Will China capture the main benefits from Belt and Road?

Maybe not, that is the topic of my latest Bloomberg column.  Here is one excerpt:

I was struck by a recent deal between China and Montenegro that gave China the right to access land in Montenegro as collateral, in case Montenegro does not repay certain loans. This has upset people in Montenegro, and it makes China seem like an imperialist country with territorial designs. But there’s also a more benign interpretation: China is demanding land as collateral because it knows Montenegro is not creditworthy. The loan sent Montenegro’s ratio of debt to gross domestic product to almost 80 percent, from 63 percent in 2012.

To put that in context, let’s say you heard of a loan shark who threatened to break the fingers of borrowers who did not repay. You would sooner infer that was a risky, so-so investment rather than a sure winner.

In essence, China is playing the role of loan shark, and that is not obviously the way to get ahead in today’s world. If China did claim some land in Montenegro as recompense for a bad loan, it might find holding the asset to be more trouble than it’s worth, much as Amazon decided to depart from a deal with New York because of hostility in parts of the city and state governments. If China tried to sell the land, a potential new buyer could never be sure of having enforceable title to the property.

Another problem with Belt and Road, at least from a Chinese point of view, is that China is dealing with many countries that are much smaller in terms of their GDP. There’s a tendency for small countries to renege on deals in hopes that big creditors won’t bother to make an example of them. You might think that smaller countries are easier for China to push around, and there is some truth to that. At the same time, both China and the small countries know that the small countries are not entirely masters of their fates, and so punishment strategies can be counterproductive or occasion more resentment than it is worth. Has the U.S. found it so easy to induce Honduras and Guatemala to stem the flow of migrants toward the border?

And this:

China has proven remarkably poor at supplementing Belt and Road with soft power persuasive techniques using diplomatic and cultural influence. This is no accident, nor does it reflect some kind of stubborn unwillingness of the Chinese to learn to wield soft power tools. Rather, the problem is structural. Since the Chinese government does not derive legitimacy through normal democratic channels, much of its diplomacy and foreign policy have to be channeled to please domestic audiences, whether the citizens or coalitions within the Communist Party. The necessary internal presentation shapes incentives for Chinese foreign policy, and that in turn alienate the other countries China is dealing with.

There is much more at the link.


It's more like a cannibal loan shark who threatened to bite off the fingers of borrowers who did not repay. It's a punishment for breaking an agreement, but you can't help but wonder if the fingers were what the cannibal was after all along.

If you disagree, consider Sri Lanka and its port deal.

Why is nobody holding Sri Lanka responsible for the bad deal, and the port/airport that should never have been built?

Are Sri Lankans child like primitive people that cannot muster the skills to do a cash flow analysis beforehand? Why the low expectations to Sri Lankans?

I guess that is the main point of the post. Are we saying that China is wrong here because it is willing to take the risk? Or are we saying that Sri Lanka (in this instance) is wrong for taking the risk? If this was a "good" deal for China, why other countries did not go for it?

Deals like this are ways in which politically connected Lankans and politically connected Chinese can get rich by creating a flow of money out of the pockets of ordinary Chinese.

One way to justify this within China is to structure it as a loan so that China gets the money back and/or gets political influence in lieu of that money. But this doesn't necessarily have to *work*. So what if the debtor countries eventually turn around and thumb their noses at the PRC; the decision makers will have already enjoyed their profits.

> Why is nobody holding Sri Lanka responsible for the bad deal,

Plenty of Sri Lankans are -- or least they are holding their political opponents responsible. In case you don't know, SL isn't a unified hive-mind but rough-and-tumble democracy complete with a former populist thug-president and his enemies.

Plenty of people blame Rajapaksa for entering into the deal. And the fact that later governments felt they had to keeping going down that road is a hint that it really did buy China some power. So at that level TC's is right wrong.

But in the bigger picture, China getting property rights over a Lankan port is as much China's rulers as of Lanka's because when it comes to military matters, that title deed is just a piece of paper -- China will have to keep SL governments sweet in perpetuity if they want it to mean anything.

"Sri Lanka" didn't do the deal, a corrupt leader with close ties to China (they sent campaign cash directly to him) pushed it through near his home town. While it may be a bad deal for the country, it was probably a pretty great deal for former President Mahinda Rajapaksa.

It's strange that there's little comparision to the "soft" pressure that the west uses. We have witnessed what happens when IMF and similar entities start pushing on defaulted creditors that financed in the old way their projects. They end up losing the projects, losing economic sovereignty and liquidating all sort of assets (not only the ones related to the project and pre accorded, but anything the State might have) at ridiculous prices.
It's also funny that the explanation is that China embezzled officials, that's quite often the case with the IMF way, often accompanied by using the loans to inflate currency and finance capital flight.
China is certainly not a fairy godmother granting wishes, but knowing the damage that west policy did to other countries when led to a default I am not quite sure that China's way will be more damaging.
Piece of interesting data: before the Chinese revolution, creditors held China hostage and run its customs. It was much worse than if they'd kept a piece of land, they kept China from generating the revenue required to pay the loans back, so as to keep milking it in the future.
I'm still not convinced that this is not a better deal for Montenegro vs financing it through World Bank or similar.

Congratulations, you've done a mostly economic analysis of an initiative that has mostly strategic and diplomatic goals. The blunders of US foreign policy over the past few decades have left a vacuum that China is trying to fill, however imperfectly. It doesn't matter that they're not doing a particularly good job of it yet, they'll improve over time.

The diplomatic elements are directly undermined by the guards against default that provoked the negative reactions in Montenegro.

That leaves strategic goals, which are what, exactly? Is China building overseas military bases, naval ports, listening posts, or anything else of actual strategic value? Nope.

And making a real return, of course, is unlikely.

No, the way to analyze what China is doing is purely in terms of domestic corruption. The goal is to shovel Chinese state budget funds into the contractors who will be building these things. The diplomatic goals are mere cant for domestic political consumption, to make the pork barreling go down smoother. The demands for local contributions and loan collateral, which completely undercut the diplomatic goals, are a way of smoothing over budgetary objections from people who point out what a sinkhole TAZARA was.

So, insofar as the US sees China as a strategic rival, the US should talk up how worried it is about this. That helps sell the diplomatic influence angle in internal Chinese politics, and thus maximizes how much money the Chinese waste on it. Maybe somebody can arrange a few Trump tweets?

That leaves strategic goals, which are what, exactly? Is China building overseas military bases, naval ports, listening posts, or anything else of actual strategic value? Nope.

Who needs to build? Just buy or rent ports and hack into the USG employee database and steal information of was it 23 million employees? And who knows who walked in and downloaded what off servers.

"Influence" is a vague term, but it's what China is looking to increase in the developing world. After the collapse of the USSR, it became apparent that the US is only interested in developing economies as a predator state interested in bribing top officials and extracting as much economic wealth as possible. That's the vacuum China is expanding into, and while they're not very good at it yet they have the luxury of a competitor that is quickly losing the ability to even understand what the game is. The developing world looks at the US and China as choices of models to emulate in their development, and it's a mark of how low we've fallen that even with our huge historical and cultural advantages China can even make an argument that their model is the one to follow. But here we are.

I can imagine many authoritarians are looking at China’s model and thinking “I wish we had their problems “. Think about the various Arab Spring mini revolutions. There are many rulers far more terrified of America’s disordered, free-for-all creative destruction model than they are afraid of China’s model of corruption and one state rule. I hope I’m wrong.

US is a "predator state"?

What is China?

The US has been a kind hegemonic power. Our friends have carte blanc to do what they want so long as it does directly clash with our interests.

China being a one party dictatorship is not going to be so nice.

How is China different? They too will surely 'allow' their friends to do as they wish unless it clashes with their interests. Seems pretty similar.

Yeah, you might want to have a talk with some people in central and south America about the quality of our kindness.

Exactly. China has overcapacity in steel so its trying desperately to use it somewhere anywhere.

Many of the goals are economic, but they are to orient growth and trade towards China, overland ("Belt") and overseas ("Maritime Road"), in ways that will in future make countries strategically more pliable to Chinese economic pressure or more competition and dominance with Chinese business (which is intimately interwoven with the Chinese state).

The goal is also to manage growth such that inland provinces have more comparative growth advantage relative to the coastal provinces because they are directly tied into Central Asia and thereby to Russia, West Asia, Europe, India. Advantages of the coastal provinces include that shipping via sea is from there and they are closest to Asia Pacific and US markets. Balanced growth within China will ease internal tension within China, and it will help the party with further growth as it's not clear that they can grow the coast to highly developed levels.

This is all the case even if there is "upfront" cost to China on the assets. (Though even countries did nationalize at some point, if they're as integrated with the Chinese economy as BRI plans, that won't be without economic sanction, so I'm not sure that threat is as severe as Tyler believes).

Though strategically I wonder how much the assets they're building could be used for military purposes, even if that's not their prime purpose.

> There’s a tendency for small countries to renege on deals in hopes that big creditors won’t bother to make an example of them.

What are some recent examples of this? I suppose the chance of military invasion is probably lower now than in the past, but that didn't stop Greece's creditors from inflicting some pain.

No, the pain was inflicted by the fact that Greece was in a primary budget deficit. Greece wasn't being squeezed by its existing creditors; it was being squeezed by the fact the people it was asking for new loans weren't willing to make them as big as Greece wanted. There is a big difference in leverage between being a debtor threatening to default on an existing debt, and being a spendthrift trying to get a new loan.

The truth about Red China has been revealed. Read the article the MSM, Hollywood and Wall Street don't want you to read: https://nationalinterest.org/feature/why-america-must-maintain-ideological-dominance-52082

Cowen opposes investment in public goods in the U.S., so it's not surprising that he would oppose it in Montenegro or in any of the countries in which China is building high speed rail. Here's a recent story about the difficulties of the high speed rail project in Malaysia: https://www.nytimes.com/2019/04/12/business/chinese-high-speed-rail-malaysia.html China over-priced the project, the extra charge to fund bribes and kickbacks to local officials. That kind of heavy-handed approach to gaining approval from local officials does indicate how tone-deaf China can be; indeed, the state-backed Chinese company that builds the high speed rail was under sanctions from the World Bank because of its history of paying bribes in the Philippines. To get the project in Malaysia back on track, China reduced the price by a third. Has China learned from the experience, or learned enough to change its heavy-handed approach in dealing with other countries? Maybe, if Malaysia is an indication. But its history of practicing what's called "debt trap diplomacy", lending huge sums of money to vulnerable countries and then taking over valuable assets when they cannot pay, together with its history of paying bribes to local officials, won't endear China to those places that are essential for the success of its Belt and Road Initiative. An aside, the road to Singapore goes through Malaysia. [For all of China's faults, I should point out the contrast between China and the U.S.: as China seeks to establish and promote ties with its neighbors and trading partners, the U.S. is putting up barriers to its neighbors and trading partners.]

The European colonial powers built infrastructure projects in Africa, basically to facilitate resource extraction. The Chinese are following in that tradition. Overall, I think the colonialists lost money on the enterprise, and I suspect the Chinese will too.

"Cowen opposes investment in public goods in the U.S."

Yet another one of your statements that doesn't match reality. If you start from a premise that's obviously, factually wrong, there's not much point to the rest of the argument.

"Tyler Cowen has a piece in the New York Times arguing that, in part, it might be a sensible idea for government to be spending more on public goods."


It might be sensible? A ringing endorsement! In 2013 during the great recession, no less. Cowen coupled his ringing endorsement with the suggestion that we spend too much on social security and Medicare. The argument made in Forbes by Tim Worstall for increased investment in "public goods" (citing Cowen's ringing endorsement) takes a narrow definition of public goods. His example is immunization against measles, ironic given the current outbreak. No, Wostall isn't talking about, for example, better public transit, and likely neither is Cowen. The entire approach to the subject reminds me of the Republicans' approach to public debt: increase the debt substantially while in power and then use it to support cuts in social security, Medicare, and other social welfare programs when the debt rises.

Thanks for getting the discussion off track.

And you write: “The entire approach to the subject reminds me of the Republicans' approach to public debt: increase the debt substantially while in power and then use it to support cuts in social security, Medicare, and other social welfare programs when the debt rises.”

What you don’t get, or maybe don’t want to, is that we demi-Republican and Republican fellow-travellers don’t believe in expanding the state. We wish to shrink the state or at least slow its growth. (We see the expansive state as a infantilizing barrier to liberty and responsibility.) What better way to counter the ratchet effect of constant state expansion under the Dems than to restrict its funding?

China can build all the roads and ports to export its products, but they still keep up 40% tariffs on imported goods...that's a barrier far worse than America's current 10%

"China is investing in fixed assets and infrastructure from southeast Asia to the Balkans and East Africa. That poses a danger to China that host countries will eventually nationalize the assets without giving China comparable value in return. It’s a lesson the U.S. learned when it lost control of the Panama Canal and Saudi Arabian oil assets."

What? Did the USofA not have good investment return from the Panama Canal from 1914 to 1999? The investment is still yielding benefits to the US even if it's controlled by Panama. Today, ~60% of the traffic in the canal (number of ships) is from ships beginning or ending their route on a US port.

It's clear that the Panama Canal was useful to the US regardless of ownership as long as shipping from the US can economically use it.

Having direct control over the Panama Canal was pretty important to the Allies in WWII.

And at the time pretty much every agreed that the Panama Canal would be a boon to its owners and the overall economic outlook of the Western Hemisphere. Saying widely celebrated public works projects worked so this one must too isn’t a great argument.

'It’s a lesson the U.S. learned when it lost control of the Panama Canal and Saudi Arabian oil assets'

Further, the U.S. as such never owned any KSA oil assets, in contrast to the Panama Canal. And we did not 'lose' control - we merely gave it back (without actually giving it back to Columbia, the country whose territory the canal was originally in when first construction began, decades before the canal was opened).

Which really makes one wonder why Prof. Cowen did not mention about how unsuccessful Cuba has been in 'nationalizing' Guantanamo Bay Naval Base.

"And we did not 'lose' control - we merely gave it back "

That's a pretty dumb comment. First, you can't give something back that didn't exist before you created it and secondly even if you did give something back you would have lost control of it.

If I borrow a car from a friend, I'm in control of the car. When I return it, I then have lost control.

We didn’t give it back to the king of Spain either or the Incan emperor. It’s so funny that you think reciting facts that literally everybody who took AP history knows is a sign of erudition and yet you still don’t know that giving something back means you lose control over it.

It’s kind of like how I don’t know if you gave up your sanity or GMU took it from you, but you definitely aren’t in control of your mental faculties anymore.

China holds hundreds of billions in US land and improvemants as collateral for US debt to China. While it has faced opposition when its seen as China government buying up America, it can outsource the job to wealthy Chinese. But China is treated the same as the Persian Gulf kingdoms extracting "wealth" from the US and the rest, selling off their land by mining pillage and plunder.

The who knows how many home, condos, housing complexes in the US coastal elite areas (none in Trump voting regions with cheap vacant house that are too big and costly for locals), and in London, et al, have been bought to secure trade debt.trades in the 60s.

Plus the occasional Smithfield pork, etc processing.

"China holds hundreds of billions in US land and improvemants as collateral for US debt to China"

This seems to demand some clarity here. US government debt is not backed by land or improvements. Private debts are not the same thing as 'debt of the US'. If Tom's Autoland floated a $10M bond to buy a bunch of new dealerships that China purchased, that may be a US debt in the sense that it is a US entity that owes, it has nothing to do with me. If Tom defaults and China suddenly owns 10 autodealerships nothing has been taken from the US or myself.

On the other hand maybe a Chinese bank or entity has purchased CDO's that have my mortgage or pieces of it. If I stop paying my mortgage, China may end up owning my house...but even there that's unlikely. More likely my house would be sold to someone else at a foreclosure auction and China would just get the cash raised, which probably would not fully pay off the mortgage. If no one buys my house at foreclosure, China may end up owning it but they probably would not be happy to do so and would turn around and try to sell it immediately.

Likewise China is not an entity but a lot of entities. Are you talking about the Chinese gov't buying debt, Chinese companies, or individuals?

China has previously bought MBS to the tune of hundreds of billions of dollars and could have lowered interest rates by as much as 1% priort to 2008. Sterilizing their surpluses leads to a lot of malinvestment.


China is 6 years into this foreign policy initiative. It may be that internal politics prevent them from learning from their mistakes, but they (the Party) seems to be smart enough to learn. Contrast Belt & Road to any number of U.S. foreign policy initiatives and it's pretty obvious that the bar is pretty low. The one thing BaR might be (stress "might") is a game changer. How many Western ideas (currently) have that potential?

Just what game do you see B&R changing here and what changes derive from it? Seems like a a very old game that is being implemented in the modern way. Nor am I really sure there is much distinction in how those in the east play the game differently from those in the west.

Did you just say that authoritarian governments are more sensitive to the will of their people than democracies?

No, it says they can advance unpopular policies, but they can't do everything their leaders want. Giving free money to Montenegro is probably not the hill Chinese communists (or American politicians, by the way) would choose for dying at.

+1, good comment TR

Thank you.

Is that what this says?

"Since the Chinese government does not derive legitimacy through normal democratic channels, much of its diplomacy and foreign policy have to be channeled to please domestic audiences..."

Exactly. If a communist government had been elected on a platform of how great it is to give money to countries slightly richer than China (PPP per capita), fine, it wouldn't be an issue, right? Things being what they are, it kinda is an issue. I bet some American politicans would like to spend more on foreign aid, too.

The party (and basically any government) can choose to be unresponsive here or there, but it probably can not be unresponsive all the time, and, again, Montenegro is probably not the hill it will choose to die at.

This is an imposter. There are no grammatical or syntaz errors, or spelling errors fron my tiny Asian keyboard. There is no racism, or anti-Americanism, or Brazilian support.

Such is imposter's life in Trump's America

It is not true. I am myself.

It is true. I am also myself.

A lot of simple narratives about what China was becoming and might achieve have evaporated in the last few years. I think we should resist the temptation to replace them with new simple narratives(*).

China has a lot going on, and internal tensions that might be very opaque to us.

I don't know what is going to happen, but this month's news wasn't great. Disappearing mosques and disappearing people? Not good.

* - speaking of Taleb circa 2007, a classic pundits' do-over.

By the way, note that we might have gotten a different present, if we had an administration that tied human rights to trade privileges.

Then those disappeared people might matter more.

Point of Information: Making loans solely or mainly based on collateral protection/value reflects insufficient regard for the other factors (capacity to repay, "character" of the borrower, uses of the borrowed funds, etc.) involved in making credit decisions; and orderly recovering the loan amount while earning a "proper" return was a woot cause of the subprime loan/RE bubble crisis and financial fiasco of 2008, which none of the geniuses at the Fed and Treasury saw coming.

"I was struck by a recent deal between China and Montenegro that gave China the right to access land in Montenegro as collateral"

So what is the land and what is being done with it now? Wandering Earth aside, China cannot drag land from Montenegro to mainland China. If China takes the land because Montenegro doesn't pay the loan they are stuck trying to do something productive with it in Montenegro....which would probably be beneficial to Montenegro. Seems like a heads I win tails you loose deal from Montenegro's position.

It is not that simple.

Ok, so?

As President Captain Bolsonaro has pointed out, Red China does not want to buy from countries, it wants to buy countries. It wants to control strategic economical assets. He has acted to block key Red Chinese investments in Brazil and make sure Red Chinese can not buy Brazilian land.

OK what does it mean if China buys a country? If tomorrow China 'buys' Montenegro, what would be different in, say, one year? Five years?

Red China would have achieved control over Montenegro's strategic assets and would have achieved control over Montenegro and its population. From Mala Ada in the Ulcinj municipality to Moćevići in the Pljevlja municipality, an Iron Curtain would descended across the Montenegro.

Montenegro's 'strategic assets'?


And what exactly are their strategic assets? Is the plan, you are saying, Montenegro borrows the money then loses these assets when they can't pay it back. Once China owns these 'assets' on paper what exactly can it do with them?

Control them, use them for its own benefit and to the detriment of Montenegro's national interests. That is why America is persecuting Huawei and Brazil is blocking Red Chinese investments.

Control what? What are these assets you are talking about? If they are so important then why wouldn't Montenegro just pay back the loan? You, I'm sure, consider the mortgage payment pretty important, no?

I still say this is going to end up being a war somewhere and some how as sooner or later one of these nations will end up failing on their debt. (And I really hope the US can remain on the sidelines.)

1) The reality of China foreign policy is run by their treasury department has been effective at promoting their economic interest without creating enemies.

2) I find soft power has very limited effectiveness and sometimes it feels like the US has to over-spend on the military to achieve these goals.

3) I do believe the population is itching for a war given some the poll number of expecting war with Japan over a few empty islands.

4) I would expect the Chinese populations will not have a lot of patience for other nations failing on their debt so that is one reason why I do expect war. And given the issue of the Uighurs treatment China does appear to be going down the nationalism road more than the West and has little interest in protecting minorities.

5) One of the key nations is Pakistan who can easily turn enemy on a dime here.

If everyone can hold on until birthrates stabilize, less than or equal to two, everything will be fine.


He said "if everyone can hold on until birthrates stabilize, less than or equal to two, everything will be fine".

China starts shrinking in 2020 or so.

Bigger problem is excess male children.

Or is it?

"I still say this is going to end up being a war somewhere"

China is totally unable to project force outside SE Asia/Siberia. It still lacks an effective blue water navy nor does it have any significant military airlift capacity.

The US could control the Panama Canal because it is close by. How does China get to the Balkans or Africa to invade?

China has a base in Djibouti now.

So the model here is China is lending lots of money out and then plans to go to war to get it paid back? Has there ever been a war fought over paying back national debts in history? Has it ever 'worked' for the country that was owed money?

There were a lot of cases in the 19th/early 20th Century where a small, weak country would default on its debt, some European powers would send in some gunboats and take over the customs houses (with a bit of violence in case of attempted resistance), and then tariffs collected on imports would go to European creditors for however long it took to pay them back.

Of course, since China doesn't have the navy to do that, and Montenegro is a member of NATO, that model certainly can't apply in the example case.

Amusing to imagine that. "We are taking over your port and taxing every import that comes in here until you pay us back".
"Errr ok, well most of our imports come from you so if it's so important to you why don't you just raise your prices and save your navy?"

Funnily enough, China was one of those cases. It's well described in Bertrand Russell's 1920 "The problem of China". But keeping a piece of land is much less harmful to the country than losing its policy setting abilities, specially because the creditors usually tried to extend the situation as long as possible, and keep the money flowing permanently

Wow, China, Russian, Iran are pure evil.

LMBO, a neocon trying to lecture China on softpower.

Since 1979, how many times has China been at war with anybody?

No compare that to how many hundreds of thousands of brown skinned people has the US been responsible for killing since then? And how many trillions of USD tax dollars were burned for nothing? How many wars has the been engaged with since then?

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