China’s Belt and Road objectives are shifting
When the history of China’s Belt and Road Initiative (BRI) is written, it’s unclear how much there will be to say that is positive.
After spending more than US$1 trillion to build a network of infrastructure projects across emerging-market countries designed to connect large portions of the global economy to Beijing, cracks are beginning to form. Funding is drying up, existing projects are falling apart, and receiving countries are drowning in debt.
This is leading some nations to rebel openly against Chinese influence in their back yards. Given the softening global economic outlook, it’s time to ask some hard questions about the future of the BRI and how China might pivot its foreign-policy efforts in the near future to cover over BRI’s endemic challenges.
From its origin, the BRI was a vehicle for extending Chinese influence across emerging markets, from Asia to South America. In the mid-2010s, when the BRI gained real momentum, the collective economic narrative was one of irrational hope for emerging markets.
From the World Economic Forum to the pages of the financial press, emerging markets were heralded as the next great economic miracle. Greater connectivity through smartphones and aviation links gave hope that a new middle class would arise from Kenya to Kazakhstan. Buoyed by fast urbanization and even faster birth rates, this middle class would propel the global economy to new heights.
As the world superpower closest to these population centers, China moved quickly to insert itself into these changing economic tides. Beijing was eager to connect these new hives of economic activity to the Chinese economy through the deployment of infrastructure programs, cheap loans, and technology partnerships.
TikTok, the viral Chinese social-media application that has taken the world by storm, has arguably been an arm of this expansion.
The BRI was the “project of the century,” in the words of Chinese President Xi Jinping, that would reshape the global order with China at the center.
This was all possible in an era of cheap money spurred by low interest rates and blockbuster Chinese economic growth, but the picture is gloomier now. The Chinese economy is struggling to regain its huge growth rates in the face of a global economic downturn and continued restrictions from the Covid-19 pandemic.
Complicating matters is anger from several countries over the quality of their BRI projects. The Wall Street Journal recently reported on several BRI projects from Ecuador to Zambia that have experienced severe construction flaws.
Ecuador’s $2.7 billion Coca Codo Sinclair hydroelectric project is a prime example. Thousands of cracks have emerged in the Chinese-built plant that could knock the entire thing offline. As it is one of the largest sources of power in Ecuador, fixing the plant could drive the country deeper into debt.
The breakdowns in BRI projects is adding fuel to claims that China has engaged in predatory lending practices (known as debt-trap diplomacy) that have contributed to debt crises in places like Sri Lanka. Other critics have said that the breakdowns confirm that China moved too aggressively in building projects that were often mismatched for a country’s existing infrastructure or excessively damaged the environment.
Last year, the Chinese government quietly made some changes to the structure of the BRI. Dubbed Belt and Road 2.0 in internal discussions, Chinese policy markets agreed to evaluate new projects more rigorously and allow for debt renegotiations, which was a red line previously.
The changes will likely continue if the global economy enters a prolonged recession and projects fail. Economists Sebastian Horn, Carmen Reinhart and Christoph Trebesch were quoted in the Wall Street Journal as saying that countries in financial distress hold nearly 60% of China’s overseas loans. This is compared with just 5% in 2010.
De-dollarizing oil trade
As the BRI continues to buckle, China’s top leaders are refocusing their foreign-policy goals with a new push in the Middle East. One of China’s long-term foreign-policy objectives is breaking up the dollar-denominated oil trade so that oil is bought and sold in other currencies. To that end, Chinese companies have invested handsomely in oil-producing countries. China even made a bid to take a significant stake in Saudi Aramco.
The Chinese president recently traveled to the Arab Gulf region and held the first China-Arab Summit in Saudi Arabia, in which Beijing pledged deeper economic cooperation across various sectors. The real focus was on oil and guarantees for more Chinese imports of Middle Eastern crude.
The BRI is too large to disappear overnight but it’s going to have to change rapidly. As the cheerleaders of emerging-market economies quiet down, China is quietly recasting its foreign objectives away from poorly built projects in debt-laden countries toward areas that promise real return.
Breaking the dollar-denominated oil trade is one such area. Expect to see Chinese leaders around the Middle East much more in the coming years.