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China’s One Belt One Road Trade Network Has Upside For Its Partners, But Also Significant Financial Risk

ArmchairTechInvestor, March 6, 2018, by Brad Peery

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China claims that it is developing relationships with countries on its One Belt, One Road Network that will end up assisting those countries, but the financing for the projects can present the countries with significant financial challenges. China has spent massive amounts on building the infrastructure within China. Much of those investments have been completed, and China is now exporting its infrastructure building to a trade network linking 68 countries in Asia, Africa and Eupope that make up about half of the world’s population, and one-third of the world’s GDP. The projects will require massive amounts of financing, with $8 trillion being the number being discussed. This compares with the $1.2 trillion of U.S. Treasury Securities that China owns.

The financial risks for some of the countries are starting to become clear. Data from the Center for Global Development outlines some of the issues. Eight countries are mentioned as facing financing issues. The countries are:
• Laos, in Southeast Asia;
• Montenegro, which provides an entry to Europe, and is building a roadway link to the Balkans;
• Djibouti, an African port city;
• Krygyzstan and Tajikistan are getting railroads, roads, hydropower plants, and a major gas pipeline;
• Mongolia is getting funding to build hydroelectric power plants, and build a road from the airport to the capital; and
• Indian Ocean ports are being built in the Maldives and Pakistan.
Debt levels of these countries are rising, and their dependence on China increasing.

Sri Lanka has had difficulties paying interest on $1 billion of debt it owes to China. The debt was renegotiated in return for a Chinese state-owned company getting a 99-year lease on the port.

In Pakistan, there have been protests from Pakistani fishermen that are being displaced by Chinese developments around the Gwandar Port. 91% of the revenues will go to China from the port, and only 9% to Pakistan.

Two additional countries, Cambodia and Afghanistan, could owe more than half their external debt to China.

Other issues in the countries are the tax concessions China is extracting, and the use of Chinese manufacturing companies to supply materials, instead of using materials supplied from within the countries.
*China’s Help Leaves Allies in Debt, Wall Street Journal, by Josh Zumbrun March 5, 2018

ArmchairTechInvestor Opinion
China’s professed guiding principles in the projects are peace and cooperation, openness and inclusiveness, and mutual learning and mutual benefit. However, as expressed by a U.S. representative, back in the Obama era, whoever holds the debt calls the shots, possibly supplanting the International Monetary Fund, the U.S. and private investors in importance to the countries.

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