Belt and Road is not dead, it is changing
Since the second half of 2018, China’s portrayal of its Belt and Road Initiative (BRI) has changed. The multi-billion dollar deals that characterized 2016 have gone. The defining BRI moments of 2017 – the inaugural Belt and Road Forum in Beijing and the enshrining of BRI into the CCP constitution – have not been surpassed since. China has moderated its flowery rhetoric on the Belt and Road Initiative and been more reluctant to invest large sums of money abroad. Indeed, China’s outward investment has fallen over 20% since 2016. Even though the second Belt and Road Forum will happen in April 2019, commentary around it has been surprisingly quiet.
Belt and Road is still happening, Chinese firms are still internationalizing, but at a slower pace and without the same levels of drumming from the government propaganda machine. Here are 6 key reasons why:
1) In response to increasing criticism abroad
International perspectives on the Belt and Road have become increasingly polarized through 2018. This is most evident through the United States, with Defense Secretary Mattis saying that, “in a globalized world, there are many belts and many roads”. US Secretary of State Pompeo also issued a warning to Panama and other nations in the region about the potential dangers of accepting Chinese investment. “When China comes calling, it’s not always to the good of your citizens,” Pompeo said. It’s not just the US however, 27 of 28 EU Ambassadors to China also signed a letter criticizing the BRI in 2018, in part for its lack of transparency and structuring of debt. Whether the criticism reflects realities or not, it has resulted in greater scrutiny of BRI around the world, and forced China to tread more carefully.
2) More risk-based approach to project selection
A number of BRI projects have turned sour due to problems including: resettlement (Vietnam), fears of land-grabbing (Kyrgyzstan) and debt (Maldives, Pakistan and Malaysia). Mahathir’s election in Malaysia followed by the cancellation of key BRI projects worth over $20 billion have been the most visible manifestation of these concerns.
These project reversals have not only encouraged other BRI countries to revisit the terms of their loans, but also forced a recalibration in how Chinese financiers, especially the policy banks and SOEs, think about risk overseas. Previously many Chinese companies adopted a very aggressive approach towards internationalization in order to benefit from first mover advantage, but it came at the cost of miscalculating risk. It was this systematic underpricing of risk that has led to a number of projects experiencing difficulties today.
As a result, Chinese investors are becoming more careful about how they think about risk overseas. They are now ensuring they have risk mitigation procedures in place and that they understand the local conditions on the ground (cultural, economic, political and social) before they commit to big investments. This has, inevitably, slowed down the project approval process.
3) Economic and Political distractions at home
China’s economy is slowing down – 2018 was already the slowest in over 2 decades, and 2019 may fall below 6%. Along with an unfavorable global backdrop, especially the trade war with the US, domestic economic headwinds are top of mind for policy makers. Last year alone, 2.8 million people were made redundant in China’s industrial sector, for example. This year, those economic pressures will continue to have an impact. We have already seen the Chinese leadership revert to stimulus measures in recent months to shore up the economy, this may well have to come at the expense of BRI investments abroad.
Alongside these, there will be political pressures that continue to distract attention of policy makers away from Belt and Road in 2019. These include: the 100 year anniversary of the May 4th movement, 70 years since the founding of the PRC and 30 years since the Tiananmen Square incident. The government will be vigilant for any signs of unrest, and will want to ensure public perception through 2019 is managed carefully. Given negative perceptions towards BRI in recent months (see next point), it’s unlikely they will want to accelerate BRI’s development through 2019.
4) Chinese netizens are not happy
At home, Chinese citizens have started to question the value of BRI. This was most clearly seen in netizens’ responses to the historic Forum on China-Africa Cooperation (FOCAC), which concluded with the “FOCAC Beijing Action Plan (2019-2021)” and “Beijing Declaration” being adopted. The flagship announcement was a $60 billion pledge made by President Xi Jinping to promote African infrastructure and development. The $60 billion consists of: $20 billion in credit lines, $15 billion in grants, interest-free loans and concessional loans, $10 billion fund for development financing and $5 billion to finance imports from Africa.
However, following the announcement, many Chinese netizens were frustrated by the country’s excessive investment spending abroad, noting that around 30 million Chinese citizens still face poverty. Given that managing public opinion is paramount for the Chinese leadership, it's unsurprising that the big multibillion dollar announcements have quietened down.
It’s not just values of money that people are beginning to question, but also why Chinese citizens are engaged in dangerous countries thousands of miles away. These sentiments have flared up following deaths of Chinese citizens in Pakistan, Kenya and Sudan.
5) Saturation of BRI opportunities
China has signed 123 cooperation documents on BRI development with 105 countries, and 26 similar documents with 29 international organizations. Naturally, the rate at which China can sign countries up will be slower from here on. The countries that have up to now refrained from signing up to BRI are the ones who have more structural reservations, and it will be difficult to convince them to change their minds.
Additionally, the most bankable BRI projects have already been invested in. The developing world might need infrastructure, but it does a poor job at putting together truly bankable projects. Low-hanging fruit have already been picked, and designing bankable projects is a slow and time-consuming process.
6) Capital controls
Since the start of 2017, China has put in place tightened restrictions on capital being used for investment abroad. The State Administration of Foreign Exchange (SAFE) has said it will scrutinize investments in what it has called, “irrational” sectors including real estate, sports complexes, cinemas and other areas it deems unrelated to firms’ core businesses.
The underlying themes behind China’s Belt and Road Initiative are most certainly still there. Namely, finding new markets abroad, exporting excess capacity, expanding usage of the RMB and facilitating China’s rise in the world are still key rationale for the internationalization of Chinese companies. However, while the long run direction is still intact, the short term trajectory has hit some bumps; highlighted by the more moderate portrayal of BRI in China. Belt and Road is not dead, it is changing.
Photo credit: King & Wood Mallesons