Could the Covid -19 pandemic spell the beginning of the end of China’s Belt and Road Initiative (BRI). The end of the beginning, perhaps? Or has it merely brought Chinese President Xi Jinping’s trillion-dollar project closer to a fork in the road rather sooner than might have either hoped or expected.
“China will further harmonise policies, rules and standards with [Belt and Road Initiative] partners,” he told last month’s APEC forum, “and deepen effective cooperation with them on infrastructure, industry, trade, science and technological innovation, public health and people-to-people exchanges.” Worthy words, but strikingly tame compared to the lofty tone of his early speeches on the subject.
Xi first unveiled plans for what was then called One Belt One Road in a speech to Indonesia’s parliament back in 2013 and elaborated on the idea a year later on a visit to Kazakhstan. At the time, Xi went so far as to invoke the spirit of Yu Gong, the original pan-Chinese cultural icon, demi-god and founder of the Xia dynasty, who is best know for ridding China of a great flood. Through sheer perseverance, Xi added, Yu also removed two mountains that stood between his remote village and the outside world.
The original Silk Road stretched between Asia and Europe some 2,000 years ago, Xi explained, and the overland section of the new BRI would re-establish Chinese and Asian connectivity with the rest of the world by developing a vast network of railways, energy pipelines, highways and streamlined border crossings stretching westwards to Europe via Central Asia, and southward to Pakistan, India, and the rest of Southeast Asia. 50 special economic zones (SEZs) would also be built along its route.
To the south this was to be complemented by a string of deep-water ports strategically positioned along the coastline of the Bay of Bangal and the Arabian Sea, the so-called String of Pearls, where the vast containers ships plying the waters of the Maritime Silk Road could load and unload. He also unveiled plans to build up to 50 special economic zones, all along the BRI’s route.
At the time, according to the Asian Development Bank’s calculations, the region was facing an annual infrastructure shortfall of nearly $800 billion, so there weren’t too many heads of Asian states in a position to argue with Xi’s promise to ‘break the bottleneck in Asian connectivity by building a financing platform’. Certainly there was unease about China’s avowed intention to use the network to establish the renminbi as an international currency and there were siren voices warning about the dangers inherent in Beijing’s ‘soft power’ strategy, but this was 2014 and Russia had just annexed Crimea. There was just as much inclination to consider China as a useful counterbalance to Putin’s ambitions as a threat in its own right.
Xi was as good as his word and China promptly embarked on a massive infrastructure spending spree. Last year, the World Bank estimated that around $500 billion was invested in BRI projects in 50 developing countries between 2013 and 2018, while risk intelligence data providers Refinitiv, (using different parameters) put the figure at the considerably higher total of $1.9 trillion.
Whatever the true tally, everybody agrees that a significant proportion of the 1,590 projects the BRI has funded have brought material benefit to their recipient states as well as to China itself. In Greece, for example, the China COSCO Shipping Corporation’s investment in the Port of Piraeus has seen container flow increase from 1.5 million twenty-foot equivalent units (TEUs) to 3.7 million TEUs, adding over $700 million to the Greek economy and creating 10,000 jobs.
Several other Central and East European countries have also accepted BRI financing, as have some Western European states including Luxembourg and Portugal which have both signed provisional agreements to cooperate on BRI projects. This, their leaders have argued, is a way to attract Chinese investment and potentially improve the quality of competitive construction bids from European and US firms.
So far so good – except that the World Bank also estimates that about $300 billion was financed via public and publicly guaranteed debt. With interest rates seemingly destined to remain at record lows indefinitely that didn’t seem to be too much of a problem at first.
But that was then, and this is now.
Back in 2014 (despite the regional devastation caused by viruses such as SARS and several prescient warnings from the scientific community), the likelihood of a pandemic bringing the entire world economy to its knees seemed fanciful. Today, with nations of all sizes and ideologies anxiously working out how to repay the trillions of dollars they have had to borrow to prop up their economies over the past year, debt has once again become a four-letter word and high on the list of issues giving their leaders sleepless nights. And that almost certainly includes President Xi and his team at China’s Ministry of Finance.
According to a recent report from the Institute of International Finance (IIF), Chinese non-financial corporate debt in China rose to over 165% of GDP in the third quarter of 2020. In the same period, the IIF reports, total Chinese debt across household, government and non-financial corporate sectors came close to 290%; and although it notes that the country has the capacity to increase its exposure to belt and road countries, the institute believes that China will now place more emphasis on the sustainability of related financial flows.
A retrenchment is already well under way and a research team at Boston University recently calculated that lending by the China Development Bank and the Export-Import Bank of China collapsed from a peak of $75bn in 2016 to just $4bn last year. Worse is to come, if a separate report published this month by the French insurance-credit group Euler Hermes turns out to be accurate in its calculations that the 10 African and Latin American countries that have benefited from strong Chinese engagement since 2010 – Argentina, Brazil, Ecuador, Angola, Egypt, Ethiopia, Ghana, Kenya, South Africa and Zambia – will face an external financing gap of $47 billion by 2025 as a result of China’s gradual disengagement from financing.
The years that have elapsed since Xi first unleashed BRI on a largely compliant world have not been been an outstanding PR success for China. Those siren voices warning of soft power and other ulterior motives that struggled to get themselves heard back in 2014 have become ever more vocal, amid proliferating allegations of malpractice. On the back of claims that Chinese and local companies colluded with each other to inflate power project costs by billions of dollars, Pakistan for one is now seeking to renegotiate repayment terms, while several big-ticket projects in Malaysia are currently also bogged down in controversy. Elsewhere, popular disaffection with Chinese domestic policy is also beginning to impact on BRI’s future. In 2019, for instance, mass protests against the construction of Chinese factories swept through Kazakhstan, driven by anger over the Chinese government’s treatment of Uighurs in Xinjiang Province just as much as by concern over costs.
Geopolitics has come more into play too. China’s biggest regional rival India has tried to convince other Asian countries that the BRI and the String of Pearls strategies are part of Beijing’s plan to dominate Asia, and that China is deliberately creating unsustainable debt burdens for its Indian Ocean neighbours in order to seize control of regional choke points. (For its part, India has been providing its neighbours with some development assistance of its own, particularly in Afghanistan where it has spent $3 billion on infrastructure projects.)
Global concerns over climate change are a much bigger consideration today than they were back in 2014 as well, and could have a significant impact on the nature of the BRI projects choses to fund in the future. This April, 260 environmental organisations wrote to China’s finance minister asking to withdraw its support for 60 Chinese-backed oversea projects that were now suffering from Covid-19’s economic fallout, or at least reject demands for debt relief. The list ranged from coal-fired power plants in Turkey to palm oil plantations in Cameroon.
Given that the $183bn that China’s two major development banks extended in energy finance loans to BRI countries between 2013 and 2018 was largely destined for oil, coal and hydropower projects compared to just under $5bn for solar and wind development, the growing pressure on Xi to shift away from funding polluting infrastructure is fast emerging as one of the greatest obstacles to an initiative that has come to be regarded as one of his signature foreign policy programmes. The upside is the potentially massive potential demand from BRI countries for investment in green-energy infrastructure.
Then there is the fall-out COVID-19 pandemic, where Xi is on a mission to transform China’s role from villain to hero. While the jury may still be out as to the true genesis of the virus, there is no disguising the fact that it first took hold big time in Wuhan before spreading around the globe with such disruption and devastation.
Cynics would say that China has been in damage limitation mode ever since and in October when it hit the headlines – this time for the right reasons – for the right reasons with it signed on to COVAX, a UN-led program aiming to promote equitable access to COVID-19 vaccines for developing countries. Separately, it has also promised to provide $1 billion in loans to help Latin American and Caribbean countries purchase vaccines and to distribute free vaccines across Africa and Southeast Asia.
In some cases, this has been in return for aid in carrying out safety trials, but for others, promises of vaccine doses have been connected with pressures to agree to specific foreign policy objectives. Some things, it seems never change; but Xi may soon have to decided if all these challenges are just a series of troublesome speed bumps or call for a change of direction.