Asian Property Review examines the impact from the fallout of unprofitable megaprojects financed and built by the Chinese under the auspices of the Belt & Road initiative.
Text by Benjamin K. Yong.
Sri Lanka was the first country to get a taste of what happens when big Chinese-funded infrastructure projects don’t get enough returns and you still have a big loan to service for the project – so big that it spans two generations to pay off. What’s the solution? The country decided to lease the port for 99 years to the Chinese thus giving effective control of the port to a foreign entity.
Following that, a number of other ASEAN countries which have many similar projects funded and built by the Chinese under the Belt and Road initiative, got worried. “From Malaysia to Myanmar, the Chinese have been bankrolling national projects across Southeast Asia – the Philippines is no exception. But, with minimal information available to the public and Congress of what the loan conditions might be, there are serious concerns that [President] Duterte is taking the Philippines headfirst into a debt crisis,” an online portal warned.
It is estimated that with an interest rate of between 6 and 14% for a US$167 billion loan from the Chinese, “the Philippines could end up in a debt bondage to China”. “Without releasing all the details of the loans to the Philippine Congress and the general public, it becomes impossible for Congress to conduct a full cost-benefit investigation and vote for the loan to proceed,” it says.

Robert Wihtol, Adjunct Faculty at the Asian Institute of Management and former Asian Development Bank Country Director for China and Director General for East Asia has this to say about what he calls ‘Asia’s Debt Trap”: “China is using the region’s appetite for infrastructure as a vehicle for its geopolitical ascendancy. Under the Belt and Road Initiative, China is working hard to attract infrastructure investments in the region and beyond, to improve its access to markets in Asia, the Middle East, Africa and Europe. BRI projects are being financed by its stateowned policy banks, China Development Bank and China Exim, a dedicated Silk Road Fund, and local governments and state-owned enterprises. China is also encouraging public and private financiers in the 64 OBOR countries to chip in.”
Having said that, he notes: “The race to finance Asian infrastructure has many upsides. The push to lend increases the total financing available for infrastructure and encourages lenders to streamline their procedures and make funds more accessible for borrowers. Having numerous financiers increases the scope for joint financing, which can help to spread the risk inherent in large projects.
“However, the race also has downsides. Increasing financing does not in itself address the shortage of bankable projects. On the contrary, it may actually increase the likelihood of unjustified projects being financed. Geopolitical and economic rivalries can see projects of questionable value get pushed through on political grounds, without proper assessment of their financial and economic viability, and cutting corners in technical, environmental and social due diligence. There is a growing risk that countries will borrow for white elephant projects, saddling them with hard-toservice debt and lenders with nonperforming loans or default.
Wihtol continues: “The current glut of international financing risks triggering a repeat performance (of a financial crisis) at the regional or global level. The first casualties are already apparent. CDB and China Exim lend on largely political grounds, do not have clear-cut debt sustainability limits and have recently incurred major losses in risky countries such as Sudan, Venezuela and Zimbabwe. In Venezuela, for example, loans were secured against oil reserves, before prices – and the economy – collapsed. The losses have forced China’s policy banks to reassess their approach to sovereign risk and their country lending priorities.

” There is a growing risk that countries will borrow for white elephant projects, saddling them with hardto-service debt and lenders with nonperforming loans or default. ” — ROBERT 
“Indonesia’s high-speed railway market, again, demonstrates the downsides of political competition. Throughout Southeast Asia, Japan and China are competing fiercely for high-speed rail projects, supported by state-owned banks and occasional political arm twisting. The Jakarta-Bandung link has been a particular bone of contention. Following years of positioning by the two competitors, last year the contract was awarded to China. Many suspect political intervention. Over a year later, rather than moving ahead quickly, the project is mired in bureaucracy, rising costs and undermining its financial viability.”
Wihtol concludes that financing Asia’s infrastructure gap is essential for the continued prosperity of the region. “But the current politically-driven race to provide funding entails major risks. The spectre of bad debt has reared its head.”
Oliver Nicoll, Director of Research, Asia Pacific Investment Partners (APIP) observes two striking characteristics of OBOR: the scale of its ambition, but the lack of anything approaching a clear plan for delivery. “Endless summits are arranged with regional and global partners, where positive sentiments are dutifully recorded by reporters, but little eventuates. So, in terms of a negative effect, I think we are still lacking clarity.
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“It is true, that for many developing countries, the prospect of Chinese investment in infrastructure is tantalizing. The scale of many of these initiatives, would not realistically be delivered without the know-how and financial weight offered by Beijing. Detractors point to ‘high’ interest rates levied, when compared with those offered by non-governmental organizations (NGOs) – rates they argue could lead one to delinquency or default, strengthening the hand of the Chinese.”
“On both fronts, and in Sri Lanka, in particular, the question is less about Chinese investment, and more of balancing exposure and influence. The promise of a large cheque from Chinese institutions should not legitimize the investment in itself.
Nicoll says the Mattala Rajapaska Airport or Hambantota Port, underline the complexities of this approach. “Projects need to be carefully modelled to assess utility and financial worth over long horizons, and stress tested to consider sensitivities. In addition, a country’s strategic infrastructure must be financed from a variety of sources, so as to not one day be overly dependent on one partner. In this regard, it is worth introducing some financing from more expensive sources, if together with the other (cheaper) capital, it reduces overbearing influence, in difficult economic times.”

 Sr Samuel Tan, Executive Director of KGV International Property Consultants based in Johor Bahru agrees with the above assessment and adds: “I believe these mega deals should not be seen from a single perspective. The devil lies in the details. If they can pass the basic economic litmus test, it is good and welcomed.
On whether recent Chinese capital controls have any adverse impact on ASEAN, Nicoll says: “My general take is developing countries are likely to be less adversely affected compared with some of their more developed counterparts. The reason for this are twofold. Primarily, the real concern expressed in Beijing has been the flight of capital to trophy projects – often in the real estate space- where Chinese entities have been willing to overpay for exposure. This sort of investment, can obviously have a distorting effect on recipient countries, and is not strictly desirable for the Chinese government. It can be seen as less strategic, and more as a repository, outside of China, in relatively safe assets.
“Strategic investments, in developing countries, however, are of a very different nature. Some will clearly be hubristic – others may be vanity projects. But frequently, they are concentrated in high growth economies, and have been keenly priced, because of a lack of other partners willing to provide financing. Consequently, these will be seen to further the interests of the Chinese state and enhance Beijing’s geopolitical influence, and so will come under less pressure to be abandoned. Indeed, infrastructure associated with OBOR in particular, is being expressly encouraged by the Chinese government, suggesting it is not foreign investment that has attracted the ire of Beijing- but rather its direction.”
In conclusion, despite the risks and stricter controls over fund outflow, some analysts are of the view that China will continue to lend and developing countries will continue to borrow in the next few years, particularly in the maritime route to Europe via Southeast Asia. It is for the recipient country to ensure that there is cost-benefit analysis conducted. Clearly, a balance has to be found between building for prosperity and over-borrowing.


In April, one of China’s biggest companies and the world’s fourth largest player, the Ocean Alliance, made a huge shift from Klang to port operator PSA Singapore’s terminal. State-owned China Cosco Shipping is also among the member companies of the alliance, according to Singapore’s Straits Times.
The newspaper cited data compiled from Northport and Westports, the two operators in Klang which said cargo throughput was down by a sharp 8.4% in 2Q 2017 to 3 million twenty-foot equivalent units (TEU) after nearly four years of increasing loads.
The biggest impact on Klang was reported to be the loss of transshipment volumes — goods stored before being shipped to their final destination — from giants United Arab Shipping Company (UASC) and France’s CMA CGM. This could total up to 2 million TEU annually. UASC has now merged with Germany’s Hapag-Lloyd, making it part of THE Alliance, while CMA CGM is the biggest company in the rival Ocean Alliance.
Both groups handle nearly half the world’s shipping capacity. Following the shift, Klang’s Asia-Europe calls were halved. The slowdown has added to concerns of port oversupply due to plans for new Chinabacked megaports like the RM43 billion Melaka Gateway and on Carey Island, which sits just off Klang in Selangor. The planned port for Carey Island now has an Indian partner, with its mooted valued halved to RM100 billion, the paper reported.


In recent months, concerns have been raised over the many megaprojects being financed and built by Chinese companies in Malaysia, many of these under the auspices of the Belt & Road initiative. Asian Property Review interviews 3 experts for their views on this thorny issue. They are:

1. Dato Joseph Lim (JL), Founder of Global Green Synergy Sdn Bhd, Vice-President of the Malaysia-China Chamber of Commerce.

2. Dato’ Seri Matthew Yeoh (MY), managing partner of Yeoh Mazlina & Partners, member of ASEAN Legal Alliance.

3. Sr Samuel Tan (ST), Executive Director of KGV International Property Consultants
APR: With the Chinese government now cracking down on foreign investments by Chinese companies, do you think it would jeopardise some of the overseas investments already committed by them? 
JL: For those already committed, I believe the Chinese government will let them continue. In the case of Forest City, it could be the case that some individual investors might not have cleared their tax, hence they couldn’t bring out their money. The restriction is more on Chinese companies taking money out to buy equity in overseas development projects. If these companies participate as main contractor or in project execution, it’s not a problem. The government is just trying to limit the outflow of money.
MY: Whether or not Chinese overseas investments would be jeopardized would depend on how much the Chinese Government is willing to back these investments. If they serve the Chinese national interests in the long run, there should be no problem in the continuance of these investments.
I just came back from a trip to Laos PDR where a group of Chinese investors with the backing of the central government have signed letters of intent to invest tens of billions of RMB into the special economic zone in Savannakhet province. Laos PDR has the good fortune of being in the direct path of the rail project linking Kunming with the rest of ASEAN. The Chinese have recognized that the success of its railway links down south, and indeed a huge part of OBOR, starts with Laos. I am confident that within a short period of time, one can see marked improvements in the Lao economy
ST: The tightening of capital outflow out of China had already affected the China developers’ housing projects as seen in some of them in Iskandar Malaysia. Inevitably, the sales were impacted adversely. However, since the targeted segment is mainly the China market, the local developers do not feel the pinch. What is detrimental is the perception this has created in the minds of investors. The general take is that Iskandar Malaysia’s property market is now in a standstill as the Chinese are not allowed to take their money out of China to purchase overseas properties. As explained above, this is far from true.
Local developers do not depend on the China market save for a remnant. They depend more on the local buyers. The slowdown of China’s development in Iskandar Malaysia is also not too disturbing. Firstly, they have already sold many and these will keep them busy for the next few years until the control is loosened. Secondly, the control causes them to restrategise to concentrate on the commercial elements in their projects. Product mix is also recalibrated to meet the local demands. Thirdly, the slowdown gives more breathing space after years of rapid demand from the China market.
APR: The East Coast Railway Link (ECRL) which is financed by China’s state-owned Exim Bank and built by China Communications Construction Company (CCCC) has been said to be unnecessary as there are doubts as to whether there would be enough passenger and freight load to get decent returns. Your comments, please. 
JL: As businessmen, we hope this rail link can help bring up the development for the 3 states on the east coast- Kelantan, Pahang, and Terengganu, as soon as possible. The rail can bring down the cost of logistics – especially freight from Kuantan port. More than 100,000 vessels pass through the Straits of Melaka to China. Out of these, 70% are going to China to deliver all kinds of goods and resources. By stopping at Port Klang, and then by rail direct to Kuantan, which is next to the South China Sea, it can save 3 days of transit time, thus lowering costs. So, it’s one of the keys to drive the east coast corridor. MITI is also launching a 15-year tax concessions for these states which will attract foreign investors. Pahang and Terengganu alone for the past 3 years have grown though FDIs.
MY: Infrastructure which is meant to serve the public should not be profit-oriented. Its cost of funds should likewise be low and affordable. The ECRL is meant to be an alternative to the port of Singapore for goods to be transported from the South China Sea of the Indian Ocean and beyond. However, when one speaks of alternatives, the underlying truth is that it has a competitor, and unless that competitor is giving up without a fight, business will always not be monopolized by the ECRL. Transporting the goods using the ECRL will save only 1.5 days but it is estimated to cost about 35% more. This fact alone will ensure that only the very urgent dispatch will use the ECRL. Unless there is a dramatic increase in freight, the common understanding is the ECRL will be underutilized and could possibly be loss-making.
APR: Some quarters are claiming that Bandar Malaysia and the High Speed Rail (HSR) are also not necessary and are a waste of resources. In particular, it has been said why pick a Chinese company as master developer when Malaysian developers can do the job e.g. Battersea and Melbourne iconic developments. Your comments, pls. 
JL: Yes, Malaysia has all sorts of proven technology but yet to compare with Chinese technology. Even in Europe, they have adopted Chinese high speed rail because it beats others in terms of cost and supply chain. When it comes to advanced building technology, it’s not the technology only, it’s also the entire supply chain in the industry. Malaysia doesn’t have the market size to sustain this kind of supply chain but in China, they have. In the 21st century, why debate whether it’s made in China or made in Malaysia? When someone is doing better than us, we should collaborate with them. For example, in Proton’s case, we have the technology but comparing the cost of production per unit with China, we lose out because we don’t have the supply chain. We can thus leverage on their unique selling point.
HSR is a very iconic project to grow our Malaysian economy. Most visitors would be happy to take only 90 minutes from Singapore to Kuala Lumpur by rail where they can make stops en route at Melaka, Muar or Batu Pahat. It will help develop the towns along the route. I foresee that the HSR will be more popular than the flights between the 2 capitals because it actually takes longer if you fly.
MY: There is a need for the HSR between KL and Singapore. The highways are packed with vehicles and in spite of the many flights a day between these two cities, there never seem to be enough. The concern in awarding Chinese companies as the master developers is that they tend to control the whole supply chain to award most of the jobs to Chinese companies – engineers, consultants, architects, sub-contractors, materials, etc. It would be better to use local expertise for these projects.
ST: The benefits of the HSR are much debated issues. As to whether China should be the master developer, it depends on whether it is more competitive compared with others. Advantages should not be seen purely from the cost and maintenance of the rail. The socio-economic aspect such as benefits to the towns along the route should also be considered. HSR, if properly implemented can be a catalyst to development in the towns around the 7 stations. On the flipside, studies have also shown some models do not impact the towns at all. Hence, the planning must be thorough to ensure that there will be positive spillover effects.
APR: There are also claims that there are too many ports. With less reliance on oil globally as countries ditch fossil fuel in favour of renewable resources, there would be less need to transport such raw materials. Your comments, please.
JL: Malaysia does not have enough deep sea ports but we have many ports to carry middle range cargo. We have deep sea ports in Penang, Port Klang, Melaka (Melaka Gateway – soon), Port of Tanjong Pelepas in Johor, and Kuantan (soon). The sea covers two thirds of the world – transporting by sea is still the cheapest before the railway. My view is that the Pan-Asia Railway Network connecting China and ASEAN presents the cheapest and most economic form of transportation. But we may not see this happen in 10 years’ time. I agree that if the Pan-Asia rail exists, it can overcome all these issues. For example, we can deliver durians to China within a day. We can grow a lot more Malaysian tropical fruits for export, as well as other higher value added goods and even seafood due to the shorter and cheaper delivery time. At this stage, I see there is a need for the ports before the PanAsia railway comes into existence.
APR: The Kra Canal (if it ever materialises) might be the death knell for Malaysian ports. Your comments, pls. 
JL: The Kra Canal is just a rumour –if it happens, the Thai government would by geographical default give away South Thailand to Malaysia! Secondly, economically, it is not justified to spend huge amounts of money to make this happen.
MY: If it materializes, then yes. However, my personal opinion is it will not happen. The Thai Constitution provides that Thailand shall forever be one single country, and some have interpreted this to mean that it is unconstitutional therefore to cut a canal across the land. The more practical issue is this: All the Muslim majority provinces are south of the proposed canal, and if there ever is a canal, it will give new meaning to the separatist movement down south.
APR: Malaysia may be trapped in massive debt if it is unable to repay the soft loans provided by China’s banks. If Chinese banks stop funding, the Malaysian government, meaning taxpayers would have to bear the cost of the projects. In other words, we are borrowing now for the next generation to pay. How to mitigate this risk? 
JL: Under the Belt and Road initiative, China not only funds Malaysia but also other countries within the belt. If China somehow experiences political or economic instability, it would slow down overseas spending. But I am very confident with the Chinese government. From their past history, they never overcommit to others. For the Chinese, when we promise, we always fulfil our promise – it’s one of our good traits.
MY: The short answer is we need to borrow less and improve our productivity. Our people are our greatest asset. We need to fix the many ills we have and go through some austere times. Handouts and subsidies will not solve our problems in the long term. Almost every country has its problems and it is how they cope with these problems and come out of them that matters. Japan and Germany had to rebuild their economy after the Second World War (with foreign help) and China had to endure a century of humiliation. At one time in the 1970’s, we (Malaysia) were giving aid to South Korea. How times have changed!
ST: This is perhaps the greatest danger in the entire playout. Massive debt and inability to repay will cause much loss to the nation. It is not just economic loss and sovereignty. Debts will need to be paid in one kind or another. Inability to pay may result in the sale of strategic assets to foreign parties. It will also cost us more in debt repayment due to the drop in our sovereign rating. The parties paying for these are not merely the present generation but the generations to come.
APR: The terms of agreement for the projects are not transparent. How do we solve this issue? 
JL: From what I understood through the Belt & Road summit, the Chinese President has agreed to train 5,000 professionals from all over the Belt countries for the next 3 years on technology – big data, nanotech, biotech, etc; batch by batch. They have already set up a human resource institute to support this training. In terms of revenue and profit distribution on a government to government (GTG) basis, so far they have yet to announce; there are no figures in the market. For example, for the Kuantan port deepening, what is the equity for the Chinese party? We don’t know. If the contract is GTG, Malaysians should have the right to know – it should be transparent. So far, we have not done research on that so I can’t comment more. What I can say is the Chinese developers would still need to employ locals at the management level such as engineers and architects. This is because only they can understand Malaysian guidelines. So, somehow, they will still benefit Malaysian SMEs including the services sector. Furthermore, if Malaysian SMEs want to collaborate with Chinese SMEs, the former have to keep their tax payments in order otherwise, they would not be able to get loans to match up to the massive scale of Chinese SMEs.
MY: A culture of transparency and accountability is necessary for the long term good.
ST: These are critical issues which the authorities must address. Projects invested here must benefit the locals. Materials and services should be sourced from Malaysians unless not available locally. The criteria must be simple, realistic and measurable. In the events of non-compliance, the authorities reserve the right to withhold approval or impose penalties.
APR: China’s assistance in port-building and expansion in Kuantan and Melaka may allow China to control crucial economic regions and dominate strategic geopolitical locations. China’s clout and control may negatively impact Malaysia’s independence in defence and regional (ASEAN) decisions. Your comments, pls. 
JL: In 2016, China invested USD170 bil worldwide out of which about 70% (USD100 bil) was invested in Asia. Out of this USD100 bil, less than 1% was invested in Malaysia. Total FDI from China is less than 2%. So, 98% of FDI that came into Malaysia is not from China. Hence, there is a wrong perception that there is too much Chinese investment in Malaysia. What we are seeing is a lot of Chinese main contractors. They are just executing the job; there is no equity involved because it is not direct investment.
MY: Sri Lanka is not the only country that has to lease its ports to China. Australia has had to do the same in Cairns too. China has even set up its first overseas military base in Djibouti. Are these the early signs of neo-colonialism? All forms of colonialism begin in an innocent fashion. It is a stronger country helping out a weaker country through such things as economic aid, building of infrastructure, education, transfer of technology and so on. Soon, political power is gradually eroded and handed over, or is compromised by overdependence on the stronger power. Colonialism (or whatever name you call it) is not in itself a bad thing. If it helps the weaker nation by creating wealth rather than exploitation only for the home country, this could be a great catalyst. In Malaysia’s case, I do not think we have come to the point of overdependence on China. In time to come though, we may be in a position whereby China has so much vested interest in Malaysia that she has to speak out or take a stand on our behalf if we are threatened (similar to what the US has to do for South Korea and Japan).
APR: Your views on Forest City project. 
JL: It’s wonderful and sexy because it’s a special economic zone between Malaysia and Singapore. It has tax-free incentives and will have direct links such as a bridge to Singapore. In Malaysia, we may not have a company which can sustain this project which may take 20 – 30 years to complete. Most Malaysian companies may not be interested in a project which only gives returns in 20 years’ time. But for big giants like Country Garden, it’s not unusual to take 20 – 30 years to build a city. I foresee it would succeed and become an iconic zone but it may take 20 – 30 years. With regards to the reclamation works, perhaps China has better technology to enable faster settlement.


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