China is increasingly feared by the West as a competitor and portrayed as an undemocratic nation, a country in which a one-party dictatorship rules over everything and there is no freedom of expression. The Chinese government is accused of inconceivable human rights violations by shady organizations and “specialists”. The USA, its secret services and NGOs founded specifically to defame China support and finance separatist and terrorist activities, primarily in Xinjiang and Tibet, fuel anti-Chinese resentment in the countries of the region, and establish anti-Chinese alliances such as QUAD and AUKUS and try to undermine the expansion of the New Silk Road and prevent other countries from cooperating with China. By Marco Wenzel.
You can read Part I here.
Since around the year 2000, when China became a world power, the country has received predominantly negative coverage in the western media and the country is portrayed as an aggressive expansionist power. In the eyes of the West, the New Silk Road project is an instrument for reshaping the international order and establishing China’s hegemony over the Asia-Pacific region and beyond.
The logic of the New Silk Road project is different from the “development aid” that the West generally grants to third world countries. China’s investments in other countries are never altruistic, but they also offer advantages to partner countries and China values the development of the infrastructure of its partners. China is generally valued by its partners and not viewed as an exploiter. Two thirds of the world’s population could be linked by the New Silk Road. China specializes in infrastructure programs, building not only roads, ports and railroad lines in its contracting countries, but also sports stadiums, schools, bank buildings, government buildings, etc.
The allegations that are made against China’s projects in the West are mostly as follows:
- China is luring its partner countries into a debt trap, making them dependent.
- China is carrying out the construction work on the various projects with its own workers and is importing most of the raw materials and construction machinery required directly from China.
- The execution of the construction work is often associated with serious environmental damage. The working conditions are poor and residents in the areas affected by the construction work are often evicted and expropriated.
Financing the New Silk Road
China finances the New Silk Road on the one hand through state-owned Chinese commercial banks. To finance structural projects, China has also founded the Industrial & Commercial Bank of China, the largest bank in the PR, and the China Export-Import (Exim) Bank. In addition, the Chinese government has set up the New Silk Road Fund and the Asian Infrastructure Investment Bank and, together with Brazil, Russia, India and South Africa, the New Development Bank. So it is not just China alone that is contributing to the financing of the Silk Road.
The money is then usually given in the form of loans to the participating countries in order to implement the agreed projects. With these countries, China concludes so-called Memorandums of Understanding (MoU), agreements that regulate future cooperation.
The terms of China’s loans vary from country to country. In Asia, and particularly in the Indian Ocean, India is its greatest rival. According to China, the Indian Ocean should not be India’s ocean alone. To some countries, such as Nepal and Mauritius, China is particularly generous to counteract the influence of India. India, on the other hand, views the expansion of China in the region with great suspicion and tries, for its part, to win over the decision-makers in the region. Some countries can benefit from this rivalry and negotiate favorable conditions for the construction of infrastructure projects.
We want to take a closer look at a few projects and not turn a blind eye to the disadvantages and allegations that the local population has raised against cooperation with China in various projects.
The debt trap
Pakistan is perhaps China’s most loyal partner. China has a high reputation among the local population and the country has concluded an MoU with China. The most important project for China in Pakistan is the port of Gwadar. The port plays an important role in China’s drive to gain access to the Indian Ocean and control shipping there. China itself has no connection to the Indian Ocean. The deep sea port was built and financed by China and completed in 2010. The cost was over $ 1 billion. In return, China got control of the port for 40 years.
But Gwadar would be nothing for China without the Karakoram trunk road, the connecting road between Pakistan and Kashgar in the Chinese province of Xinjiang, via which goods for import and export to China are transported. The Karakoram Highway was built by Pakistan and China together and completed in 1978.
In 2015, China granted Pakistan additional loans totaling USD 60 billion for the CPEC (China-Pakistan Economic Corridor) as part of the thirteenth Five-Year Plan to improve its infrastructure. It is used to build roads and railway lines, but also power plants and even pipelines. It is alleged that China charges 5 percent interest on these loans, in fact a high interest rate nowadays. In comparison, a study by the OECD shows that the loans for development aid of all OECD members have an average interest rate of 1.1 percent. Pakistan is likely to struggle to repay the loans, but Chinese loans only make up 30 percent of Pakistan’s total debt.
In Sri Lanka, in the Hambantota district, China built a deep-sea port and an airport at the same time, financed by a US $ 8 billion loan to the government. It opened in 2013. The Rajapaksa International Airport, named after the then President of Sri Lanka, is probably the loneliest airport in the world. The terminal can handle 1 million passengers a year, but none comes. Hambantota is too far away from the capital Colombo and the region is hardly developed for tourism. And the ships prefer to dock in Colombo, one of the most important Asian ports, rather than in Hambantota. Sri Lanka struggled to repay its debt to China. In order to limit China’s influence on Sri Lanka, India has now leased the airport, despite the lack of passengers, and China has leased the shipping port.
Hambantota is the prime example that is always cited by China’s opponents to prove that China is luring its partner countries into a debt trap in order to then take over the built infrastructure itself. Contrary to popular narrative, however, the port was not granted to China in exchange for debt relief. The port operations are still not cost-effective, but the port is still owned by Sri Lanka, which pays USD 100 million in repayments every year on the loan:
“The often cited ‘port deal’ was actually a lease clearly separate from the loans taken out to build the port, and the money from the lease was used to strengthen the country’s foreign exchange reserves rather than to be repaid to China used. There was no debt relief even though the port was leased to China for 99 years. The ownership structure has not changed. According to the lease, however, a significant portion of the port operations will be handled by the China Merchant Port Company, so a large portion, if any, of the profit will be generated by CM Port”. (The Diplomat, January 1, 2020)
The truth about the implementation of the unprofitable project is more likely that Percy Mahinda Rajapaksa, who comes from the region around Hambantota, wanted to set a monument with the project and miscalculated. It was originally the Rajapaksa government that approached China with the request to finance the project and to provide the necessary investment loans that could hardly be obtained from other sources. In addition, liabilities to China in 2016 did not amount to 5 percent of Sri Lanka’s total debt. The debts to western countries were much higher at the time.
With a length of 414 kilometers from the border with China, a new railway line recently connected Laos with China. If everything goes according to plan, the railway line will soon also run from Vientiane on a planned new bridge over the Mekong to Thailand and finally to Singapore.
The agreement between China and Laos was signed in 2015 and works began in December 2016. The line is operated by the Lao-China Railway Company (LCRC), a joint venture.
Laos has borrowed heavily from China for this. Around USD 3.6 billion of the total costs of USD 5.97 for the railroad were financed by a loan from the Export-Import Bank of China, the rest was divided between a company made up of three Chinese state-owned companies for 70 percent of the loan and a Laotian state-owned company for the remaining 30 percent. It is estimated that the annual interest on the Chinese loan is about 20 percent of Laos government spending.
China’s critics claim that Laos will soon sink into debt that it can no longer service, thus falling into the debt trap. But the railway line also offers inland Laos great opportunities to open up to the outside world, to intensify its trade with the Southeast Asian countries and to promote tourism. The big question here is whether a project that focuses on globalization and increasing world trade will be sustainable and profitable. In 2015, the world was still doing fine, nobody could have known at the time that Covid would paralyze tourism, the economy and trade. It is well known that predictions about the future are always difficult to make.
The expansion of the infrastructure and transport connections through China in many countries that the West has so far ignored or, at best, only viewed as suppliers of raw materials, is in any case often presented as a hidden debt trap that is supposed to drive cooperation partners into dependency. The myth is spread that China is deliberately granting expensive loans to weak economies as part of a “debt-case diplomacy” in the hope that they will not be able to repay the loans later and that Beijing will then take over the built facilities to compensate for the loan default could. But that is a malicious assumption. There is no Beijing strategy to lure developing countries into unsustainable debt. China itself is also suffering from loan defaults. And loan defaults occur when the facilities built are unprofitable, as in the Hambantota case. And who would like to be left with unprofitable infrastructures in foreign countries?
In this context, there is often talk of hidden debts. Because the various projects are not always carried out directly through contracts between China and the various governments, but also through contracts that companies in the individual countries conclude directly with Chinese companies and for which the respective government often guarantees. It is not always clear what exactly happens when the risk is distributed between states, developers and lenders of public-private infrastructure projects when the projects go wrong and who is ultimately responsible for repaying the loans. The role of the state and its responsibility for protection are often not defined. Private Chinese port and logistics companies are global players in a highly competitive market. They operate independently of Beijing in a capitalist environment and, like their competitors, primarily aim to maximize profits.
China offers its partners, especially in the countries of the Third World, in Africa, South America and Asia, an attractive alternative to loans from the IMF and the World Bank, which always use neoliberal reforms, social cuts, streamlining of the state, tax cuts and new markets for large western corporations in return for their loans. Anyone who accuses China of concluding unequal contracts with its contractual partners as part of the New Silk Road project is forgetting the blackmailing of the West for its “development aid”.
The construction works
China has overcapacity in the production of steel, cement and construction machinery. About half of the world’s steel is produced in China. China produced 1.1 billion tons of steel last year, 800 million tons of which came from imported iron ore from countries such as India, Australia, Brazil and South Africa. That corresponds to almost half of the total global steel production. China also produced 24,000 million tons of cement last year, nearly 54 percent of global cement production. There is also considerable overcapacity in the manufacture of heavy construction machinery such as excavators, cranes and bulldozers. Chinese domestic demand cannot absorb the excess capacities. The projects for the Silk Road come at just the right time. From an economic point of view, the New Silk Road thus also serves to secure China’s own economic growth, even to protect it from a severe recession.
Usually, the construction work that is part of the New Silk Road is carried out on site by Chinese workers and with Chinese raw materials. There is hardly any domestic added value in construction, and local producers are neglected. As a result, a large part of the borrowed money flows straight back to China. Often the contracts are designed from the outset in such a way that Chinese products have to be used for the construction and the tenders, if there are any, are designed in such a way that only Chinese companies get a chance. It is clear that there is always a smell of corruption attached to such contracts.
The enormous quantities of cement and steel that China produces despite global overcapacities can thus be exported for infrastructure projects abroad. And the projects also offer employment opportunities for Chinese workers. All of this is indeed a major problem and leads to resentment and public protests in individual partner countries.
As early as 2009, when a new parliament building completed by China was due to be opened in the Seychelles, the opposition parties refused to move in on the grounds that a parliament building would have to be built with local money and local companies and not by the Chinese. Then, in 2018, truck drivers blocked the road in front of a government building to protest that China had imported its own trucks, including drivers, to build a dam.
The use of Chinese steel for the China-funded projects in Pakistan has now caused displeasure among local manufacturers. The Pakistani Steel Manufacturers Association is calling for the government to ban the duty-free imports of steel from China. Pakistan grants Chinese companies special exemptions, including consumer taxes, sales taxes, and import duties on building materials and other goods, while domestic companies have to pay these taxes. Chinese contractors are also allowed to import machinery and equipment from China without paying customs duties.
Pakistan is contractually obliged to use only Chinese products in various projects. In 2015-16, China exported more than 100 million tons of steel to Pakistan, which was half of China’s total steel exports during that period. Pakistan imported $ 646.7 million worth of iron and steel from China in 2020, according to official data. Due to the massive imports of machinery and building materials related to the CPEC (China-Pakistan Economic Corridor) project, Pakistan has a large trade deficit with China. The CPEC is investing $ 10 billion in transportation and other related infrastructure projects, with up to 15 percent of the cost being (Chinese) cement.
Environmental damage and social problems
With the projects, the contracting countries often also bring Chinese working conditions into the country. Many projects also pollute the environment and even drive out the local population.
For China, Greece is the “gateway to Europe”. China Ocean Shipping Company (COSCO) owns 67 percent of Piraeus container port. However, COSCO cut wages and benefits for dock workers and refused to bargain collectively for years. The working conditions are tough. Environmental associations also accuse COSCO of not complying with environmental regulations. When a dock worker had a fatal accident at the beginning of November this year, the workers called an indefinite strike for better and safer working conditions and for a collective agreement.
The China-funded Sesan 2 mega-dam in northeast Cambodia has proven to be a disaster for local communities. The dam is being developed by the Chinese Lancang Hydropower International, a subsidiary of the China Huaneng Group, which is one of the five largest electricity producers in China and has a 51 percent stake in the project, as well as the Cambodian Royal Group (39 percent) and the Vietnamese EVN International (10 percent share). Around USD 800 million was invested.
According to Human Rights Watch, the dam destroyed the livelihoods of around 5,000 local residents while producing less electricity than expected. Huge areas above the confluence of two Mekong tributaries were flooded, areas where around 5000 indigenous people and members of ethnic minorities had lived for generations. 5,000 people had to move somewhere else to make way for the project.
The project is also destroying the livelihoods of tens of thousands of other residents who make a living from fishing in the region, as the dam prevents fish migration.
Most of the adverse effects were predicted in a 1999 economic and environmental impact study and the project was classified as an unattractive investment. The dam was built anyway.
According to HRW, Cambodian officials not only ignored the study but also the objections of the communities and approved the project in 2012. The defenseless population was expropriated, expelled and resettled with false promises and insufficient compensation in newly built settlements with completely inadequate infrastructure, without work and without prospects, a common practice in many developing countries. The West also likes to benefit from such practices, Cambodia in particular has been hit hard by the land grab. In such countries there is hardly any possibility for the population to legally defend themselves against the rulers who, in cooperation with unscrupulous companies and corrupt officials, appropriate the land and enrich themselves with the projects.
“There is no evidence that the Chinese government ever imposed an obligation on the Chinese and Cambodian companies that built the dam to comply with international standards and corporate social responsibility standards or adequate compensation for the damage caused by the project or even standards that would apply if the dam had been built in China”, the HRW report said.
Motivated by profit, companies undertake raids against the population in cooperation with a corrupt local elite. Some Chinese corporations are now just as big, so powerful and almost as independent as major western corporations, and their only goal is to make a profit at any price.
As with lending to unprofitable projects that Beijing uses as a debt trap, some large Chinese companies run projects where the benefits to the company outweigh the benefits to the host country. Corporations are capitalizing on crooked deals building much-needed infrastructure in some of the world’s poorest countries by exploiting a lack of funding and an appetite for large infrastructure projects.
The Chinese government should be more careful here because it ruins the reputation worldwide. A first step seems to have been taken, the government in Beijing now seems determined to keep a closer eye on large companies and to force them to assume more social responsibility. To what extent this will affect future undesirable developments within the framework of the BRI remains to be seen. It should be noted here that not everything that is issued as a BRI project are cooperation agreements between the government in Beijing and the various countries. The name Silk Road and the appearance of development aid is sometimes used to hide shady deals under the guise of BRI.