Will One Belt One Road pay off?

One Belt One Road (OBOR) is just getting started, but the superlatives are flowing. OBOR 'will benefit 4.4 billion people in 65 countries' and 'according to some estimates could be more than 12 times America's Marshall Plan to aid post-second-world-war Western Europe, in comparable money-of-the-day terms.' No wonder expectations in recipient states are high.

Within China, one million documents have been published referencing the initiative. OBOR is going to happen and official China is mobilising for this ambitious program. Words of warning are few, and muted. But in the private sector, there is scepticism. True, Chinese firms are going to win big. But one can sense a resignation that this is going to be a costly geopolitical project rather than a commercial one.

Perhaps for this reason, the authorities strain to insist that OBOR will be 'market-based' and 'lean, clean and green.' Naturally the Chinese Communist Party's definition of 'market-based' may differ from others', but the general idea is clear: the projects are broadly meant to make financial sense. And indeed, a year ago, when yuan globalisation was still on the front burner, Chinese commercial banks were reminding clients that the US$1 trillion in potential export financing would be underwritten on international standards.

But today, such prospects have been wound back. Most OBOR lending will be issued not by commercial banks (which want to be repaid) or even multilateral institutions like AIIB (which are operationally cumbersome), but by Chinese bilateral policy banks like China Development Bank and China Exim Bank. These banks, especially CDB (aka 'China's superbank' or 'the bank that saved the world') are known for their heroic risk appetite. They have spearheaded the country's epic credit expansion since 2008, and its growing overseas role.

Still, they must be a little worried to hear from credible sources that 'Chinese officials privately admit they expect to lose 80 per cent of their investment in Pakistan, 50 per cent in Myanmar and 30 per cent in central Asia.' If true, that is extraordinarily generous of them. It means Chinese development lenders are knowingly prepared to lose tens of billions of dollars from their adventure abroad. Aid, in other words. [fold]

Or maybe not. China's bruising negotiations with Thailand to build its bullet train have 'hit a speed bump' again. China Exim Bank demanded commercial land development rights along the railway line in order to defray its exorbitant cost. 'We are not the same as Laos', came the sniffy refusal from the Thais, who say they have plenty enough money to build lucrative real estate developments. The term of art here is 'bundling.' The Chinese want a bundled deal (common for financing railways); the Thais want to unbundle.

This reveals an expectations mismatch between donor and recipient countries. Beijing's mandarins naturally want a Chinese developmental project that pays for itself — 'geopolitics with a P&L', if you like — with an appropriate 'win-win' distribution of the collective benefits. Some Chinese analysts take umbrage at the Marshall Plan comparison and its Cold War connotations. OBOR is not a charity, they argue, because China is still an emerging country itself. Recipient countries may not see it this way. To them, China appears extravagantly well funded. So they expect concessionary financing and, apparently, don't even expect to pay all of it (or even most of it) back.

The anticipated loss rate in Pakistan is telling. The CPEC corridor is of high strategic importance to China. But, traversing bandit country as it does, CPEC promises to be a savagely uneconomic affair. The security arrangements alone will be challenging. CDB also made an all-in bet on Venezuela (which is not officially in the OBOR scheme), thinking its loans-for-oil deal would provide credit protection under Chavismo. As their client unravels, the CDB bankers are renegotiating and writing down their loans.

That is not to dismiss the impact of OBOR, nor its logic. It might just be another example of the 'infrastructure gap' paradox — why the world is awash with savers' money and yet perfectly good investment projects can't get funded (hint: because private investors don't trust the governments that regulate their deals). OBOR faces an exacerbated dilemma because costs and benefits aren't internalised with one country.

The fact that China can seemingly defy infrastructure financing constraints domestically simply underscores how challenging OBOR will be. At home, Beijing's policy banks can rely on 'markets' that are rigged in their favour. And anyway, they will get bailed out if things go bad. Overseas they will not be treated so kindly, and more astute Chinese lenders know it.

Photo Getty Images

Julian Snelder