, it will need to sell more and more of its exports to developing countries. And already, India is acting to block China’s software companies.
Moreover, making alliances will be crucial if China wants to press its territorial claims in the South China Sea and elsewhere. China is a huge country, but not so huge that it can afford to go it alone. China’s rivals in Asia and the West should take note, and offer their own, better alternatives to China’s ham-handed effort.
Bloomberg
