…Pakistan, Sri Lanka debt crises threaten Beijing’s regional influence

The drive to Pakistan’s port of Gwadar takes seven and a half hours from Karachi via the Makran coastal highway. Much of the 600-km route is deserted, with no restaurants, restrooms or even fuel stations. On a recent journey, around 200 vehicles in total could be counted during the entire drive.

Arriving in the city on Pakistan’s Indian Ocean coast, Chinese and Pakistani flags are ubiquitous, and Chinese-financed construction projects loom, but the city is spookily devoid of economic activity. Near the seafront, broad avenues are curiously empty of vehicles. Inside the city center, the roads are narrow, congested and covered with foul smelling drain water, with few multistory buildings aside from the Chinese-built port compound. 

It is hard to visualize Gwadar as the launch pad of a new global paradigm, but that is what Beijing would have the world believe.

Nine years ago it was plucked out of obscurity —  a backwater in Pakistan’s restive Balochistan region — and presented as China’s commercial window onto the Indian Ocean, a hub for regional integration under the Belt and Road Initiative, which was to harness the juggernaut of the Chinese economy to the goal of Asian economic development. 

 

The BRI is an audacious program of lending, aid and infrastructure contracts totaling over $880 billion, according to the American Enterprise Institute. 

The initiative, which includes pledges to 149 countries, aims to promote Chinese-led regional integration — and sow economic dependence on Beijing.

First announced in a speech by Chinese President Xi Jinping in 2013 as the “Silk Road,” the BRI was fleshed out in April 2015 with the announcement of the China-Pakistan Economic Corridor (CPEC), stretching from Gwadar to the Chinese city of Kashgar, in Xinjiang. The CPEC showcased the China-Pakistan “all-weather friendship” with $46 billion in pledged funds that has since grown to $50 billion. It was to be the backbone of the now renamed Belt and Road Initiative.

When the CPEC agreements were signed, Pakistan’s government called Gwadar “the economic future of Pakistan,” an alternative to Dubai that would turn around the country’s economic fortunes.

The government also claimed that Gwadar’s gross domestic product would increase from an estimated $430 million in 2017 to $30 billion by 2050, and produce 1.2 million jobs for a population that currently stands at 90,000. 

But today, with just a couple of months until the 20th Chinese Communist Party Congress in Beijing, the CPEC is on the verge of crisis, as is the BRI itself.  Many headline projects have either failed to get off the ground or produced mixed to poor results. 

This week, Nikkei Asia begins a three-part series, a comprehensive effort to take stock of the BRI nearly a decade after it began. Today, the project’s initial optimism has been replaced by disappointment over mismanagement, debt crises and corruption that have left many projects unfinished or incapable of fulfilling their promised potential. 

Nikkei Asia journalists have traveled to focal points of BRI investment over the last decade – from Gwadar to Sihanoukville and Colombo to Kuala Lumpur. Their reporting illustrates the already mature legacy of China’s far-reaching efforts to increase its global influence.

Unmet promises

The lack of discernible economic activity in Gwadar underlines a tough reality: Nearly eight years after China announced a breathtaking list of development projects in the city — a new airport, the Gwadar Free Zone, a 300-megawatt coal power plant and a water desalination plant — none of these have been completed and what investment there has done little to create growth or an economy. 

Instead, stringent security measures strangle the local fishing industry, which once accounted for 70% of the local economy.

The same security measures also sharply curtailed lucrative informal trading with nearby Iran. Despite these security concerns, however, the city continues to import electricity from its neighbor, which regularly shuts down the supply under different pretexts of maintenance.

A 300-MW power plant was to be built in Gwadar but so far the work has not started. The power shortage is arguably the biggest stumbling block for any meaningful development there.

Adding to this is a chronic water shortage that creates unrest every summer as the government trucks in water for residents. There is a small desalination plant, but it is run only for the benefit of the Chinese workers.  

Seen through a strategic lens, Gwadar is of seismic importance to China as a window into the Indian Ocean. Western experts have said they believe it could eventually become a Chinese naval base, something both countries heatedly deny. 

But this top-down logic of the Gwadar project has clearly neglected the bottom — increasingly dissatisfied locals. The port is derelict owing to power cuts and other shortages. Protests broke out in December over fishing rights, and at least one major Chinese investor has reportedly exited. 

Michael Kugelman, deputy director of the Asia program at the Wilson Center in Washington, says Gwadar is a victim of outsized expectations. “There was an assumption that new infusions of Chinese capital and technology would magically develop Gwadar into a world-class port, even though previous efforts to achieve similar goals had fallen far short,” he said.

Grand strategy

When it launched the BRI in 2013, Beijing’s main motivations were domestic, according to Gong Chen, founder of Beijing-based think tank Anbound, who advised the central government about BRI in the early days.

Chen told Nikkei that, when the concept was first presented to policymakers, its primary drivers were China’s severely aging population, the difficulty of recruiting workers in the Pearl River Delta, China’s desire to expand its market scale and an overhang of excess capacity in many economic sectors.

But the BRI could not help but be seen as the beginning of a new Chinese-led geopolitical order in Asia, just as the Marshall Plan heralded the arrival of the U.S.-led Atlantic project in Europe. Now it is an open question whether the BRI is a net economic benefit — or even, in many cases, a liability for its chief recipients.

Part of the problem is that, while BRI investment is portrayed as aid, it is most often not. The initiative is intended to make money for Chinese banks and infrastructure companies — funded mainly by loans and energy supply agreements that in many cases have outrun their recipients’ ability to pay.  

Millions of Pakistanis, for example, are subject to electricity blackouts every day due to a dispute over fees from Chinese coal-fired power stations.

In Sri Lanka, another focal point of the BRI, Chinese loans triggered an infrastructure boom but also a debt overhang that arguably helped push the country into its first debt default in May and drove former President Gotabaya Rajapaksa from power. 

Many Sri Lankans resent what they see as China’s role in using its largesse to prop up a corrupt elite around Rajapaksa. They are demanding an end to the corruption and mismanagement that has left millions of people facing acute shortages of food, fuel and medicine. 

In Cambodia, while Beijing-backed loans have flowed to infrastructure like roads, bridges and power plants, a shadow stream of speculative investment from private Chinese  investors has poured in and driven unsustainable development that has displaced communities. 

A large amount of the investment surrounded an online gambling industry that was later banned by Cambodian Prime Minister Hun Sen, who acknowledged the sector’s ties to criminality.  

Meanwhile in China, the state banks that are lending to the BRI are increasingly troubled by bad debts. 

According to data collected by Rhodium Group, a New York-based economic research company, the total value of loans from Chinese institutions that had to be renegotiated in 2020 and 2021 rose by $36 billion from the previous two years, surging to $52 billion.

That may be just the tip of a submerged iceberg of debt. Research published last year by AidData, an international development research lab based at the College of William & Mary in Virginia, suggested scores of BRI countries together might have $385 billion in “hidden debts” or undisclosed liabilities that governments might be obliged to pay.

Chen of think tank Anbound says recipient countries are refusing to repay debt and that this is “the most worrying” challenge facing the grand undertaking.

“Widespread debt evasion and avoidance would have a significant impact on China’s financial stability,” he said, “and we are concerned that some countries may try to avoid paying back their debt by utilizing geopolitics and the ideological competition between East and West.” 

Life in a bubble

Power and water shortages in Gwadar have fed local discontent. But perhaps the worst problem associated with the Chinese construction boom is, oddly, joblessness. While the CPEC aimed ambitiously to create 1.2 million jobs, the city of 90,000 has not seen many of these materialize. Indeed, much of the labor for the Chinese-led projects is imported from China.

Chinese workers are forbidden from mixing with locals and restricted to a small compound, where everything is imported, and local merchants have not benefited from the new arrivals. 

“Chinese even bring their tissue papers from China and do not buy anything from the local markets of Gwadar,” said Adam Qadir, a local dealer of automobile oil.

Adam Qadir, an automobile oil dealer from Gwadar

The local fishing industry, which had accounted for 70% of the economy, has been devastated by Chinese trawlers fishing in the waters off Gwadar and taking their catches to Karachi. Younis Anwar Baloch, general secretary of the Gwadar Fishermen Alliance, told Nikkei Asia that a new highway has blocked the entry of fishermen into the East Bay, making it difficult for local fishermen to get their boats out. They are also prevented by security regulations from fishing near the port. 

As a result, eight out of 42 fish-processing factories in Gwadar have closed down, according to interviews with fishermen and Bahram Baloch, a local journalist covering economic issues.

Tensions over fishing boiled over in November and December after an Islamist religious cleric organized a monthlong sit-in outside the main gate of Gwadar port. Protestors demanded an end to deep sea fish trawling, a reduction in the number of security checkpoints, that local men be allowed to fish near the port and that informal trade with Iran be restarted.

The cleric’s protest completely paralyzed port activity in the town, and the government eventually accepted many of his demands.

Locals mostly resent the Chinese because of what are seen as excessive security arrangements – and not just in the fishing industry.

“The government had decided to fence Gwadar with barbed wire for security, and this would have separated people living in different parts of Gwadar,” a resident of Gwadar told Nikkei.

Then there are the protests over water. Although the water problem has been resolved this summer, locals say the solution is temporary, with the government relying on nearby dams for water. If it rains less than expected next year, protesters will again be on the streets, locals interviewed by Nikkei say.

Moreover, Baloch separatist militants (a 2017 census found the Baloch to represent 56% of the population of Balochistan) recently have mounted many attacks on Chinese interests in the region. As a consequence, Gwadar is considered insecure and thus heavily militarized.

To top it off, Gwadar port is not fully functional as it still lacks basic infrastructure such as water and power, which remain at least two years away, locals say. As a result, the movement of cargo is limited.

The absence of these services — not to mention the lack of a railway connecting to the rest of the country — limits the scope for investment. The attacks by Baloch insurgents have further discouraged investment. 

Mohammad Aslam Bhootani, who is one of Sharif’s principal advisers on Gwadar, said the government has controlled the security situation to a greater extent and things are moving in the right direction.

“[The prime minister] has called meetings in Gwadar and reprimanded officials for the slow pace of work in Gwadar, which will change the things now,” Bhootani told Nikkei.

But it might be too late. One apparent casualty is HK Sun Corp., the first Chinese company to set up shop in Gwadar. It handled recycling work at the port. According to a number of locals as well as several news reports, it has left Gwadar due to economic unviability. 

The Twitter account of the China Overseas Ports Holding Company (COPHC), denied the news that HK Sun Corp. has wound up operations in Gwadar.

Jeremy Garlick, an associate professor of international relations and China studies at Prague University of Economics and Business, believes that the Chinese have realized Gwadar is not viable as a commercial port and not worth developing.

“Due to lack of commercial viability and local resistance, the Chinese have been reluctant to invest as much — or as quickly — in Gwadar as was expected,” Garlick told Nikkei.

However, Garlick says Chinese interest will continue to be driven by strategy. “[Gwadar] port may be of use to [Beijing] in the long run due to its relatively strategic position near the Strait of Hormuz,” he said. “So far the Chinese have no specific use for Gwadar, and it is not used by Chinese military vessels as far as we know.”

Garlick added that in the future competition for resources could heat up, and a day might come when Gwadar will serve a purpose as a Chinese base of some kind.

“This is why the Chinese are not likely to withdraw [from Gwadar],” Garlick said.

Know when to fold ’em

BRI projects are also struggling in Cambodia — one of China’s key allies in Southeast Asia. The coastal city of Sihanoukville starkly highlights the woes of Chinese investment in the country. Official and illicit funds from the giant neighbor to the north have mixed destructively with Phnom Penh’s corrupt ruling elite.

On the city’s outskirts sits one of three officially identified “key” Belt and Road projects: the Sihanoukville Special Economic Zone.

Spanning more than 11 sq. km, it houses more than 170 factories reportedly employing some 30,000 people, largely focused on textiles and apparel, luggage, leather goods, and wood products. Still under development, the joint venture is intended to accommodate up to 300 factories and between 80,000 to 100,000 workers when completed.

Power is drawn from nearby China-funded coal plants, and soon another BRI project — a $2 billion expressway — will link the area with the capital, Phnom Penh.

Sihanoukville demonstrates the extent to which money from China has transformed Cambodia during the past 15 years.