Corporate Law

One Belt One Road: A Road to Disaster

Binit Agrawal

China’s One Belt One Road policy is destructive for the beneficiary countries and is headed towards eventual failure.


Xi Jinping has adopted the One Belt One Road initiative (OBOR) as the defining policy reformulation under his Chairmanship. OBOR has been imagined as a grand exercise in influence generation culminating in China becoming the next global superpower. Parallels have also been drawn to the Marshall Plan, which was a policy to reconstruct post-war Europe and Japan by the United States. Except, OBOR is at least ten times in magnitude. But there are some key problems with OBOR which will lead to its doom. To start with, it is important to understand what OBOR is and the economics behind it.

Economics Behind OBOR

Under OBOR China seeks to invest appx. 1.2 trillion dollars around the world creating an inland, a maritime and a digital route connecting China to countries across Asia, Africa and Europe. The investments will be in the nature of infrastructure projects. But why would a country, a majority of whose own population is yet to enjoy a quality life, invest its money in foreign nations? There are multiple reasons:

  • China is an export-oriented economy. Almost 60% of its growth post-2000 can be attributed to exports. But post-2008 growth in global demand has remained cold. By investing money, buying influence and improving connectivity in emerging countries, China seeks to enhance the demand for its goods. Further, Chinese companies like those in construction, transport, technology, etc. will also benefit.
  • China has created huge internet companies, but they are limited to Chinese borders. Within OBOR these companies will start having a global footprint by controlling data and network around the world.
  • Post a construction boom in China, the country is burdened with excess production capacity of construction materials like cement, steel, etc. As most of the contracts under OBOR go to Chinese companies these can be utilized.
  • China has huge currency reserves. These are generally used to buy low-interest paying bonds. By investing this reserve under OBOR China can reap much higher returns.
  • Ensuring access to energy and mineral resources of Asian and African countries.

If the Economics is in Place, Why is the Policy Doomed

There are no free lunches under OBOR

There can be no comparisons between the investments made under OBOR and those made under the Marshall Plan, the soft loans given by countries in general or those extended by organizations like the World Bank. OBOR investments are made in the nature of loans, mostly by Chinese state companies and banks. But these loans come with a very heavy interest rate, which few of these countries can pay back. Below is a sample of interest rates charged by China for the loans extended by it:

  • Hambantota Port Project, Sri Lanka: 6.3%
  • Norochcholai Coal Power Plant Project, Sri Lanka: 4%
  • Nairobi-Mombasa Railway: 3-4% Percent
  • East Coast Rail Link, Malaysia: 3.25%
  • Malaba-Kampala Railway, Uganda: 3%
  • China-Laos Rail: 3%
  • China-Pakistan Economic Corridor: 2-8%
  • Loans to the Philippines: 2-3%
  • Ethiopia-Djibouti Rail Project: 3.1%
  • Hwange Power Project, Zimbabwe: 2.5%
  • Soubre Power Project, Ivory Coast: 2%
  • Loans to Central Asia: 2%
  • Loans to Cambodia: 2%

As against the high rates charged by China, funds disbursed under Marshall Plan were grants, with only 10% of the total fund extended as loans. Soft Loans extended by IBRD, ADB and other such agencies range from 0.25-3%, taking into account various economic metrics. Credit lines extended by India come with an interest rate of less than a percent to 1.75%. Loan granted by Japan to India for the bullet train project costs us just 0.1%.

The problem of high-interest rate is further extenuated by the fact that most of these countries are already economically unstable. They are burdened with huge foreign loans, most of them Chinese and an increasing share of their budgets are going towards servicing these loans. Pakistan, Sri Lanka, Kenya, Nigeria, South Africa, Ghana, Tajikistan, Laos, etc., major beneficiaries of OBOR, are all looking at looming debt crisis.[1]

Chinese Loans are Ineffective

When the IMF granted loans to India in 1991 it asked for a slew of reforms in return. So did the grants under the Marshall Plan. In general, most of the loans by international agencies and democratic countries come with requirements of institutional and economic reforms. Further, such loans are often monitored by observers and corruption is generally inexistent.

As against this, Chinese loans are infamous for their comfortability with grafts and corruption. Most of the Chinese investments with uncomfortable terms are willingly supported by dictatorial leaders and officials. The Kenya train investment by China has been mired in a huge corruption scandal. Similarly, Malaysia has halted Chinese investments signed by Najib Razak, with charges of corruption as one of the key reasons. Bangladesh too has scrapped multiple Chinese investments because of graft charges.[2]

Moreover, the Chinese do not demand any reforms to be undertaken while granting loans and aids. Thus, while huge sums of money flow in, there is no commensurate improvement in transparency, accountability, efficiency and human rights in the receiving country. This leads to wastage of resources, labour exploitation, environmental disasters, corruption and mismanagement. As a result, the real cost of Chinese investments is much higher.

Further, China requires that a majority of the projects be granted to Chinese contractors. Almost 89% of the economic value of OBOR projects are captured by Chinese firms.[3] As such, most of the workers employed, materials and services used are Chinese. As a result, the money fails to create income for the natives and countries fail to get the best value for the money they will eventually have to pay back.

China Takes Back Every Last Penny

It’s not just that Chinese loan come with a heavy price tag, China makes sure they are repaid. Such repayment, if not in the form of money is to be repaid in the form of assets. The case of Hambantota is a glaring example. China will now control the port for the coming 99 years as Sri Lanka was not in a position to pay back the debt. In Zimbabwe, the Chinese secured non-compliance with labour laws, first rights to mineral exploration and control over many mineral assets. In Tajikistan, they took control of around 1158 km of disputed territory and gold mines. Angola has been servicing its loans by supplying natural resources to China.


Chinese investments are a perfect recipe for economic and sovereign disaster. Populations across nations have also started to realize this. As a result, there is growing public resentment in most OBOR partner countries against China. This is evident in the multiple Chinese investment projects being stalled or cancelled. Those in Malaysia are a recent example. Simultaneously, economic woes within China are escalating and trade war is taking its toll. Thus, China, if it wants OBOR to survive, must bring reforms in the way it works and stop using colonial tactics.




Image Source: China Daily

3 replies »

  1. This article is replete with faulty assumptions. First, it claims OBOR to be 10 times of Marshall Plan. Clearly, no inflation adjustment considered. No social cost/benefit considered. Sheer exaggeration.

    Second, the article terms the 3 percent interest rate to be ‘too high’ while over looking simultaneously, the multiple grants that China gives to these countries.

    Third, the article assumes that just because a loan doesn’t come with mandatory reform requirements, it’s functional utility reduces to zero or even becomes negative (social cost) while overlooking the infrastructural development that follows and the resultant benefits to the domestic economy. The trickle down effect of such an investment are completely ignored to present a completely biased account.

    Fourth, and the most important, the article fails to justify itself. If the initial assumption of the article (that Chinese loans are accepted by dictatorial regimes who are currupt for multiple reasons with a fair tint of personal gain) is taken to be true, and barring few exceptions where Chinese work is stalled, the bull-dozers will keep on running and while it could be sovereign disaster, it won’t be Chinese loss. In fact, OBOR’s aim – Chinese domination – seems to be on perfect track.

    Do more analysis dude.
    Hope you reply to it.

    Liked by 1 person

    • Hey, the value is adjusted for inflation.

      The article is not overlooking the grants made by the Chinese. The grants made by them are negligible and most require swapping of resources. (Like, the gold mine swap in Tajikistan). And 3% is indeed very high for countries who spend a majority of their budget paying back loans (Sri Lanka until 2016 was using 95.4% of it’s revenues to pay back the debt, Pakistan is already in a debt trap and so on). You don’t get free loans without reforms, China is changing that rule. At the same time it is charging unsustainable interest rates. Added to this, most investments go into huge Soviet style projects which are not commensurate to the real needs of these countries. Laos is building a railway which costs 60% of it’s GDP. There are multiple ports and stations built by China lying empty in these countries. For example, the Mattala airport in Sri Lanka, the railways in Africa.

      Not at all, no benefits are ignored. I have hundred dollars. I invest it in my country’s stable economy, the money circulates to say create wealth worth 1000 dollars. The tendering happens on a free basis, I get the best value for my dollar. The employment goes to my country’s citizens, they earn, they spend and the money circulates and hence, trickles.
      But my country’s leaders and officials are corrupt. They eat away 50 out of my 100 dollars. Send it offshore. This can’t trickle down. The contract goes to a company which is not giving the best I deserve and is using cheap materials. Further, it is a foreign company and all it’s resources are being imported from there. The payments to this company too cannot trickle down. Also, the effectiveness of the work done is low. The employment is given to Chinese workers, the money goes to them, they will go back to spend it in their country. Meanwhile, a part of the entire spending is bound to stay in my economy. The project will also create benefits for the economy. I end with say 300-400 dollars for the initial 100 dollars investment. But you see, I could have got a lot more for the same amount. However, obviously I don’t have that kind of money and no one will lend me except China. That calls for reforms. I could be like Rwanda or Asian tigers too, but i don’t want to do that. Thus, I let my country slip into debt trap. The argument is that the efficiency and effectiveness of the investment made is a lot less than what it could be. Obviously if money is being put in, it will create some money in the ground of investment. Added to this are the social problems, and you are indeed undermining them. Look at the protests in most of these countries.

      Not at all. Every country is wary when sovereignty is at stake. It’s not a few projects being suspended, substantial number of projects are. As countries see that they will lose out, they will demand better terms. Many are already doing so. If not they will suspend the projects. Most of the countries China is eyeing even if corrupt are democracies. They have their domestic politics too. The OBOR won’t be successful as a result. As countries fail to pay back, and they will certainly do, China will find it difficult to sustain projects. Afterall what will you do with gold mines when there is very low demand for it in the markets. What will it do with an empty port, which can hardly be used for any feasible trade. It’s own economy is in a big crisis. You remember what Soviets did. They invested in huge projects in the name of influence buying. But they failed miserably, many of them in India. You are overestimating China’s might. USA, Europe, Japan and India will mount challenges when sovereignty of countries are under substantial challenges. They have started to do so. Sri Lanka and Bangladesh have already started to reject many Chinese investments. Malaysia is reviewing them all after Dr. Mahathir came.

      I hope this helps. Please do post counter comments, we would be happy to engage.