Mohan Guruswamy | China’s Belt and Road drive was just another mousetrap

The 2008 US financial meltdown was a consequence of the sub-prime mortgage crisis which followed as a consequence of flush bank coffers that caused them to hugely expand housing loans at attractive rates. As a consequence, many people who would in normal circumstances be unable to muster much credit found themselves being offered loans to fulfil the cherished American middle-class dream of owning a house.

When the US economy took a misstep, tens of thousands of employees got pink slips, with consequences to the housing business. As people became unable to service their home mortgages, the banks began to foreclose and soon there was a glut of unsold properties. Tens of thousands of home owners were saddled with huge debts, banks with even more and the circle of unpaid debts became bigger and wider till it hit the big banks. In 2008, the mother of all meltdowns happened.

But President Barack Obama, in the early days of his first term faced this with aplomb and pumped over $800 billion into the big banks, bailed out General Motors and restored confidence in the US economy.

Of banking rules and prudence that apply to people and corporations in a country, rules aren’t applicable to sovereign nations, but prudence is. You can’t take over an imploding debtor country and restructure it like Mr Obama did to General Motors, or forced Lehman Brothers into liquidation for Barclays and Nomura Holdings to gobble it up. You can’t liquidate an Argentina or force Britain to merge with France. Walter Wriston, Citibank’s legendary chairman, who nearly sank the bank by lending hugely to South American and African nations, blithely said when warned about the pitfalls: “Countries don’t go under, they roll over!” Meaning the loans are just renewed all over again, with higher costs. Now consider the case of Sri Lanka and Pakistan in our region.

The Chinese have begun backtracking a bit. The borrowers have started looking at the gift horse in the mouth. Malaysia has renegotiated the terms of the rail project with a much-reduced outlay, lower interest rates and increased local participation. It may be mentioned that the original deal was signed by paying disgraced former Malaysian PM Najib Razak a sizeable bribe. Even Pakistan has begun questioning the CPEC’s terms after deriving lessons from what happened to Sri Lanka when the birds came home to roost at Hambantota.

China first lent Sri Lanka $307 million for the first stage of the port project at rates of less than two per cent. When Sri Lanka went for another $757 million tranche, the Chinese upped the interest rate to over five per cent, and this new rate applied to the first loan as well.

Sri Lanka was truly cooked. As it couldn’t service this combined debt, it was forced to give 15,000 acres to build a sealed Chinese industrial city, where the Chinese yuan will be the currency. Hambanatota is, incidentally, in the Rajapaksas’ bailiwick, and former President Mahinda Rajapaksa had dreamed of turning it into another Colombo with a deep-water port, international airport and high-speed expressway to the capital. It was just like Mulayam Singh Yadav’s pipe-dream of turning Saifai in the boondocks of Etawah into an industrial hub with an all-weather airport. Nilgais graze on it, just as farmers now dry paddy on Hambantota’s wide runways.

Speaking at the first BRI (then OBOR) conference, President Xi Jinping said Beijing would advance 380 billion yuan ($55 billion) to support it. This was a far cry from huge figures like $750 billion or even $1 trillion bandied about. Exaggerating the size of the lollipop is an integral aspect of China’s economic diplomacy. The BRI is seen as China’s big play to seek world domination. Both the fears and the optimism are unfounded. The BRI is a project meant very simply get Chinese reserves invested in Western banks into investments where they will fetch a higher rate of return; and to take the slack from the huge over-capacity problem that plagues the Chinese economy.

Now to BRI’s economics. There is a reality most of our commentators do not see or understand. By 2013, China accumulated foreign exchange reserves of about $3.5 trillion. The capital, it claims, it is prepared to subscribe for the NDB, AIIB and Silk Road Fund will amount to around seven per cent of its total foreign exchange reserves invested in Western banks.

Since these China-promoted institutions will be providing infrastructure lending rather than grants, the return on capital from these investments could be significantly higher than the returns China gets from its foreign exchange reserves now invested in low-yielding US government bonds. It’s very simple. China needs to get value for its money and also help its demand-starved industries. They have found a typically Chinese solution to it and are making a virtue out of necessity. Look at it from another angle. The US dollar is also steadily depreciating in the long term against other major currencies. With no interest and with depreciation factored in China’s huge reserves, accumulated by extracting surpluses in its sweatshops, are steadily shrinking in value. The question that Beijing seeks to grapple is this.

One way is to put these funds to work in investment-starved countries in Africa and Asia and assure themselves returns for a long time to come.

In some, the birds have come home to roost quite early. The grandiose Hambantota port project in Sri Lanka, which once had the same bunch of Indian “strategic thinkers” in a tizzy, hosts no ships and doesn’t earn much. China is now pressuring Sri Lankans to service its debt and is seeking to extract some more in lieu of that. Much of the Hambantota investment has already been recouped by China by way of material and labour supplied to complete the project. That’s why one top European commentator called OBOR “One Belt, One Road and One Trap”. It’s a mousetrap with a big piece of cheese as bait.

Pakistan’s Dawn newspaper had questioned the benefits that will arise from linking mostly dry and barren Xinjiang, and in particular the predominantly Turkestani Muslim Kashgar prefecture with its restive four million people, to an increasingly water-starved and much troubled Pakistan? Once when a Pakistani interlocutor at a Track 2 forum asked me what would be the economic gain to Pakistan, I replied that they could sell tea and samosas to the heavy lorry traffic.