By Valentin Schmid
Beijing, China, July 24, 2017
In addition, recipient countries could only pay back a loan in yuan by selling goods and services to China, thus procuring the Chinese currency. This would be directly counterproductive to the goal of promoting exports from China with construction contracts and eventually through improved trade infrastructure.
“How is Pakistan to repay a yuan loan? They are going to generate a trade surplus in yuan. So China has to run a trade deficit with all the countries it lends to. Even if they don’t do that, Pakistan is going to have to generate some type of trade surplus with another country to have enough capital to pay back China,” said Balding.
Given that most of the infrastructure will be built to facilitate trade with China, this is highly unlikely. So in the end, China will be left to vendor finance these projects. The only way to achieve its economic objectives will be hard currency loans that are completely repaid, with interest—which China currently has no clear means of financing.
All of the economic indicators regarding the most prominent BRI projects point against this repayment scenario.
There is a reason countries like Cambodia, Laos, Thailand, Pakistan, and Mongolia don’t have good infrastructure. They have a generally poor macroeconomic framework, underdeveloped institutions, and a high degree of corruption. Building roads and railways will not change that.
Additionally, “Central Asia, a patchwork of states whose borders were drawn to make the countries more easily controlled from Moscow during the Soviet era, is hardly a promising market for Chinese goods,” states the Geopolitical Futures report.
“People talk about [the BRI] as if China is giving away money. In almost every case, it’s the Chinese credit card company giving a credit card to a despotic dictator, like in Sri Lanka or Venezuela. None of that has ended well,” said Balding.