China Trade Route Development Program Puts Diplomatic Gains Ahead of Reforms

China is rushing to complete billions of dollars in construction deals ahead of an international conference for its One Belt, One Road (OBOR) project next month. The agreements in several countries are aimed at creating a picture of success for the project, which has become a cornerstone of Chinese President Xi Jinping’s administration.

The heads of at least 20 countries are expected to attend the OBOR conference in mid-May, one of the biggest diplomatic events on Beijing’s political calendar this year.

Since March, Chinese ministers have been flying around the globe to sign major construction contracts. Those include a $65 billion investment deal with Saudi Arabia, a $4.7 billion agreement for building a Jakarta-Bandung high-speed railway line, and $3.75 billion worth of infrastructure projects in western Australia. China also reached an $850 million biorefinery deal with Finland when Xi visited the country this month.

Contradictory moves

The aim of China’s OBOR project is to open up and expand old Silk Road trade routes through Central Asia and on to Europe, as well as Southeast Asian maritime links through the Strait of Malacca and around India to the Middle East.

The grand picture that China is painting of its ability to promote enhanced trade and diplomatic links, however, is only part of the plan, analysts say.

For the most part, China is relying on its state-owned enterprises (SOEs) to advance the OBOR project. Some say that contradicts Beijing’s pledge to revamp and reform these companies, which are already burdened with overcapacity, huge debt and losses.

Xu Chenggang, a professor of economics at Cheung Kong Graduate School of Business, said that SOE debt is a major burden on the Chinese economy, and the OBOR program will only accentuate the problem as Beijing bankrolls projects in several countries.

“The so-called One Belt, One Road means infrastructure,” Xu said. “If certain countries join this, then the Chinese would say, ‘Look, we lend you money, you borrow from us.’ ”

With so much focus on infrastructure, the project may lead to the shelving of plans to shut down money-losing companies, including steel plants.

Xu said that with its OBOR push, China is not only putting diplomacy ahead of economic reforms, but it also risks making SOEs even larger, and hence more difficult to reform or privatize.

Stalled reforms

More than three years ago, Xi announced sweeping plans to reform the economy and SOEs, but it has been an uphill task for the Chinese Communist Party, given the tough choices and vested interests it involves.

Reform of SOEs means integrating weak and strong companies, breaking large, unmanageable companies into smaller entities, and closing those that are heavily indebted and unable to continue without outside support.

The biggest obstacle to SOE reform, however, is politics, said David Dollar, a senior fellow at the Brookings Institution.

“Many senior Communist Party officials are running state enterprises, or local government officials with local state enterprises, and they like having these sources of income and employment. So, it is hardly easy to get them to give them up,” Dollar told VOA.

Exporting ills

Through OBOR, China will also be exporting its system of funding projects that make political sense at contract-signing time, but are in many cases incapable of generating sufficient revenue to repay the loans, analysts said.

Economists and political factions in many countries have begun to question Chinese investments in major infrastructure projects, leading to the cancellation of some of the deals. Thailand last year canceled a Chinese contract for a high-speed rail project, and replaced it with a project about one-third the size.

Dollar, also a former financial emissary to China for the U.S. Treasury, said China has invested in both well- and badly managed countries.

Chinese officials “are also lending money to some countries with very poor governance, like Angola in Africa or Venezuela in Latin America,” Dollar said. “And where the projects are not working out well, there will not be a benefit, but the countries [are] still going to have debt, and probably China will have to forgive some of these debts in future.”

Exporting corruption

Some analysts are asking whether OBOR will give Chinese SOEs an opportunity to export their own brand of corruption.

Major political controversies have already arisen in Sri Lanka and the Philippines, while Myanmar has held up construction of a major hydroelectric dam project despite persistent pressure from its much bigger neighbor. Nepal signed several construction deals with China but did nothing to move them forward.

A large number of SOE executives are either in jail or facing investigations by the government’s anti-corruption bureau at home.

Andrew Wedeman, a political scientist and head of the China Studies Initiative at Georgia State University, said Chinese companies going to Pakistan, India or Bangladesh will not be teaching the locals anything new.

“Certainly One Belt, One Road will produce new corruption. But it will not create corruption that did not exist before. It will only increase the amounts of money. It probably would increase the rank of people involved, but it will be change in terms of quantity, not in terms of quality.”

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