When China unveiled the Belt and Road Initiative (BRI) in 2013, the trillion-dollar trade and infrastructure project was hailed as a 21st-century version of the Silk Road that would eventually link East Asia with Europe and Africa. To the capital-starved low-income nations that lined its route, the initiative represented much more — a Chinese version of the U.S. Marshall Plan, which helped rescue resource-starved Europe when it was on the brink of collapse after World War II.

Given that more than half of the BRI’s 76 participant countries had “junk” credit ratings (or no rating at all), the initiative offered the prospect of much-needed investment —especially in transport-related projects such as railways, ports and roads. Moreover, unlike aid from Western governments and loans from multilateral sources such as the Asian Development Bank, Chinese funding did not come with inconvenient demands for improvements in governance or the business environment.

China and other BRI advocates touted the initiative as a win-win that would facilitate regional economic integration and faster growth for the recipient countries, even as it deepened supply chains for the maturing Chinese economy. But skeptics warned that the primary goal of the BRI was to project Chinese power over much of the developing world. Five years (and some serious disappointments) later, it appears that the BRI’s detractors were correct in questioning China’s motives. It is also becoming increasingly clear that the BRI is taxing China’s financial resources, and may even, on balance, undermine China’s geopolitical goals.

Reality Sometimes Bites

Unlike the grant-funded Marshall Plan, most BRI projects are supported by loans. For some participant countries, the resulting debt burden has become so massive that default seems inevitable. For example, in 2016 the World Bank reported that Pakistan's debt had grown to equal 265 percent of its annual exports. Mongolia and Kyrgyzstan seemed in even worse shape, with debt-to-export ratios of 422 percent 328 percent, respectively.

What’s more, sovereign borrowers are too often stuck with excessive project costs and inferior work stemming from a lack of competitiveness: bidding on the BRI projects is opaque and closed to all but Chinese firms.

Some critics go so far as to suggest that China is intentionally forcing countries into a “debt trap” by pushing loans it knows recipients will be unable to service, ultimately forcing them to make major economic and political concessions to their Chinese benefactors. For instance, when the BRI port project at Hambantota (a city in southern Sri Lanka devastated by the Indian Ocean tsunami in 2004) failed to generate expected revenues, China turned the fiscal screws. Sri Lanka had no choice but to grant an 85 percent ownership share in the port to China Merchants Group in exchange for this Chinese state surrogate’s assumption of the project’s billion-dollar debt.

A similar dynamic seems to be playing out at the ports of Doraleh in Djibouti and Gwadar in Pakistan, which, like Hambantota, may end up as homes away from home for the Chinese navy. China likely also leveraged its creditor position to pressure debt-strapped Cambodia, Laos and Myanmar into nullifying a collective Association of Southeast Asian Nations stand against its aggressive territorial claims in the South China Sea.

To be fair, proponents of the debt-trap hypothesis have in turn been accused of cherry-picking project failures as proof of China’s insidious intentions, while ignoring successes. The BRI-financed rail line from Djibouti to Addis Ababa now provides land-locked Ethiopia access to an Indian Ocean port, while another BRI rail project links Kenya’s capital of Nairobi to the port at Mombasa. And following investments made by China’s COSCO Shipping, Piraeus in Greece grew from the world’s 93rd-busiest container port to the 38th-busiest, with a sevenfold increase in shipping volume.

Moreover, in cases in which BRI projects have proved financially unviable, the failure may only reflect the inability of Chinese banks to accurately assess future rates of return. Chinese banks’ track record on domestic infrastructure projects is, after all, far from stellar.

Likewise, project failures too often reflect the recipient countries’ inability to prevent revenues from being drained away by corrupt officials. Transparency International's 2017 Corruption Perceptions Index found that malfeasance levels were unusually high in BRI participants including Cambodia and Tajikistan (tied for 161st of 178 countries, with 1 being least corrupt), Laos (135th), Myanmar (130th), Pakistan (117th) and Sri Lanka (91st). Little wonder that, in Cambodia, a multibillion dollar BRI casino resort project produced a “sprawl of mostly empty hotel buildings, deserted beach bars and the unfinished shell of a casino” — not to mention significant damage to the local environment and the displacement of thousands of residents.

Chickens Coming Home to Roost

BRI-related corruption charges are generating popular backlash, notably in Sri Lanka, Malaysia, the Maldives and Pakistan, where incumbent politicians have already suffered election defeats. And not surprisingly, recipient countries are revising their visions of BRI as manna from heaven.

In August 2018, Malaysia’s new prime minister characterized the BRI as a form of “new colonialism.” Malaysia subsequently canceled a BRI railway and two gas pipeline projects. Similar concerns, combined with rising debt levels, have led to the withdrawal of Sierra Leone from an international airport project, the Maldives from an airport upgrade, Pakistan and Nepal from big hydro projects and Myanmar from the construction of a deep-water port in the city of Kyaukpyu.

China, for its part, may be realizing that it bit off more than it could swallow. The Marshall Plan worked, in part, because the dollar was the world’s currency: the United States could always create more to sustain its financing. In China’s case, very few BRI projects are financed in renminbi. Indeed, the initiative is highly dependent on dollar-denominated funding, at a time when Chinese foreign hard currency revenues are suffering from the Trump administration’s trade sanctions.

The first half of 2018 saw China run its first current account deficit since 1998, forcing the government to spend roughly $32 billion in foreign exchange reserves to strengthen the renminbi in October 2018 alone. If China needs to run down reserves to finance domestic expenditures, the BRI may prove to be a luxury it can no longer afford. 

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One option for China would be to open the BRI to co-financing from the Asian Development Bank, World Bank and other multilateral lenders. However, given the lending standards and transparency demanded by these organizations, it is doubtful that many BRI participant countries and projects would qualify. And in any event, sharing authority with multilaterals that have traditionally heeded the words of Washington is the last thing the Chinese had in mind.

An irony here is that China may be suffering from a case of hubris not so very different from that suffered by the United States after the fall of the Soviet Union. While China seems close to dominating East Asia at the expense of the United States and Japan, the cost of projecting power into the rest of Asia (not to mention Africa and Europe) is proving to be very high. China is here to stay as a great power, but overreach may be just over the horizon.