A checkered story of the Belt and Road Initiative - Xi Jinping announces reorientation

In what might be his most important speech on the Belt and Road Initiative (BRI), President Xi Jinping at the third BRI symposium held in Beijing on 19th November 2021 emphasized the increasingly complex international environment faced by his signature overseas program hailed as a centerpiece of China’s foreign policy. In addition, his emphasis on projects having a direct bearing on improving people’s wellbeing represented a shift away from previous big-ticket or even white elephant projects like ports, rail lines and hydraulic projects.

Despite his insistence on pressing ahead with the high-quality (a term meant to replace high-speed) development of BRI, the latest remarks represented a significant climbdown from its once sky-high ambitions, which could be traced back to the year 2013 when the initiative was unveiled.

There are several reasons or factors illustrating the cooling of the BRI.

The first has to do with increasing pushback and criticism against projects along the new silk road, ranging from accusations of a so-called debt trap to difficulties for foreign companies to participate and finally to high emissions of greenhouse gases. In 2018, for example, the newly re-elected Malaysian Prime Minister Mahathir Mohamad at the end of his visit in Beijing announced a halt of two major BRI projects, worth more than $22 billion, citing high price tags and doubting their viability and necessity for the country. The same year, the south Asian island of Sri Lanka handed over its Hambantota port to China on a lease contract for 99 years after the country could not repay its loans from Chinese Export-Import Bank (Exim), a frequently quoted case by some Western countries that the BRI was both predatory and unsustainable in its nature.

But the environmental pressure has been mounting on China. According to the Institute of International Finance, 85 percent of BRI projects involved high emissions of greenhouse gases and included at least 63 coal-fired power plants. In the wake of the recent dialogue between US climate envoy John Kerry and his Chinese counterpart Xie Zhenhua in Tianjin in early September, Xi Jinping announced that China will stop building overseas coal-fired power projects at the UN General Assembly on September 21st 2021.

The second reason for China’s pullback is the geopolitical tensions and conflicts in the countries along the Belt and Road. The bulk of the formally 140 BRI countries according to Chinese sources are emerging or frontier economies, and therefore fiscally, commercially, socially, and environmentally fragile countries. There is a spate of media coverage of kidnapped and even killed Chinese nationals in the past years. On July 17th, three Chinese nationals working for the COVEC construction company were abducted by unknown gunmen in Mali. In Pakistan, one of the biggest recipients of BRI funding and projects, a bus blast also in July killed 13 people, including nine Chinese workers. As a result, President Xi in his November 19 remarks emphasized the importance of putting in place an “all-weather” warning system in overseas projects.

On top of such costs from casualties, many BRI countries have a relatively weak governance structure, making elite capture a salient problem. Corruption allegations and the lack of transparency have been hard on the heels of the initiative since its inception. According to Jonathan Hillman of CSIS, “in many of the 80-plus countries that the BRI aims to connect, corruption is endemic. Among participating economies, the median credit rating is junk, so alternative lenders stay away. Chinese construction companies benefit because - backed by state financing and often state ownership - they are willing to take risks that others will not.”

Also, Beijing has been accused of buying its way into peddling influence and gaining political leverage by funneling money to its friends in privileged positions in some BRI countries. Those accusations have gathered steam over the past years. So, it comes as no surprise that Xi’s speech highlighted the necessity and urgency of tightening the screw on cross-border corruption and strengthening enforcements of a set of foreign corruption laws. According to Xi, Chinese companies and citizens have to conform to local laws and customs, disciplining themselves and cleaning up their act. “Each time you are found crossing the line, we will hunt you down.”

Finally, the structural slowdown in the Chinese economy has the hands of Chinese construction companies and financial institutions tied and set back China’s BRI ambitions.

The year 2018 saw the first light of BRI slowing. Chinese companies signed Belt and Road contracts worth nearly $125.8 billion in the whole year, according to China’s Ministry of Commerce (MOFCOM), a 12.8% decrease over the same period. This is the first time the statistics recorded a decline since the MOFCOM published BRI data from the year 2015.

The domestic credit crunch and the greater call for diversification of funding were among the factors in starting to clip the wings of the BRI. Further, Vice Premier Liu He raised concerns in early 2018 about heavy lending by Chinese banks, not just for the BRI. The clampdown on domestic and overseas lending put a big dent on new BRI contracts.

In addition, there has been an advocacy for diversifying the sources of BRI funding given its astronomic price tags. The second BRI summit in Spring 2019 reflected a rethinking on BRI financing. The communiqué called for the greater involvement of international financial institutions, multilateral development banks, and private capital. These propositions were echoed by prominent financial figures like former Central Bank Governor Zhou Xiaochuan.

The roaring back of the BRI in 2019 in the wake of the second BRI summit notwithstanding, the Covid-19 pandemic eventually sapped the momentum and made Chinese leaders think twice before going all-in again.

Given the brake on BRI, its next phase will place a premium on so-called “soft connectivity”, aimed at keeping standards and rules aligned with each other. In other words, it can be expected to see fewer vanity projects such as dams, ports, and rail lines, among others in the pipeline of BRI. Instead, more environment-friendly and less bloated and costly types of infrastructure projects will become mainstream in what could be called the BRI 2.0.

Also, Chinese contractors and major lenders are to play a less prominent role in the years to come, while the third-party cooperation will play a much more important role instead. As a result of fine-tuned practices, we will see greater percentages of local workers and loans from lenders other than Chinese banks in projects such as telecommunications data centers, charging stations, hospitals and schools, and smart agriculture, among others.

There are several implications for different stakeholders.

For European business, the BRI 2.0 will mean even narrower but likely more substantial cooperation opportunities especially in the field of BRI insurance and financing, maybe some engineering and environmental-impact consulting, albeit all still taking place in countries with demanding risk profiles.

European policymakers should review their Eurasia-oriented connectivity policy through the lens of a BRI whose geographic priorities are poised to shift towards ASEAN countries in line with China’s trade policy agenda of driving more regional economic integration in the Asia-Pacific both for geo-economic and supply chain security reasons.

For European member states of Asia-engaged MDBs there is an opportunity to evaluate future cooperation opportunities with the BRI in countries of shared engagement as an opportunity to follow-through on China’s rhetoric of wanting to improve governance and sustainability of its infrastructure projects.