China’s BRI Hurdles Prompt an Investment Shift

Since its launch in 2013, China’s Belt and Road Initiative has attracted equal measures of suspicion and admiration. Some commentators compare BRI to xieyi, a traditional Chinese painting style that uses broad brush-strokes to capture emotion rather than minute details. As Jonathan Hillman in his book The Emperor’s New Road writes, “When viewed up close, the BRI begins to lose focus.”

Beijing also seems to have come to this realization, albeit rather late, after splashing billions of cash into mega-sized overseas construction projects.

In its 14th Five-Year Plan (FYP) for 2021 to 2025, the Chinese Ministry of Commerce (MOFCOM) has put a brake on fast overseas expansion. During the period, it plans for China to invest $550 billion (including spending in non-BRI countries), down 25 percent from the $740 billion spent over the 2016-2020 period. In addition, Chinese contracting volume is planned to decrease from $800 billion in the previous FYP to $700 billion in this FYP.

Indeed, it might be BRI’s moment of reckoning. Despite some success after eight years of implementation, BRI stands at crossroads. Some participating countries are having a second look at some high-profile BRI projects, and there are concerns that the risks may outweigh the benefits.

A recent report by AidData, capturing 13,427 Chinese projects across 165 countries over an 18-year period, found that 35 percent of BRI infrastructure project portfolio has encountered major implementation problems. Some of the leading factors include corruption scandals, labor violations, environmental hazards and public protests. Interestingly, the researchers noticed that infrastructure projects outside of BRI encountered fewer implementation problems.

Notably, concerns around debt sustainability is leading low and middle- income countries to mothball BRI projects. Specifically, large projects within the transport sector (shipping, road and rail) have attracted the most backlash. As they are considerably pricier and more conspicuous, these projects are the backbone of critics’ arguments about China’s “debt-trap diplomacy.”

As an example, in 2018 Malaysia was forced to suspend Phase 1 of the China Exim Bank-financed East Coast Rail Link project because of concerns of overpricing and corruption. The railway connects Port Klang to populous Peninsular Malaysia. The project was reinstated in 2019 after Malaysia renegotiated the terms of the project with China Communications Construction Company (CCCC), the state-owned infrastructure contractor that spearheads many BRI initiatives.

The greatest BRI retreat has been felt in Europe as countries in the region come under EU and U.S. pressure. The shift has been prompted by national security concerns amid talks of China’s aggressive geopolitical posture. Romania, Lithuania, Slovenia and Croatia have taken broad measures to suspend public tenders involving Chinese companies. At the beginning of 2021, Croatia cancelled a $3 billion agreement to commission Rijeka Port to a consortium of three Chinese contractors.

With the US- backed B3W (Building Back Better World) and EU’s “Global Gateway” strategies now functional, will the BRI deal size shrink in future?

While it may be early to tell, it appears some competition is unfolding in the field of development finance.

Nigeria announced last July that it was turning to Standard Chartered Bank to fund $3.02 billion for the ongoing Port Harcourt-Maiduguri railway project. This resulted after lending delays from China’s Exim Bank.

“We are actually waiting for the Chinese to give us loan we applied for and they kept delaying us. Will we wait for them forever? The answer is no,” said Rotimi Amaechi, Nigeria’s Transport Minister.

Ecuador has also sealed an agreement with the US International Development Finance Corporation (DFC), a Belt and Road rival, which will see the US refinance up to $3.5 billion in Chinese debt.

In a recent BRI investment report for 2021 by Dr. Christoph Nedopil, director at Green Finance and Development Center opines that there is likely to be a significant shift in BRI portfolio going forward.

“For 2022, we see better opportunities in investing in smaller projects that are faster to implement (for example, solar and wind farms) and an opportunity to scale back large and often-loss making projects (coal),” Nedopil said.

Following the launch of Guidelines for Greening Overseas Investment and Cooperation, issued in 2020 by the Chinese government, Dr. Nedopil estimates that BRI’s green finance and investments have slightly increased to a new high in 2021 at $6.3 billion (compared to $6.2 billion in 2020).