Is China’s Belt And Road Already In Retreat?
Seven years and hundreds of billions of dollars of investment later, China's global infrastructure spending spree is shifting into a lower gear.
2017 BLOOMBERG FINANCE LP
When I first began traveling the corridors of China’s Belt and Road Initiative (BRI) in the spring of 2015, there was an almost ubiquitous sentiment of hope and excitement across the network. I would be paraded out to look at massive nascent logistics and industrial zones, new cities and fledgling financial districts by project managers convinced that they were building “the next Dubai.” Most of that time what I was looking at were just empty fields or barren expanses of reclaimed land, airports without flights or ports without ships, but I was almost invariably told how this would all change very soon. Today, nearly five years later, I have to admit that many of these claims were wishful thinking.
When China’s BRI was first announced in 2013, it was generally viewed as a much-needed new avenue of investment that could help fill Asia and Africa’s ever-growing infrastructure gap as well as provide a new avenue of growth for the stagnating economies of Europe. China stepped up in the global arena and earmarked billions of dollars for infrastructure and technological development, and then began rapidly deploying this money to dozens of major projects all over the world.
The BRI was easily absorbed by the international community then, as it appeared to be moving in the same direction as other similar initiatives, such as Kazakhstan’s Nurly Zhol infrastructure revitalization plan, India and Russia’s North-South Transport Corridor, the EU’s TRACECA Corridor, and, later on, India and Japan’s Asia-Africa Growth Corridor. It seemed as if the entire Eurasian and African regions of the globe were on the same page, investing billions of dollars into infrastructure development and ushering in the next phase of globalization. But in 2020, not even a decade since the initiative was announced, China’s Belt and Road is already showing signs of retreat.
“Six years and many billions of dollars later, it is still a blurred vision in need of a comprehensive and coherent implementation strategy,” said Plamen Tonchev of Greece’s Institute of International Economic Relations before giving the BRI’s progress up to here a letter grade: “D, at best.”
To be sure, there has been some success along the Belt and Road. Legions of Chinese factories have moved into countries like Vietnam, Cambodia and Indonesia, which Bruno Maçães, the author of Belt and Road: A Chinese World Order, described as an “economic earthquake” which shows that phase-I infrastructure building can lead to phase-II industry within the context of the BRI. Greece’s struggling Piraeus Port was taken over by China Ocean Shipping Company (COSCO) in 2016, and transformed it into the second-largest port in the Mediterranean. Development of an entirely new 30-plus line freight train network between China and Europe has given birth to a new transport option between expensive air and slow sea, and has sparked the rise of logistics and industrial zones in western China, Kazakhstan and Poland.
However, in this time of general economic prosperity, where nearly every emerging market seems to have dove head first into infrastructure construction and more money than ever is available for development, the Belt and Road’s successes are often marginalized by its failures.
“It's still difficult to find places where you can find huge transformation,” Maçães pointed out. “You can see the direction and the trend but … most of them so far are logistics, so they're not so visible in daily life.”
In the opening phases of China’s Belt and Road, there was a proverbial feeding frenzy of countries hungry for Chinese funding and construction know-how to turn their mega-project dreams into realities. Countries like Sri Lanka, Malaysia, Pakistan, Djibouti and Cambodia all jumped in with two feet, welcoming China—and their billions—with open arms. But what happened? Many of the early projects failed, were localized, or have gone stale, sitting idle somewhere between white elephant and construction site. Multiple government administrations in BRI countries were unexpectedly voted out of power by opposition parties critical of their China dealings, as billions of dollars worth of half-finished BRI projects were sent back to the drawing board.
“I think we still haven’t really discovered how many white elephants are roaming along the Belt and Road from those earlier years,” said Jonathan Hillman of Washington, D.C.’s Center for Strategic and International Studies, “and we might not until there’s an economic downturn.”
In 2020, the BRI seems to be downshifting. According to Chinese government data, China’s overseas investment growth is in decline, peaking at 49.3% year-on-year growth in 2016 and then retracting by 23% in 2017 and another 13.6% in 2018. In the first half of 2019, Chinese FDI rose a mere 0.1%. Moody’s, the international credit rating agency, predicts that this downward trend will continue over the coming years due to an “increased awareness” of the risks that both partner countries and China itself takes when engaging in such large-scale development in risky, unproven markets.
“It’s possible that we’ve seen ‘peak’ Belt and Road,” Hillman explained. “The early years were all about expansion—in sheer numbers of projects, geography and functionally. Project activity has now slowed down, likely due to both internal and external pressures. Chinese foreign exchanges reserves are down, and Chinese officials may have become somewhat more concerned about risk levels.”
These concerns about risk have been backed up with action. In early 2019, Pakistan cancelled a $2 billion BRI coal plant and then vowed to cut back the loans that they’ve taken out from China for new rail lines by another $2 billion. Myanmar dramatically scaled down their Chinese-backed Kyauk Pyu deep-water port project from $7.3 billion to $1.3 billion due to fears of excessive debt. Sierra Leone outright cancelled a $400 million airport project that they started with a Chinese firm. The $10 billion Sino-Oman Industrial City is little more than a fence around 11 square kilometers of parched and barren desert. Even with 49% Chinese ownership, Khorgos Gateway, once the up-and-coming central station of the Silk Road Economic Belt, is still an under-performing dry port in the middle of a 550-hectare empty field that is supposed to pass as a special economic zone. Even the sprawling China to Europe rail network, a miracle of international cooperation, hasn’t been able to obtain financial viability, relying on Chinese government subsidies, which Beijing says they are going to start cutting.
The problem, in many cases, is a lack of long-term funding. In 2018, the deputy head of the Development Research Center of China’s State Council even admitted as much, saying that the BRI’s funding gap is in the ballpark of a half-trillion dollars per year. In 2018, the former president of China’s Export-Import Bank stated bluntly that most Belt and Road countries don’t have enough money to fund their projects or repay their debt.
“Recipient countries are viewing projects with greater scrutiny [as far as] debt sustainability, environmental impacts, and overall economic viability,” Hillman said. “Both sides are learning, in other words. This smaller pipeline of projects could be a good thing for all involved—if it forces greater attention and prioritization.”
We also must look at how much money China really has to continue funding extremely expensive infrastructure projects in other countries. With many BRI nations no longer thirsty for Chinese loans—the main source of Belt and Road funding to date—the time is near when China is going to have to start putting up genuine FDI if their continent-spanning geo-economic empire is going to keep moving forward. But where this money is going to come from is the question. The U.S.-China trade war took a massive toll on China’s domestic economy and the impact of coronavirus is as yet untold—although it’s predicted that it’s going to be significant. China has also entered the typical doldrums of an upper-middle-income economy—the new normal of 6% GDP growth will turn into a new normal of 5% will turn into a new normal of ... (you get the idea).
However, while we can look at the failed and stagnant projects, the debt traps, the financial implosions, the fiascos, the environmental destruction and the wasted resources that have defined the early years of the Belt and Road, we must keep in mind that all of this can ultimately be seen as lessons. When China first leapt onto the global stage as a development partner, it did so on its own terms and, in many ways, it made its own rules. That did not work out so well. But the recent retraction of overseas investments and projects may be demonstrative of a change in strategy and a move towards caution at a time when the world is becoming far more economically volatile than when Xi Jinping stepped onto that stage in Kazakhstan and began talking about belts and roads for the first time.