End of the Road for the Belt and Road?

In late July, the Chinese Communist Party’s Politburo held a meeting to outline China’s economic priorities for the rest of 2020 – an even more pressing task than usual, given the economic wreckage left by the COVID-19 pandemic. But perhaps more interesting than what the Politburo discussed was what it left out: The Belt and Road Initiative.

The Belt and Road Initiative (BRI) was inaugurated by President Xi Jinping in 2013 and has become a cornerstone of China’s economic and foreign policy since then, even making it into the CCP’s constitution in 2017. At a meeting with the stated purpose of “analyzing and researching the current economic trends and economic work,” then, the BRI’s rhetorical absence was telling. As the Financial Times’ Tom Hancock noted on Twitter, it was the first Politburo meeting not to mention the Belt and Road since the project was unveiled seven years ago.

Around the same time, a report by the American Enterprise Institute (AEI), which runs the China Global Investment Tracker (CGIT), found that China had invested just $23.45 billion in Belt in Road countries from January through July 2020. That’s a steep drop-off from the over $106 billion invested in all of 2019.

Another metric, Caixin Media’s One Belt One Road (OBOR) Index, similarly shows the BRI in free-fall amid the pandemic. The index measures cooperation between China and BRI member countries, with any number over 100 denoting growth and anything under 100 decline. In April 2019, the OBOR Index was at a robust 110.8; a year later, it had plummeted to just 59.1, the lowest figure since the index launched in 2016.

Of course, COVID-19 goes a long way toward explaining the BRI’s dimmed prospects. Countries around the world are turning inward amid the economic crisis that has followed from lockdowns. Wang Xiaolong, director general of the Chinese Foreign Ministry’s International Economic Affairs Department, reported at a news briefing in June that 20 percent of BRI projects have been “seriously affected” by the pandemic, with 30-40 percent “somewhat affected” and 40 percent seeing little impact.

But even before the pandemic took hold, there were already signs that the BRI was in decline. According to the Caixin OBOR Index, a noticeable drop began in November 2019 – months before COVID-19 was declared a global pandemic. The index has BRI cooperation entering a contraction in November 2019, and continuing to decline ever since.

The AEI’s CGIT has the drop-off beginning even earlier. An AEI report from January 2020 found that “Chinese investment and construction around the world contracted in 2019.” In fact, according to the CGIT, Chinese investment along the BRI peaked in 2015, at $127.47 billion. Caixin’s OBOR Index – which was not active in 2015 – puts the peak in bilateral interactions in July 2016, with ups-and-downs since but overall a downward trend.

Curiously, the BRI has been growing in one metric: the number of participating countries. The Chinese government’s official website for the BRI (www.yidaiyilu.gov.cn) lists 138 countries (not counting China itself) as participants as of August 2020. That’s up from just 65 in May 2017, when the first Belt and Road Forum was held in Beijing. But while the number of countries signing on has ballooned, the benefits China is offering – in terms of investment dollars – are dwindling. That translates to markedly less return for each individual participant.

What changed?

For one thing, as many commentators have pointed out, China’s foreign exchange reserves declined, slowing down BRI investment. China’s forex reserves peaked at around $4 trillion in 2014, and have now stabilized at roughly $3 trillion. While that’s still a hefty sum, it means 25 percent less money to throw around overseas.

Alongside the foreign exchange reserves decline, though, is a deeper problem: China’s overall economic slowdown. With a slowing economy, China’s government has expressed concern about fiscal health. The COVID-19 pandemic only exacerbated that trend. Chinese Premier Li Keqiang, in his 2020 Government Work Report, warned that “Government at all levels must truly tighten its belt.” He specified that the central government would commit “to negative growth in its budgetary spending, with a more than 50 percent cut to outlays on non-essential and non-obligatory items.”

That does not bode well for the BRI. As Yufan Huang and Deborah Brautigam noted in a recent analysis for The Diplomat, 94 percent of China’s lending to low-income countries (which make up a sizable chunk of BRI members) comes from Chinese official lenders, i.e. governmental financing institutions and development banks. With harder times ahead and calls for “belt tightening,” those official sources of funding are likely to dry up even more quickly.

And that’s without mentioning the debt crisis COVID-19 has sparked in the developing world. Most of China’s BRI projects involve loans taken out by host countries – often low-income countries – to build infrastructure, which is notoriously unprofitable. The pandemic and the resulting solvency crisis drove home the unsustainability of China’s proclivity to fund mega-projects in poorer countries that might struggle to repay their loans. According to Huang and Brautigam’s analysis, low-income countries owed China $104 billion as of 2018; now many of those same countries are seeking debt relief at a time when the Chinese government is worried about its own fiscal health.

What does this all mean for the BRI? To be clear, the project is not going to disappear anytime soon. That would be politically disastrous, especially coming so soon after the CCP’s charter was updated to include support for Xi’s pet project. But the BRI is changing, and may soon be unrecognizable from its 2015-16 heyday. The era of the mega-project is coming to an end, in favor of smaller projects that (presumably) are more profitable and sustainable. Notably, these projects are meant to be funded by private companies, as the Chinese government looks to outsource the bankrolling of the BRI.

AEI pointed to this change as a caveat in its report on the BRI’s decline in 2019. The report noted that the CGIT only counts investments worth $100 million or more, so smaller deals are being left out. The decine in BRI investment, as AEI put it, was thus “concentrated in large, headline-winning deals.” With more smaller deals in 2019, AEI admitted that the total decline in BRI investment might not have been as great as the CGIT data indicate.

Again, this shift toward smaller BRI projects, supported by private capital, was in motion well before COVID-19. In 2017, at the first Belt and Road Forum in Beijing, Xi made headlines by announcing over $110 billion for various Chinese government funds supporting BRI projects. At the next Belt and Road Forum in 2019, Xi instead highlighted that $64 billion in deals had been signed. The transition was underway from eye-popping government spending to business deals made by Chinese companies (albeit including state-owned enterprises)

On a similar note, Li’s 2019 Government Work Report emphasized the need for “joint pursuit” of the BRI, including with third parties – a diplomatic way of suggesting that China was no longer keen to fund 100 percent of every BRI project. Li also pledged that, in building the BRI, Beijing would “observe market principles” and “see that enterprises are the main actors” – in other words, no more white elephant projects that make little economic sense.

In the 2020 Government Work Report, Li made these points even more clearly, promising that China would “uphold market principles” and “give full scope to enterprises as the main actors” in developing the BRI. He also emphasized “the healthy development of outbound investment.”

China has branded this new phase of the BRI as a “focus on quality.” It’s in part a response to criticisms (from the United States, most notably) that China’s BRI projects don’t meet international standards, either for quality or for financial sustainability. But the shift is also a necessary adjustment to keep the BRI sustainable for China itself in changing economic circumstances.

The BRI becoming leaner and more market-driven, with more participation from private firms, is not a bad thing. Indeed, a true pivot toward quality over quantity would address many of the concerns other countries have expressed about the project. The problem, however, is that to date, mega-infrastructure projects have defined the Belt and Road in the public imagination. If those are phased out, what exactly is the BRI? That’s the question China will have to answer to keep its signature foreign policy relevant.