U.S. Fights China for Influence, One Project at a Time
By Niharika Mandhana (WSJ)
Updated Nov. 13, 2018 3:16 p.m. ET
Washington prods private sector and focuses on financing as Beijing’s ‘Belt and Road’ hits obstacles
HONG KONG—The U.S. has launched a new strategy aimed at ramping up investment in Asia to vie with Chinese President Xi Jinping’s overseas infrastructure-building spree, as Beijing grapples with setbacks to its sprawling program.
But China has a head start—and a state-led model that makes it easier to finance and build on a large scale. Mr. Xi’s Belt and Road initiative has offered hundreds of billions of dollars for railways, bridges and ports in dozens of countries, expanding its strategic influence along the way.
Among the recipients are economies that have struggled to attract U.S. investment or adequate financing from multilateral banks.
The Trump administration is looking to change that by helping the private sector invest. In October, President Trump signed into law the Build Act, which creates a new development finance agency that offers loans, loan guarantees and political-risk insurance to private companies.
Mr. Trump said last year that this strategy would offer “strong alternatives to state-directed initiatives that come with many strings attached,” a reference to Beijing’s plan. The goal, proponents say, is to encourage businesses to invest in low-income countries and spur growth with projects that make economic sense.
The Build Act allows for $60 billion in U.S. development financing around the world under the new agency, the U.S. International Development Finance Corp. The IDFC merges existing programs, doubles the current agency’s spending cap and has the authority to own equity stakes in projects, giving it more flexibility to choose and guide them.
The U.S. sees Belt and Road as a tool used by Beijing to advance its strategic and military interests. A number of Trump administration officials and U.S. lawmakers describe the risks of China using “debt traps” to gain control of sensitive infrastructure and “predatory economics” to undermine the autonomy of debt-burdened countries.
Some new governments in Asia also see it that way. Many developing economies initially embraced China’s plans, which pledged to address, at least in part, Asia’s infrastructure spending needs, estimated by the Asian Development Bank at $1.7 trillion each year through 2030.
But elections have delivered setbacks to China, including the suspension of $20 billion in projects in Malaysia, Pakistan’s shifting strategy to combat an emerging financial meltdown and the ouster of a China-leaning government in the Maldives. Some newly empowered politicians said China-backed projects approved by previous governments promoted corruption, saddled their countries with debt and threatened their sovereignty.
So far, however, for countries facing dire infrastructure needs, “there aren’t many specific or visible alternatives to China,” said Amitendu Palit, a senior research fellow at the Singapore-based Institute of South Asian Studies. “China is still their best bet.”
China’s political leaders are able to steer investment decisions, and the country is often willing to fund projects in high-risk markets that others avoid.
The first section of Pakistan’s Multan-Sukkur Motorway, a key leg in the China-Pakistan Economic Corridor, was inaugurated in May. The new government in Islamabad is looking for help to manage the debt burden of its Belt and Road projects.
The first section of Pakistan’s Multan-Sukkur Motorway, a key leg in the China-Pakistan Economic Corridor, was inaugurated in May. The new government in Islamabad is looking for help to manage the debt burden of its Belt and Road projects. PHOTO: AHMAD KAMAL/XINHUA/ZUMA PRESS
“China has giant state-owned enterprises that are directed by organs of the state to make huge investments, even investments that are of questionable commercial value,” said Jeff Smith, a research fellow in the Asian studies program at the Heritage Foundation. “The U.S. political and economic system is not designed to play this game.”
The Trump administration has earmarked $113 million for digital, energy and infrastructure projects in the Indo-Pacific region, in what Secretary of State Mike Pompeo described as a “down payment on a new era in U.S. economic commitment.”
“With American companies, citizens around the world know that what you see is what you get: honest contracts, honest terms, and no need for off-the-books mischief,” Mr. Pompeo said in July.
China has said its Belt and Road loans aren’t debt traps, and that its financing is aimed at boosting economic and trade links.
In Washington, there is “a lot of debate and consternation about how to respond” to China’s plans, said Mr. Smith.
One effort involves leveraging regional alliances. A U.S. government agency that will be absorbed into the IDFC signed an agreement with Japan and Australia in July to jointly mobilize investments, echoing U.S. security alliances in the Indo-Pacific.
Tokyo has experience in infrastructure financing in developing countries in Southeast Asia, where it is involved in a range of projects, including railways and energy production. Prime Minister Shinzo Abe said in 2015 that Japan would provide $110 billion to fund Asian infrastructure projects over five years.
Japan has expanded its operations, searching for investment opportunities in South Asia and offering loans to countries such as Bangladesh for ports and bridges.
Tokyo has sought to differentiate itself from Beijing by emphasizing “quality infrastructure,” and framed its efforts increasingly as part of the broader Indo-Pacific strategy designed to counterbalance China. Japanese money remains more selective than China’s and isn’t available to many countries.
Infrastructure projects should “increase employment, help grow education opportunities for the workers, attract even more FDI and as a result make the loans easy to pay back,” Mr. Abe said in June, when he announced new efforts to mobilize billions of dollars in funding. “Infrastructure that stimulates self-sustaining cycles in this way is high-quality infrastructure.”
Write to Niharika Mandhana at firstname.lastname@example.org