Belt and Road Initiatives in the Transportation Sector Have Not Created “Debt Traps”, Argue Nanjing University Professors
Title: The effect of Chinese enterprises on the transportation investment of countries along the “Belt and Road”: development effect or debt trap (中国企业对“一带一路”沿线国家的 交通投资效应:发展效应还是债务陷阱)
Journal: China Industrial Economics
Authors: Shen Kunrong, Nanjing University (沈坤荣), Jin Gang, Nanjing University (金刚)
Publication Date: September 2019
The authors write that Chinese investments in the transportation sector under the Belt and Road Initiative have not increased countries’ debt burdens or created “debt traps.” Critics are concerned that BRI investments create unsustainable debt burdens for participating BRI countries, which can result in shifts of economic control and sovereignty to Chinese lenders in exchange for debt relief. Such critics often point to the failed Sri Lanka Hambantota port investment as evidence. (Note: China secured a 70 percent equity stake and 99-year lease for the port when Sri Lanka could not service its debt.)
Using data from the American Enterprise Institute and the Heritage Foundation’s China Global Investment Tracker, the authors evaluated Chinese investments in countries that participate in BRI (62 countries at the time of writing) against Chinese investments in non-BRI countries from 2005-2018. They noted that, since BRI’s launch in 2013, there has been a significant uptick in Chinese investments in the transportation sector in BRI countries (and less so in other sectors). As a result, the authors chose to focus their analysis primarily on the transportation industry.
The authors observed that, since 2014 in the transportation sector, there has been a downward trend in problematic Chinese investments in BRI countries, but a slight uptick in problematic investments in Chinese investments in non-BRI countries. They define “problematic” as those investments that become stranded assets as a result of non-commercial, external factors. They also write that, while overall debt in BRI countries has increased significantly since 2014, this trend also held true in non-BRI countries, and that these overall debt increases in both cases were not a result of Chinese investments.
Chinese state-owned enterprises (SOEs) have been the main drivers of BRI investments in the transportation sector. There was not a statistically significant difference in the number of problematic investments in SOE-led investments versus investments led by private Chinese companies.
In BRI countries, Chinese companies were more likely to invest in mergers and acquisitions as opposed to greenfield investments (which involve the construction of new facilities and infrastructure). The authors comment that an M&A model capacitates local firms to do work and reduces the likelihood that Chinese companies would establish a long-term foothold in the country.
The authors conclude that the Chinese government should encourage more private Chinese enterprises to participate in BRI and that firms continue to invest mostly in M&A models. They also argue that qualitative examples of problematic BRI projects, especially in Sri Lanka, Kenya, and Djibouti, are outweighed by empirical evidence that discredit the “debt trap” theory. The Chinese government needs to do more work to improve its public image on this front, they write.
Note: China Industrial Economics is published by the government-affiliated Chinese Academy of Social Sciences (CASS). Shen Kunrong is dean of the Nanjing University School of Business and a 2008 recipient of the Sun Yefang Award, China’s highest award in economics.