The long game

IFR IMF/World Bank 2020
12 min read

Don’t write off Xi Jinping’s Belt and Road Initiative. Although the volume of BRI projects may be down up to 30% this year, Beijing is being more forgiving of debt as the project focuses on Asia

For the past year, up to 13 million Chinese pre-teens have tuned in every day to the China International Television Corporation’s smash-hit animated television show “Legend of the Silk Road”.

The animations present the historical, geographical, cultural and social conditions of ancient China exchanging with foreign countries, explained Xue Jijun, chairman of CITC at a press conference in July last year.

But there is another agenda to the show. It is a way of subtly showing off both the benefits and historical precedents of China’s Belt and Road Initiative.

Since 2013, President Xi Jinping has put his Belt and Road Initiative at the heart of his foreign policy. What is often dubbed China’s Marshall Plan – the US$15bn aid programme to Europe after World War II – is a mixture of aid, trade and infrastructure.

Amorphous enough to cover almost anything, official definitions of the BRI can run to pages. The World Bank has an entire micro-site dedicated to explaining and defining the project, but at its simplest level, the BRI was developed primarily as a way of enhancing China’s connectivity with the world.

Not only is a definition hard to pin down, but the size of the project is also similarly elusive.

The World Bank put a figure of US$575bn on BRI projects in 2018, while according to a Refinitiv database, more than 2,600 projects at a cost of US$3.7trn were linked to the initiative in June.

But since the outbreak of the Covid-19, many have seen the coronavirus as the nail in the coffin for a project that was already slowing down.

As New York-based research group Rhodium Group noted in a white paper earlier this year: “Loans to key BRI destinations were already slowing before the Covid crisis, due to a mix of criticism from some recipient countries, financial headwinds inside China generated by deleveraging a frothy banking system, balance of payments concerns and a subsequent push by Beijing to improve lending practices.”

Loans to BRI projects have become a cause celebre with unhappiness at the rapacious terms and the behaviour of Chinese banks played out on the front pages of national newspapers.

The frequently cited example is that of Hambantota Port in Sri Lanka. Thanks to high-interest loans signed with Export-Import Bank of China which it could not pay, the Sri Lankan government was forced to sign the port away to China on a 99-year lease in 2017.

At least, that is how the story had been retold.

But claims of aggressive China’s debt diplomacy have been wildly exaggerated. Sri Lanka did not default on the loan, there is no Chinese military base there and the Sri Lankan government still owns the port. But reputational damage was suffered.


Since then, the velvet glove of Chinese financial assistance has been much more apparent. When asked about debt forgiveness at a press conference in the summer, Wang Xiaolong, director-general of the ministry’s international economic affairs department, admitted that about 40% of all Belt and Road transactions had been impacted negatively by Covid, and that up to 20% of them may require some level of assistance, either in terms of rescheduling or relief. China, he said, would actively consider that.

There is no doubt that Covid has slowed and changed BRI. Year-on-year, the decline in announced volumes is around 20%-30%, according to China’s ministry of foreign affairs. Headline projects that have been delayed include coal-fired power plant projects at Hamrawein in Egypt and Gazaria in Bangladesh, a US$10bn port project at Bagamoyo, Tanzania, and a metro project in Hanoi, Vietnam. But it would be presumptuous to write BRI’s obituary.

The mistake that many have made is to regard the Belt and Road as only a five or 10-year project. As Mukhtar Hussain, head of BRI and business corridors, Asia-Pacific at HSBC, points out, “there’s nothing short term about what China thinks and does. China views this as an initiative for the next 50 years”.

It is worth taking a step back for a moment to see how the project has evolved.

The first stage, the launch phase, was 2013 to 2018, with a lot of activity focused on big-ticket infrastructure projects. These mostly large cross-border M&A transactions came against a backdrop of benign markets with a lot of liquidity. This was also at a time when the infrastructure projects were not deemed to be particularly creditworthy and financing from Chinese state-owned entities was welcomed.

At the time, said the head of M&A at one of the international banks in Hong Kong bluntly, places like Pakistan would have struggled to get a billion dollars worth of commercial debt.

“Chinese SOEs have huge access to state lending vehicles and there’s unlimited capital available to them to do these acquisitions that fit in with the national development priorities. And private companies have huge access to cash because Chinese banks assume that they have the support of the government,” he said.

For the next two years until the Covid lockdown, China realised that if the Belt and Road project was truly to be global in its nature it needed to be far more inclusive in terms of its approach.

“You can’t have a situation where every Belt and Road transaction is being run by a state-owned enterprise,” the banker said.

It was also a time when BRI investment was truly stretching its reach. Take Eastern Europe, for example,

A report in January this year from international law firm CMS showed that China was by a long shot the top investor in Central and Eastern Europe in 2018, responsible for €6.4bn of M&A deals.

“I think the interesting aspect of the China investment into this part of the world is the political aspect, so that where it lands in terms of jurisdiction, sector and in fact, the specific assets can be very much influenced by the relations between the Chinese powers and whatever jurisdiction we’re talking about,” said Helen Rodwell, co-author of the report and partner at CMS in the Czech Republic and Slovakia.

A significant point here, as the head of the Warsaw-based CEE-China desk of another law firm explained, is that a base in Eastern Europe can often allow simpler access to the European Union for Chinese companies – important at a time of political difficulties.

Looking forward to the post-Covid world, BRI is changing once again. But make no mistake, there is still space for traditional projects.

In mid-September, for example, foreign minister Wang Yi was in Ulaanbaatar agreeing to a number of BRI projects, including the joint construction of Mongolia’s Prairie Road development initiative which puts the central Asian republic at the hub of a road, railway, oil pipelines, gas pipelines and power lines project to connect China and Russia.

But these are becoming less common. Xi himself has highlighted the shift in tone, saying that the BRI now needs to be open, green and clean. He underlined the green element, speaking via video link to the United Nations General Assembly in New York in late September, when he pledged that China would go carbon neutral by 2060.

In the next phase of Belt and Road projects, one idea that has gained ground is that they will increasingly focus on sectors, what HSBC’s Hussain calls the “needs of the hour”.

“Rather than developing another port or another power station, maybe they could spend more time and more energy focused on public health infrastructure, immunology, or on research and development,” he said.

With this shift towards sectoral work, one aspect that will become even more difficult than it already is will be to quantify the financial scope of the BRI project as a whole. It is already a challenge to get a sense of the scope of funding in, say, the bond market, as bond prospectuses rarely articulate that something is specifically BRI.

“There are very few issues which actually spell it out in the use of proceeds in the offering circular,” said David Yim, head of Greater China debt capital markets at Standard Chartered. Some Chinese financial institutions do so in general terms, but not necessarily which projects, he said.

The shift towards openness is already apparent. By this, China appears to mean more international inclusion. “If you’ve got a Chinese consortium building a power station, you might hope that, for example, Siemens might supply the turbines and Atkins might supply the consulting engineering,” is how one BRI analyst explained it.

There may be some carping around the edges of the BRI initiative but there is no getting away from the fact that it is the only game in town.

Last November, the US, Japan and Australia jointly announced the formation of a counter-initiative called the Blue Dot Network.

In a briefing earlier this year, Keith Krach, US under-secretary for economic growth, energy, and the environment, called it “an infrastructure trust standard in terms of a lot of these projects that are going on around the world”.

People still remain to be convinced and, so far, the Blue Dot has been a damp squib. Its website hosted by the US department of state is remarkably opaque on what it has actually achieved, and as one banker in Asia put it, its projects "are relatively small-scale and they still have a long way to go before they can match the scale and significance of BRI”.

But whatever the longer-term ambitions of the Belt and Road project are, certainly in the medium term it is likely to focus on its own back door. With the Sino-US trade war still ongoing and any changes after the US presidential election in November likely to take some time to filter through, it makes sense.

HSBC’s Hussain points out that while China’s trade with the US was around US$300bn last year, the country’s trade with ASEAN was around US$600bn. “This tells you that China is shifting its focus away from those historic corridors into the new corridors that sit in its own neighbourhood,” he said.

This is where it is needed and where it is wanted. Many have been swift to try to write off China’s BRI initiative but it never pays to underestimate the country.

Adrian Murdoch

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