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China this month celebrates the 10th anniversary of the Belt and Road Initiative, which ranks as the world’s biggest development programme ever undertaken by a single country.
Over the last 10 years, the BRI, as it’s generally called, has seen Chinese financial institutions lending close to $1tn to finance infrastructure projects all over the developing world. With me to discuss all this is Yunnan Chen, a researcher at ODI, a global affairs think-tank.
Yunnan, could I start by asking you, in your view, generally speaking, has the BRI been a success?
So when the BRI was launched it served multiple purposes. It was seen as China’s global public good offer to the world, particularly to the developing world in providing infrastructure, finance, and providing the kind of connectivity infrastructure that could foster greater trade, growth and economic development.
But it was also a way for China’s own domestic economy to resolve its own problems, and to achieve China’s own strategic and economic interests.
Why was it helping China domestically?
So in this period following the global financial crisis, the Chinese government pumps a huge amount of capital into a domestic economic stimulus. So you see massive infrastructure construction, a huge domestic investment in heavy industries. And around 2011 you’re already seeing excess capacity and a bit of an overheated economy.
And in this period is when we also see the government trying to push companies and exporters to go out to seek more lucrative better returns in international markets. And they also inject capital into China’s policy banks and financial institutions, which enables them to provide the financing to support Chinese companies to win these contracts overseas.
Right. It’s really extraordinary, though. Over 10 years, nearly $1tn has been lent by these Chinese financial institutions. For some of the recipient developing countries has this made a really big impact?
We’ve seen huge railway projects, some mega projects as they’re called, in the form of standard gauge railways in Nigeria, Ethiopia, Kenya. High-speed railways in south-east Asia, in the case of Jakarta going through Laos. Also, several port investments as well in Kenya, in Pakistan with the China-Pakistan economic corridor.
And in a lot of these places this hard infrastructure is also tied into wider investments. A lot of which has also come from Chinese state-owned enterprises and private companies. So you see the establishment of industrial zones, which were trying to bring in greater foreign direct investment.
And so really, I mean, that seems like there’s been a lot of very positive activity. Have you seen clear impacts on the ground?
Chinese investments have brought local employment. They have increased incomes in some areas. And they also have transformed the landscape of cities across Ethiopia, across Africa, for example, in providing this kind of much needed infrastructure.
But there has also been quite a lot of controversy around the BRI.
Infrastructure, overall, is a very high risk sector. They’re very, very long-term investments. They take a very long time to really come to break-even, or to even make money. But what they do serve is a bit more of a public goods function.
That said, there have been a certain number of Chinese projects that have really struggled once constructed in making that economic rationale make sense.
What we read about now is that the Chinese government is having to bail out quite a few countries that were part of the BRI. One of the consultancies that we quoted in the Financial Times recently said that over the three years from 2019 to 2022, the Chinese government was paying out $104bn to bail out countries that had fallen down on borrowing through the BRI.
How does China feel about being, kind of, the lender of last resort to these developing countries?
I don’t think China is necessarily bailing out the recipient countries, rather than bailing out its own banks. In the end, a lot of this finance, you know, it’s lent to the borrowing country. But ultimately it goes back into paying China’s policy banks or commercial banks. And in the end it is the Chinese contractors that win the project or that benefit.
Well, that’s a very interesting point. So in a sense this money is being lent by China to prevent defaults by countries to Chinese financial institutions that have lent to the BRI.
Exactly. There’s been a, sort of, systematic issue of moral hazard with a lot of these infrastructure projects. You have borrowing countries that have wishlists of infrastructure projects that they want to construct. You have Chinese companies who want to win these contracts. And you have Chinese policy banks and financiers who want to support these companies to go out.
And so in all of this we’ve seen a period of exuberance, particularly in the early part of the 2010s, and then a bit more of a pullback, particularly after 2016. The real critical juncture is when China loses a quarter of its US dollar reserves after the 2015 stock market crisis.
And after that you really see a growing conservatism and a bit more of a pullback, and a bit more of a reassessment of the risks that the financial sector is taking overseas – and also domestically.
Going forward, do you think that the Chinese government is prepared to continue with these BRI bailouts? Are we going to see tens of billions of US dollars every year being spent by the Chinese government to bail out these BRI projects, or are we going to see something different?
Because of the way in which these banks operate, they’re also policy-oriented institutions. What that has meant is that there’s been a little bit of a kicking the can down the road approach when it comes to dealing with projects that are facing difficulties, or borrowers who are struggling to repay the loans.
Banks have, generally, been very unwilling to write down, or make any kind of concession or debt relief that requires them to take a hit on their balance sheets. And in turn, I think what we’ve seen from the central bank is… as well trying to keep these financial institutions afloat, and keeping them financially healthy.
So that they can continue to operate in the way without having to agree to significant cuts or write-downs in their portfolio. Whether that’s sustainable, I think, is to be seen.
So what do you think comes now, then? I mean, is China falling out of love with the BRI? Is China going to stop the lending to the BRI projects? Or are we already seeing, actually, a decline in the level of lending to BRI? What do you think the future holds for all of this?
The impact of Covid, I think, was really already a tail-end of a very dramatic decline in overseas official lending. And there’s clearly been a bit more of a pullback and a greater risk aversion from China’s policy banks, as well as the ability of China’s policy insurer to finance and to underwrite this overseas lending.
I don’t think this means the end of the BRI as a narrative. And certainly, with the forum this month, there is still a very top-level political commitment to what the BRI represents in terms of China’s relations, and as a platform to engage with the Global South and with developing countries.
But the rhetoric has shifted already. We’re seeing more mentions of small and beautiful projects. A greater emphasis on a green BRI that’s more sustainable and prioritises cleaner, greener forms of infrastructure investment.
So looking at it from the perspective of the developing world, as we said, China has lent almost $1tn over the last 10 years. This has been a real boon for the ambitions that those developing countries have to build crucial infrastructure.
We’ve now got climate change coming up, presenting huge problems mostly for the developing world. And we’ve got a population explosion, which is going to see continents like Africa really increase their levels of population over the next 10, 20, 30 years.
Doesn’t this come at just the wrong time for the developing world? I mean, the fact that China’s encountered so many problems in the BRI, and is now retreating a little bit.
It does raise a question of where that infrastructure finance is going to come from. And we’ve seen a response of competitive offer from the G7, and the partnership for growth and infrastructure investment from the EU, in the form of the Global Gateway.
And all of these are, again, infrastructure focused, trying to compete with the Belt and Road Initiative in a period where the BRI has already seen a bit of a decline. But China can still play a huge role for climate investment in supporting the energy transitions of developing countries through the provision of renewable technologies, for example.
China is the biggest manufacturer and producer at scale of solar panels, of wind turbines, and of renewable and clean energy technologies. And the export of that, and the provision of these at low cost to developing countries will also be crucial in their ambitions for a green energy transition and for a green development pathway.