New reports suggest that China has dramatically curtailed lending towards the Belt and Road Initiative, Xi Jinping’s flagship global infrastructure and trade program. First proposed in 2013, the BRI is a trillion-dollar investment program designed to forge economic and political links between China and countries across Eurasia, Africa, and the Pacific through the financing of infrastructure projects. The initiative has been controversial from its inception, both for its demonstration of China’s global influence and the social, environmental, and economic costs it sometimes imposes on partner nations. A new report by the Financial Times’ James Kynge and Jonathan Wheatley, based partly on data from Boston University’s Global Development Policy Center, argues that China has practically abandoned the BRI due to the financial shock of misguided investments abroad and political demands for domestic investment:
Lending by the Chinese financial institutions that drive the Belt and Road, along with bilateral support to governments, has fallen off a cliff, and Beijing finds itself mired in debt renegotiations with a host of countries.
“This is all part of China’s education as a rising power,” says Mr Hillman, a senior fellow at Washington-based think-tank CSIS. “It has taken a flawed model that appeared to work at home, building large infrastructure projects, and hubristically tried to apply that abroad.”
[…] [Researchers at Boston University] found 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.
[…] In global development finance, such a sharp scaling back of lending by the Chinese banks amounts to an earthquake.
[…] “Naturally, if state-owned enterprises decide to switch back to the domestic market in order to follow the leadership’s wishes, the budgeted financial resource for overseas investments will reduce accordingly,” [said Yu Jie, a senior research fellow on China at the U.K.’s Chatham House think-tank.] [Source]
At The Diplomat, Tristan Kenderdine and Niva Yau used Kazakhstan, where Xi first proposed the BRI, to argue that BRI lending has not stopped but rather evolved into its next stage, which will be driven by loans from China’s commercial banks instead of state-to-state deals:
Kazakhstan is a good example of why relying on this dataset as an exhaustive list of China policy loan books is fallible. The Boston University interactive lists only seven projects in Kazakhstan from 2008 to 2019, totaling $5.7 billion[…] But the list of joint projects under the latest China-Kazakhstan bilateral agreement alone is 56 projects, totaling $24.52 billion.
[…] China Development Bank, Bank of China, ICBC, and CITIC have all opened branches or subsidiaries in Kazakhstan, issuing a variety of loans to Kazakh businesses outside of the government-to-government loan scheme. These China bank operations are directly tied to China’s domestic banking superstructure and thus operate in an ambiguous space between state and market.
[…] China’s wider underlying banking system in Belt and Road economies is fundamentally policy-driven, centrally coordinated, and targeted toward developing China’s offshore production system. This is still very much policy lending, not commercial lending. As the first phase of Belt and Road completes and even retracts, expect stronger lending in the pseudo-commercial and SOE space as Belt and Road policy banking becomes more distributed to match the economic activities of China enterprises in the region. [Source]
Replying to the Financial Times report on Twitter, economists and China-watchers proposed multiple explanations for the steep drop in state-backed Chinese lending:
2/9
As I have been writing since 2011, China’s development lending was always likely to follow the pattern of other countries when they first “went out” (e.g. the US in the 1920s, USSR in the 1950s, Japan in the late 1970s). Because of little historical…
— Michael Pettis (@michaelxpettis) December 8, 2020
4/9
This combination would inevitably lead to bad lending decisions, followed just as inevitably by debt restructuring, loan losses, and a contraction in development lending. In the 1920s, for example, the US set off quite explicitly and aggressively to displace England in…
— Michael Pettis (@michaelxpettis) December 8, 2020
7/9
billion in 2015 in cash-for-oil deals.
These and all its previous Venezuelan loans were then restructured for 3 years (and restructured again 3 years later). A friend of mine working on the deal told me at the time that all Latin American lending was now coming under…
— Michael Pettis (@michaelxpettis) December 8, 2020
9/9
shock, but it was big enough to set off a re-evaluation of the whole “going out” development lending program. I think later problems in Asia and Africa mostly just reinforced the lessons learned in Venezuela.
— Michael Pettis (@michaelxpettis) December 8, 2020
That timing is consistent with the dramatic shift in policy within China toward much stricter financial regulation (which I think is more the driver than external debate). In terms of the indicators I track, outward FDI really plunged in 2017-18, the others slowed more recently. pic.twitter.com/88cVBZGajt
— Andrew Batson (@andrewbatson) December 13, 2020
just looking at the international investment position, it seems like the hard stop came in Q4 of 2017. Here's a chart with the actual dollar values for ease of interpretation: pic.twitter.com/l5IzFOnvdI
— Andrew Batson (@andrewbatson) December 13, 2020
BRI is written into the constitution. it is far from “over”
— Bill Bishop (@niubi) December 14, 2020
At the South China Morning Post, Kinling Lo explained that the coronavirus pandemic has had a significant impact on China’s BRI investment in 2020:
China’s foreign ministry said in June that about 20 per cent of all belt and road projects had been “seriously affected” by the coronavirus pandemic, with 40 per cent “adversely affected” and 30-40 per cent “somewhat affected”
The same month, Chinese Foreign Minister Wang Yi tried to play down the impact of the global health crisis, saying Beijing wanted to “see key belt and road infrastructure projects restarted as early as possible” to “help countries preserve jobs and contribute to economic stability”.
The China-Pakistan Economic Corridor, Melaka Gateway in Malaysia and Jakarta-Bandung high-speed rail project in Indonesia are among the schemes to have faced difficulties this year. [Source]
Chinese state media writes that reports of the BRI’s death are greatly exaggerated. A CGTN opinion piece claimed that “the idea that the BRI is taking a hit against its stated objectives is nothing but a distorted narrative which is at odds with ground realities.” In late November, Global Times published a glowing article on Chinese BRI projects in Bangladesh, Egypt, and Myanmar, which argued that the BRI has “played a significant role in the global anti-pandemic fight.” Meanwhile, Xi himself continues to promote the BRI, calling on December 14 for China and Somalia to “enhance bilateral cooperation” on BRI projects.
In the first three quarters this year, China's trade with BRI partners reached over $960 billion. Our direct investment in the non-financial sectors of BRI partner countries was $13 billion, registering a 30 percent year-on-year growth.
— Lijian Zhao 赵立坚 (@zlj517) November 18, 2020
Those rosy narratives are belied by some BRI partner nations’ decisions to pull back from the project. Amidst a severe downturn in bilateral relations, Australia is reconsidering its relationship with the BRI. A new law gives the foreign minister the power to withdraw from agreements penned between states and foreign governments, which observers believe will lead Australia to renege on a 2018 Belt and Road deal. In late November, Malaysia cancelled a $10.5 billion port project contract with a Malaysian contractor that had ties with Chinese developers, causing observers to question whether the port was part of the BRI. A Malaysian government official told Nikkei Asia that the contract was cancelled in part because “the developer was also seen to be awarding more contracts to Chinese companies, thus raising our doubts.” The United States also recently indicted Chinese gangster Wan Kuok-koi, better known as “Broken Tooth,” on corruption charges related to his company’s involvement in BRI projects in Malaysia and Cambodia.
