China’s Belt and Road initiative (BRI) has received a lot of attention.  You have argued that the BRI has grown beyond its original scope, both geographically and in terms of the projects under its banner. Do you think this expansion threatens the core goals of the BRI, or does it merely supplement them?

Jonathan Hillman: BRI does pose a coordination challenge for China, with something that was already quite ambitious–and infrastructure projects are difficult in themselves to pull off effectively–the further you stretch the scope geographically and functionally, the less control you have over this massive program. So on the one hand, if you were thinking that maybe less control is a good thing, and this means the program is going to be more of a bottom-up initiative than a top-down one. That's an argument that could be made. But I also think that the less control China has over this, the less ability it has to minimize risk. That's where some of the danger lurks.

 

Why do you think the BRI has grown so rapidly and widely beyond its original scope?

The simplest explanation is that this is Xi Jinping’s signature foreign policy initiative, and within China people are lining up to say that whatever it is that they do is now part of BRI. There are political incentives for them to do that. But there are also commercial incentives. Because when the state is providing financing for a lot of these efforts, repackaging your work as related to the Belt and Road could actually give you some commercial opportunity as well.

 

Malaysia's new prime minister, Mahathir Mohamad, recently cancelled two major BRI projects, arguing that they would not benefit Malaysia and are unaffordable. Pakistan, where the CPEC is central to China's BRI, is asking for a review or renegotiation of major projects. What are the implications of these two developments for the BRI at large?

A few interesting things  are happening. One is that you've now seen the Belt and Road become a more salient topic within the politics of recipient countries, and so in elections, it becomes something that's part of the election contest. So there's been a bit of pushback. Opposition parties have been successful in pointing out some of the shortcomings of the Belt and Road.

The other thing that's notable in the Malaysia example is that typically these large projects–and this extends beyond Belt and Road–are really hard to cancel once funding has started flowing and groups have signed off on something. It's very difficult to take a project away. If in fact those projects do remain cancelled–there are plenty of examples of projects coming back from the grave–it's actually a positive thing. It doesn't look like a positive thing on its face for the Belt and Road, but given the number of projects China is pursuing, and given the difficult business environments in which it's pursuing them, inevitably some of them are not going to work out.The initiative in the longer run is better served by allowing some projects to fail.

The danger is that because this is seen as Xi Jinping’s signature initiative, the failure of a Belt and Road project is viewed as a failure of him. That's a dangerous perspective because projects sometimes don't work out and countries should be allowed–and encouraged–to cancel projects that are not actually viable.

 

How has China handled Malaysia’s cancellation of the BRI projects? Given the excessive expansion of the scope of the BRI, as you have analyzed, is this development actually a blessing in disguise for China?

It's counterintuitive that the failure of a project could be a good thing, but I actually think that if Chinese authorities want this initiative to succeed in the long run, they need to embrace failure when it's appropriate to do so, and not make this something that is promised to be more than it is, and promise to do what nobody else could do. No other related infrastructure effort would have a flawless record. Why would this one? I'm not sure that that was a very smooth interaction between the new government in Malaysia and Chinese authorities over those cancellations, but  that's something that China is going to have to adapt to as more countries have issues in the future.

 

So you think this might force some kind of flexibility into their approach to projects?

Maybe there are a few different lessons that could be learned. One of them is for the recipient  countries watching this. They might say “they were able to cancel projects, maybe we can too.” On the Chinese side, there's a lesson to be learned about being flexible and allowing projects to fail. Maybe the bigger lesson is raising the bar for what becomes a project in the first place. Some statements do suggest that they're trying to reevaluate some of the ways in which they make decisions about projects, and certainly examples of failure provide learning opportunities to say clearly “our calculus was not right in trying to move that one forward so there's something we should adjust in how we evaluate projects in the future.”

 

Notably, the former Malaysian prime minister who approved these projects is now in jail for massive corruption, and Mahathir Mohamad has long been wary of economic domination by foreign powers.  Is the cancellation of these two projects due to Malaysia's domestic politics, or to fundamental flaws in how BRI loans are structured and projects are selected?

It's a little bit of both. There's definitely been some gamesmanship going on on the Malaysian side. They seem to be trying to get the best bargain they can get with their new government. In almost all these cases where projects don't work, it's tempting to blame one side or the other, but the project itself was an agreement, and there was a negotiation that happened, and both sides at whatever point they reached that agreement felt like it was good enough. There's always going to be a lesson on both sides.

 

Some critics describe the BRI as "debt-trap diplomacy." Do you think this is a fair characterization? Does China have a strategic interest in saddling these countries with debt, thereby allowing it to take control of assets like ports? In other words, do you think that China "wants" to use debt as a subtle instrument of gaining control of strategic assets?

To me it seems like, with some of the port examples, Sri Lanka in particular, that it must have been an outcome that they considered on the Chinese side. It must have been an outcome that was among the potential futures that they considered. It's really difficult to prove motive. You have to be basically in the room when some of those decisions to lend were made.

The other thing about the Sri Lanka case that is somewhat telling is that China's overall share of Sri Lanka’s foreign debt stock is not the largest. It had around 10% of Sri Lanka’s foreign debt stock around the time that the Hambantota Port’s controlling equity stake was given to China. So it's easy to try to simplify these things, as though even when these projects fail China wins. I don't think that's always the case. There are some projects with strategic value that China could gain, but if enough of these projects go wrong, China does not win. The Belt and Road brand becomes toxic, and depending on the scale of failure you're also talking about potentially negative financial consequences for China.

 

So following that, and back to something you mentioned early on, what are the biggest risks, for individual projects, and with the Belt and Road Initiative overall? What could go wrong that would truly impact China in a negative way?

We’re seeing projects struggle because infrastructure projects are difficult in any business environment, and some of these are in very difficult business environments. All of that is occurring right now with Chinese firms that are often highly leveraged, and all of it is happening in a broader macro environment that's relatively positive.

There are some trade frictions right now, but what does this thing look like if there's a broader economic slump or downturn? I don't know. I am not sure stress-testing the Belt and Road is something that's been done. I hope the Chinese authorities are doing that, but we're seeing these tensions and these debt issues in a relatively forgiving broader macro environment, and all that could change in the future.

 

Do you think what is happening in Malaysia, Pakistan, Tonga, and elsewhere, is  the beginning of a borrowers' revolt? Or might this just be a manageable series of blips that can be overcome through proper restructuring of loans and scaling back of certain projects?

China still has an opportunity to do a course correction and raise the standards for its projects. But I also think that some of this depends on whether these countries have alternatives. It's very difficult to be a politician somewhere and turn down an offer to build something. It's a much more different situation if you're going to build something and you’re comparing two offers, but in many of these cases, like in the Hambantota example, the choice was to build a port with Chinese money, or not build a port at all. Part of this story in the future will be how China adapts, but another part is to what extent do alternative financing sources become available. It's going to be difficult for any single country to match what China has been offering in sheer financial terms from public money, but there are also opportunities for the private sector to get involved if risk is addressed. At the end of the day for a lot of the recipient countries it is a question of alternatives.

 

At this time what would be the biggest alternative financing sources for similar projects? Would that be the World Bank, the Asian Development Bank…?

Both of those MDBs [Multilateral Development Banks], as well as the EBRD [European Bank for Reconstruction and Development], are pretty active. Those are all financing sources that also bring with them high standards. Japan is also quite active, especially in Southeast Asia, and the European Union is active in Central and Eastern Europe. Those are some of the bigger players.

 

As I understand it it's the BRI and China's willingness to offer financing with fewer strings attached that has kind of given it some competitive advantage in a lot of countries who would rather get their money more easily and without a lot of conditions. Do you think that these recent developments challenge that advantage, because you see that there's a reason for those standards and conditions, or do you think that advantage remains strong?

A willingness to build to budget rather than to the more robust risk assessment upfront is always going to incentivize more projects getting off the ground, but there's a potential for some backlash and some learning. One challenge is that often in recipient countries the leadership that makes the decision to take financing and gets the political credit for starting the project is no longer around and accountable when the project doesn't work out. That's a political challenge, but  there's probably some learning that can be done on both ends, among the multilateral development banks to try to streamline some of their processes and on the Chinese side to try to raise some of their standards.