Critics call China’s Belt and Road Initiative (BRI) a “debt trap,” risking the financial systems of participating developing nations, including China’s own. It has also been criticized for wasting money on building “useless houses” and “roads to nowhere.”

Below is an analysis of how the opinion makers assess the BRI to see if the critics are right.

‘Debt trap’ and systematic financial risk

Harvard economist Patrick Mendis and defense analyst Joey Wang have said that such countries as Sri Lanka and Pakistan have been trapped into investing billions of dollars that they do not have and cannot afford to repay, “forcing” them to surrender their sovereignty to China. That view was based on the reason behind the US-based Fitch’s downgrading of China’s rating. According to an April 9, 2013, Financial Times article by Josh Noble and Simon Rabinovitch, Fitch downgraded China’s credit rating in 2013 from “AA-” to “A+” in part because of rapid credit expansion.

Fitch suggested that China’s banks did not think through the loans they handed out, resulting in a potential bad-debt issue. Based on this logic, the US credit rating agency suggested that there is no reason to believe that the US$900 plus billion earmarked for the BRI would be any more efficient. It is probably for this reason that Mendis and Wang concluded that the BRI is a “debt trap” for countries like Sri Lanka and Pakistan.

Time will tell whether the Harvard scholars’ conclusion will materialize. However, neither the Sri Lankan nor Pakistani governments seem too  worried about the “debt trap” scenario.

Sri Lanka granted a Chinese company a 99-year lease on the Hambantota port because it believes the company has the expertise and capital to reverse the port’s losses and enhance the country’s economic prospects. Pakistan held a “party” to celebrate the completion of the China-Pakistan Economic Corridor’s first phase at Gwadar Port on January 28-29, proclaiming the CPEC will improve the country’s economy.

It is unclear whether the BRI would put the financial systems of China and the participating countries at risk.

According to former finance minister Lou Jiwei, China’s M2, the amount of money in circulation plus deposits, was US$23.6 trillion or 184% of gross domestic product of $12.8 trillion in 2017, a figure higher than that of the US. Additionally, more financial channels – Ponzi schemes, shadow banks, private banks – are surfacing. Because of the increases of lending institutions, the potential of a financial bubble exists if not controlled and regulated.

However, the Chinese government recognizes the danger, resulting in tighter financial-system controls. What’s more, the vast majority of the M2 money supply consists of deposits, estimated at more than $21 trillion in 2017.

Moreover, Chinese banks appear no less efficient or at risk than their Western or Japanese counterparts. According to the US-based consultancy Investopedia, Chinese banks  occupy the four top spots of the world’s 10 largest banks. The China Banking Regulation Commission reported that bank profits exceeded $40 billion, the ratio of non-performing loans to total lending (NPL/TL) was steady at 1.7%, the loan-to-deposit ratio was 65%, and total deposits exceeded $21 trillion in 2016.

International Monetary Fund figures showed China’s NPL/TL ratio of 1.7% is comparable to those of the developed economies, estimated at between 0.5% (Canada) and 4.2% (France). That of the US was 1.5%. China’s loan-to-deposit ratio is certainly better because, that of Japan and the West is between 76% (US) and 111% (European Union).

‘Useless houses’ and ‘roads to nowhere’

Australia’s minister of international development, Concetta Fierravanti-Wells, commented in a January 9 Australian Broadcasting Corporation interview that China’s BRI investments were spent on building “useless houses” and “roads to nowhere” in the South Pacific. Her comments earned a swift and harsh rebuke from the governments of the South Pacific island countries. Tonga, for example, pointed out that it was Chinese investment that had led to the island nation’s economic growth. Vanuatu claimed that its Chinese-financed roads improved transportation efficiency.

What’s more, the Vanuatu government pointed out that an earlier Australian-built road on the island was the “butt of jokes,” suggesting it was poorly constructed and “lead to nowhere.” It also complained that Australia’s promise of building a government house did not materialize for lack of funds.

According to a January 22 People’s Daily Online report, Tonga, Samoa, Vanuatu and Fiji called Fierravanti-Wells’ comment “sour grapes” because Australia could not do what China did.

Developing nations need foreign investment

The fact of the matter is that cash-strapped developing nations require foreign investment to spur economic growth and pull people out of poverty. The issue is which nations should they approach.

China is the preferred choice, having invested hundreds of billions of US dollars in Africa, Latin America and other developing regions. First, China does not impose non-economic or financial conditions such as on human rights. Second, China “walks the talk,” fulfilling promises that have a positive impact on the recipients’ economies.

China’s building of infrastructures, schools and other facilities and investments in Africa, South America, Southeast Asia and Central Asia are largely responsible for those regions’ development. Had it not been for the railways and roads that China built in Africa, for example, the economies of nations like Nigeria would have remained underdeveloped. Similar stories are told in Central Asia, Southeast Asia and Latin America.

Climbing on the BRI train

In spite of criticisms ranging from neocolonialism to “land grab” from the West, more and more countries joining or expressing interest in participating, including France, the UK, Canada, Japan and even the US. During his recent visit to China, French President Emmanuel Macron stated that his country would be a cheerleader for the BRI in the EU, recognizing the economic and geopolitical benefits it has brought and will likely continue to bring to the world. British Prime Minister Theresa May sang a similar song during her recent visit to China, promoting “golden era” Sino-UK relations.

Two-way trade between China and the BRI participating nations exceeded $1.2 trillion in 2017, a more than 15% increase year on year. China has already invested nearly $10 billion in these countries, building infrastructure and updating industries. As indicated earlier, China plans to invest $900 billion in the BRI’s participating countries.

It seems that among the major economies, only India and Australia are refusing to join the BRI, but only for geopolitical or ideological reasons. Australia rejected an invitation to join because of domestic politics and perhaps pinches of ideology and racial bigotry. India did so because China blocked its bid to become a permanent member of the United Nations Security Council and the Nuclear Suppliers’ Group and because the China-Pakistan Economic Corridor (CPEC) is under dispute between India and Pakistan.

The ‘beauty’ of Belt and Road

The BRI is truly an “interconnected, inclusive, invigorated and innovative” global economic development architecture. Building sea and land routes would connect the world more closely, fostering not only trade but also geopolitical stability. It is inclusive because every participant benefits from it in terms of additional trade and investment opportunities. The BRI is invigorating because it is exciting to cooperate with one another for a shared future. Finally, it is innovative because the BRI recognizes that innovation is essential to improve productivity, efficiency and competitiveness.

No doubt conflicts and project failures will emerge because economic, financial and geopolitical conditions change. Conflicts between China and the participating countries may indeed be more frequent because the BRI can and has been be politicized. Opposition politicians such as Azmin Ali and Lim Guan Eng in Malaysia have criticized their governments for “selling” out the country to China.

Claims by exiled former Maldivian president Mohamed Nasheed Wahad that China’s BRI is a “land grab” appear unfair. Maldives President Abdulla Yameen invited a Chinese company to expand the country’s only airport to promote tourism, particularly from China and kicked out an Indian private firm to manage the airport. The 50-year lease of an island near the Malé airport to a Chinese firm was for tourism development. The small island nation has little to export except marine products. But that industry is encountering headwinds because the EU has revoked duty-free status for Maldivian seafoods.

It could be argued that criticisms against the BRI are more politically driven than based on economic reasoning.