China’s Belt and Road Initiative Raises Concerns as Much as Expectations of Benefit in the Middle East

Joseph Dana

China is building a counterweight to the Western-led financial architecture that has governed the global economy since the end of Second World War. Whether Beijing will be successful is a matter of debate, but the fact remains that China’s Belt and Road Initiative (BRI) is already shifting the global economic order. This will have a profound impact on the Middle East, both positive and negative.

Under Chinese President Xi Jinping, Beijing embarked on the BRI with the simple goal of building the physical infrastructure necessary to shift global trade flows toward China. The BRI recipe is straightforward: China moves into developing countries with the offer to build critical infrastructure such as railroads, roads and ports. Using imported Chinese labor and Chinese capital, the projects form the backbone of a massive land and sea trade network where all roads lead to Beijing and developing countries are left with significant amounts of debt.

The BRI holds promise and peril for the Middle East depending on where you look. The Arabian Gulf, for example, stands to benefit from Chinese interest in the region. Not only will the BRI facilitate an increase in oil trading between the Gulf and China, the project could be a driving force behind regional energy integration and the creation of strategic energy security initiatives such as storage facilities. A stronger economic partnership with China could also offset Iranian influence throughout Central and South Asia.

The story is different for the developing economies of the Middle East. Through the BRI, China has transformed into a capital-exporting country with clear interests in safeguarding its large-scale foreign ventures. As China’s ambitions have grown, certain developing economies have become increasingly dependent on its markets and exports. This raises critical questions around the sovereignty of China’s debtors.

Chinese investment in Egypt is a cautionary example. In March, Egypt struck a deal with China to provide 85 percent of funding for a $3 billion portion of Egypt’s new administrative capital near Cairo. The project is one of Egyptian President Abdel Fattah El Sisi’s megaplan aimed at creating entirely new districts in the capital. For China, it is a win-win opportunity. Not only are Chinese banks facilitating capital for a favorable 10-year loan, but Chinese labor will be shipped in to build large portions of the district. In Egypt, where unemployment is a serious challenge, bringing in foreign labor for infrastructure projects is a dangerous play.

Financing debt and exporting labor is a popular move for China. In Pakistan, a key trading partner of several Gulf countries, there are concerns about debt serviceability regarding the $55 billion pegged to the China-Pakistan Economic Corridor (CPEC), which aims to connect Balochistan’s Gwadar Port on the Arabian Sea with Kashgar in western China. Given Pakistan’s rising debt levels, drop in export earnings and a widening current-account deficit, doubts are being raised over its ability to finance repayments to Beijing.

Sovereignty over Gwadar, the centerpiece of CPEC and immensely strategic given its access to the Strait of Hormuz, is likely to become hotly contested. This year, Beijing revealed it will build an offshore naval base near Gwadar. It will be China’s second offshore military base after its first in Djibouti.

The situation is even more grave for Sri Lanka, which is saddled with the highest debt-to-GDP ratio in the region. Unable to pay back its debt to the Chinese government lender, the Sri Lankan government formally handed over its largest port to Beijing. Strategically placed in the Indian Ocean and linking Europe, Africa and the Middle East to Asia, the port is an important jewel in China’s larger maritime ambitions for the BRI. The Chinese takeover could be a sign of developments to come.

In Africa, there are similar projects that could leave countries handing over sovereignty to China as a result of debt restructuring. The 757-km-long Addis Ababa-Djibouti Railway launched in October 2016 and costs $3.4 billion, almost a quarter of Ethiopia’s government budget of $13.9 billion. Chinese financing accounted for 85 percent of the Ethiopian portion and 70 percent of the Djibouti portion, with both loans sourced from the Exim Bank of China.

Kenya’s 472-km Mombasa-Nairobi Standard Gauge Railway, which followed in May 2017, became the country’s largest infrastructure project since independence. Valued at $3.8 billion, 90 percent was underwritten by a loan from the Exim Bank of China, and the remaining 10 percent from the Kenyan government.

China’s approach in all of these examples is calculated toward the long game of assembling institutional power and alliances. This is explicit in the nature of its loans, which are collateralized by important natural assets with high long-term value, rather than by short-term commercial viability.

For the countries of the Middle East, Chinese influence is a double-edged sword. While Chinese capital is critical for certain projects, handing over sovereignty of key infrastructure projects could raise new challenges for the region. As the economic powerhouses of the region, leading countries in the Arabian Gulf could use their goodwill with Beijing to ensure that China’s influence remains a positive force rather than one typified by neo-colonial ambitions.

Joseph Dana, based between South Africa and the Middle East, is editor-in-chief of emerge85, a lab that explores change in emerging markets and its global impact.