It has not taken long for the wheels to come off the Belt and Road Initiative. As recently as May 2017, China’s leader Xi Jinping stood in Beijing before a hall of nearly 30 heads of state and delegates from over 130 countries and proclaimed “a project of the century”.
This was not hyperbole. China has promised to spend about $1tn on building infrastructure in mainly developing countries around the world — and finance almost all of this through its own financial institutions. Adjusted for inflation, this total was roughly seven times what the US spent through the Marshall Plan to rebuild Europe after the second world war, according to Jonathan Hillman, author of The Emperor’s New Road.
But according to data published this week, reality is deviating sharply from Mr Xi’s script. What was conceived as the world’s biggest development programme is unravelling into what could become China’s first overseas debt crisis. 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.”
“Historically, most infrastructure booms have gone bust,” he adds. “Whether China can avert that fate may depend on its ability to renegotiate loans with countries now in urgent need of debt relief. If China is unable or unwilling to provide sufficient relief to its borrowers, it could find itself at the centre of a debt crisis in developing markets.”
The data that describes China’s predicament comes from researchers at Boston University who maintain an independent database on China’s overseas development finance. They 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.
The context around this is crucial. The two banks fall under the direct control of China’s state council (cabinet), so they function as arms of the state. They provide the overwhelming majority of China’s overseas development lending and the funds they disburse rival in scale those of the World Bank, the world’s largest multilateral lender.
Between 2008 and 2019, the two Chinese banks lent $462bn, just short of the $467bn extended by the World Bank, according to the Boston University data. In some years, lending by the Chinese policy banks was almost equivalent to that by all six of the world’s multilateral financial institutions — which along with the World Bank include the Asian Development Bank, the Inter-American Development Bank, the European Investment Bank, the European Bank for Reconstruction and Development and the African Development Bank — put together.
In global development finance, such a sharp scaling back of lending by the Chinese banks amounts to an earthquake. If it persists, it will exacerbate an infrastructure funding gap that in Asia alone already amounts to $907bn a year, according to Asian Development Bank estimates. In Africa and Latin America — where Chinese credit has also formed a big part of infrastructure financing — the gap between what is required and what is available is also expected to yawn wider.
‘Dual circulation’
China’s retreat from overseas development finance derives from structural policy shifts, according to Chinese analysts. “China is consolidating, absorbing and digesting the investments made in the past,” says Wang Huiyao, an adviser to China’s state council and president of the Center for China and Globalisation, a think-tank.
Chen Zhiwu, a professor of finance at Hong Kong university, says the retrenchment in Chinese banks’ overseas lending is part of a bigger picture of China cutting back on outbound investments and focusing more resources domestically. It is also a response to tensions between the US and China during the presidency of Donald Trump, when Washington used criticisms of the Belt and Road as a justification to contain China, Prof Chen adds.
“In domestic Chinese media, the frequency of the [Belt and Road] topic occurring has come down a lot in the last few years, partly to downplay China’s overseas expansion ambitions,” says Prof Chen, who is also director of the Asia Global Institute think-tank. “I expect this retrenchment to continue.”
Yu Jie, senior research fellow on China at Chatham House, a UK think-tank, says Beijing’s recently-adopted “dual circulation” policy represents a step change for China’s relationship with the outside world. The policy, which was first mentioned at a meeting of the politburo in May, places greater emphasis on China’s domestic market — or internal circulation — and less on commerce with the outside world.
“Volatile Sino-US relations and more restrictive access to overseas markets for Chinese companies have prompted a fundamental rethink of growth drivers by Beijing’s top economic planners,” says Ms Yu. “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.”
All this is leading to a fundamental rethink by China towards both the Belt and Road and its overseas lending profile, analysts believe. Mr Wang says that one strand of a new approach would be to pursue more lending through multilateral bodies such as the Asian Infrastructure Investment Bank. In addition, Chinese financial institutions may co-operate more with international lending agencies, he adds.
Such a change would amount to a fundamental reorientation. The Beijing-based AIIB and another multilateral bank in which China is a stakeholder, the New Development Bank, are very different organisations from the two Chinese policy banks. They have lent out a fraction of the policy banks’ annual average and are not directed by Beijing’s policies but by a board of directors who represent the interests of stakeholder countries.
Flaws in the initiative
Overall, though, China’s rethink betrays a tacit recognition that its overseas lending bonanza has been ill-conceived. Photographs from the 2017 Belt and Road Forum for International Co-operation — the venue at which Mr Xi declared his “project of the century” ambition — hint at what would become the programme’s fatal flaw.
Alongside Mr Xi in successive portraits were the authoritarian leaders of countries with big debts and “junk” credit ratings, such as Alexander Lukashenko of Belarus, Hun Sen of Cambodia, Aleksandar Vucic of Serbia, Uhuru Kenyatta of Kenya and several others.
Debt sustainability — or the ability of debtor countries to repay their loans — had to be part of any reassessment of the Belt and Road Initiative, says Kevin Gallagher, director of the Boston University Global Development Policy Center, which compiled the data on Chinese overseas lending “This has to be the time for a rethink,” he says. “It’s been such a priority for Xi Jinping, he’s invested so much in it that he’s not going to just turn the lights off. But they need to seriously implement their own debt sustainability analysis and their own social and environmental impact tools.”
The propensity for China’s credit-fuelled engagement of diplomatic allies to come unstuck is most spectacularly portrayed by Venezuela. Between 2007 and 2013, the China Development Bank lent Venezuela nearly $40bn, cementing a relationship that Hugo Chávez, the former president of Venezuela, characterised as “a Great Wall” against US hegemonism.
Much of the lending to Venezuela was tied to oil resources, but even before Mr Chávez died in 2013 it was clear that things were going awry. Yet Beijing was in so deep that it felt compelled to keep supporting Nicolás Maduro, successor to Mr Chavez, even after evidence of his ineffectual economic management became clear.
It lent another $20bn between 2013 and 2017 and is now picking through the country’s pile of $150bn in defaulted debt, pushing its claims against rival creditors. The whole episode carries crucial lessons for Beijing, says Matt Ferchen at Merics, a Berlin-based think-tank.
“Chinese foreign policy and policy bank officials entered into their outsized economic and political relationship with [Venezuela] with a combination of hubris, ambition and naïveté,” Mr Ferchen wrote. “[This] has contributed to the region’s worst economic, humanitarian, and political crisis in decades.”
Debt renegotiations have proliferated as the pandemic has clobbered emerging economies in Africa and elsewhere. A report by Rhodium Group, a consultancy, says at least 18 processes of debt renegotiation with China have taken place in 2020 and 12 countries were still in talks with Beijing as of the end of September, covering $28bn in Chinese loans.
So far, Beijing appears keen to pursue a soft touch, deferring interest payments and rescheduling loans. But the experience is reinforcing a growing sense of wariness that now infuses Mr Xi’s big project.
China is finding out, says Mr Hillman, that “risk runs both ways along the Belt and Road and the damage can return to Beijing”.