assessments

Apr 26, 2019 | 05:45 GMT

9 mins read

China Changes Gears on the Belt and Road Initiative

Chinese Foreign Minister Wang Yi speaks during the opening session of the Belt and Road Forum on Legal Cooperation at the Diaoyutai State Guesthouse in Beijing on July 2, 2018.
(GREG BAKER/AFP/Getty Images)
Highlights
  • Mounting concerns over Beijing's Belt and Road Initiative will not deter China from doubling down on its overseas infrastructure expansion, as the country seeks to expand its export market amid an economic slowdown.
  • Beijing, however, will seek to allay the concerns of participating countries by renegotiating costs and attracting third-party investors.
  • The developing world could also gain more options in terms of infrastructure projects as China's major competitors, including the United States and the European Union, also plan similar initiatives. 

Nearly six years since its inception, the Belt and Road Initiative, the sprawling Chinese program to connect Eurasia by land and sea, has generated enthusiasm and alarm in equal measure. The initiative's focus on infrastructure development, as well as Chinese financing options that are more enticing than those offered by many international institutions, has provided cash-strapped countries with their only effective means to improve infrastructure. From landlocked Ethiopia and Laos, to the ports of Piraeus in Greece and Doraleh in Djibouti, China has constructed and financed railways, ports and other facilities, brightening the prospects of local economies. These undertakings are just a few of the multitude of projects in the BRI, which China is bankrolling with $70 billion in investments and $400 billion in loans.

The Big Picture

China's Belt and Road Initiative entered its sixth year with a lot of momentum, but the project is also generating growing resistance and skepticism about the country's debt financing and its strategic intent. China's ability to react to these challenges — which include rival initiatives from major global competitors — will determine the fate of the project in the coming years.

On the flip side of the coin, however, the BRI has triggered local pushback, resulting in setbacks for some projects and sparking resistance from rival nations. The sheer size of many BRI plans has generated growing concern over financial sustainability, commercial viability, so-called "debt traps" and the large number of Chinese workers descending upon host countries to build some projects. This combination of anticipation and alarm will form the backdrop of the second Belt and Road summit currently underway in Beijing. Beijing will tout this year's attendance — at least 37 countries had planned to send representatives, up from 29 in 2017 — plus a broader geographic reach, as well as a longer list of signatories, including Italy, as proof of the initiative's progress. The concerns, anxieties and objections to the BRI, however, have spurred China's competitors to draft their own infrastructure initiatives in a bid to prevent more countries in Eurasia from falling under Beijing's sway. Ultimately, the degree that China manages to respond to the concerns, adjust its approach and adapt to greater international competition to fund infrastructure projects will determine the success of the initiative for years to come.

Sweetening the Pot

According to the RWR Advisory Group, at least 234 BRI projects had encountered problems by 2018 as a result of public protests, shifting political sensitivities, differences over financing and other issues. Malaysia, Pakistan and Myanmar, for instance, have sought to reduce the costs of their cooperation with Beijing, while others, such as Nepal, have canceled select projects. China's opaque approach in dealing with these projects, meanwhile, has also engendered skepticism about the potential for local corruption. 

Elsewhere, Chinese companies have been accused of corruption and collusion with local politicians in Equatorial Guinea, Malaysia and Bangladesh in connection with large projects, while political players in Sri Lanka, the Maldives and Zambia have questioned a number of aspects of the BRI. Farther afield, China's approach and its overt interest in the European periphery, India's neighbors, the former Soviet sphere and even the South Pacific have paralleled its geopolitical strategy, fueling concerns and anxieties among regional powers like the United States, European Union, India, Australia and (albeit to a lesser degree) Japan and Russia. Such concerns have prompted these powers to launch similar economic and infrastructure initiatives to compete with the BRI. Beijing's competition to build infrastructure is fiercest when it comes to Washington, which has worked to directly counter the East Asian giant by dangling the prospect of $60 billion in funding to countries in the Indo-Pacific region.

These difficulties, however, have done little to deter Beijing from intensifying its commitment to the initiative, which continues to be a domestic and foreign policy priority. China is also striving to line up more countries, especially in the developed world, to participate. For China, beyond the well-documented goal of improving the country's overland and maritime links with the rest of the world, the initiative is even more important in the current strategic context.

Because its domestic economy is slowing at a time when its top export destination — the United States — is also straining, Belt and Road has become one of China's few means of cultivating export markets, as well as absorbing surplus labor and industrial capacities. Indeed, thanks to the initiative and Beijing's support, China's state-owned cement and steel producers have widened their footprint in Central Asia, Latin America and Southeast Asia, while Chinese-produced cement, steel and aluminum have flooded into countries that are building large infrastructure projects. Ultimately, with Washington striving to counter Beijing anywhere and everywhere, China understandably sees the initiative as a diplomatic and strategic buffer that helps compensate for its geopolitical limitations

This map show trade flows in 2018 from China to countries participating in the Belt and Road Initiative

Pushing Back Against the Pushback

With these interests and concerns in mind, Beijing has quietly modified its approach to ease resistance. Over the past six months, the Chinese government has sat down with host countries to discuss project costs and financing terms. In negotiations on key BRI projects with Malaysia, China offered a 10 percent reduction on the $20 billion East Coast Rail Link; likewise with Myanmar, it substantially downsized the cost of the deepwater port of Kyaukpyu from $7.3 billion to $1.3 billion. Beijing's gesture has opened the door for discussions on other projects, as partners like Ethiopia, the Maldives and Pakistan are lining up to renegotiate the terms of their deals.

Beijing has also instructed its firms to take steps to boost oversight of their overseas investment activities, particularly in regard to risk assessments, environmental appraisals and respect for local sensitivities.

Beijing has quietly modified its approach to the Belt and Road Initiative to ease resistance.

Meanwhile, the Chinese government appears to have become more open to external investments and financing for the initiative. When Pakistan invited Saudi Arabia to join the $62 billion China-Pakistan Economic Corridor (CPEC), Beijing expressed some initial displeasure before welcoming the development. Riyadh's participation (Abu Dhabi has now joined the CPEC as well) will likely open the door to more third-party investments from countries that have amicable ties with Beijing.

China, however, is also trying to court its rivals in an effort to remove obstacles and smooth resistance to its initiative. As part of China's recent detente with Japan, the two countries have discussed joint projects along the BRI, possibly in Southeast Asia or Europe. China, meanwhile, has approached core European powers including Germany to discuss the possibility of joint projects in Eastern and Central Europe, where both Berlin and Brussels believe Beijing's activities threaten the bloc's unity. Naturally, however, China faces a risk in opening up the project to third-party countries: a loss of control over financing. To date, state-backed Chinese companies and financiers are estimated to have provided over 80 percent of the funding for the BRI.

Beijing's openness to third-party investments reflects its growing acknowledgement that domestic funding alone cannot satiate the demand and would even threaten its own companies and banks if they assume all financial risk on their own. Indeed, with domestic state-owned enterprises and banks already burdened by large debts, serious debt defaults on BRI projects would hurt Chinese companies as much as it would hurt the host countries. 

Still, despite China's move to cooperate with Japan and the European Union, lingering distrust and underlying competition have limited any concrete progress on joint projects. Ultimately, Beijing is likely to remain extremely cautious about external investment and financing given that its tight control over investments and funding has been a boon for its exports, labor force and ability to access precious commodities. As a result, Beijing will find itself unwilling to cede too much ground — especially at a time when its economy is under stress and it wishes to expand its geopolitical footprint.

Getting in on the Action

The upcoming summit will provide a clue as to how far Beijing is willing to push back against the local and international criticism to defend its signature initiative. Although Japan has cooperated with China somewhat on the BRI, it (along with India) have proposed an alternative to the initiative in Africa. And Australia, as Stratfor noted in a June 2018 analysis, "is pledging an extensive campaign of aid, trade and diplomacy in the South Pacific in the hopes of regaining the position it has lost to China in its traditional backyard." Elsewhere, the European Union submitted its own infrastructure and investment strategy for Asia last year, emphasizing sustainability and rules-based principles to counter China.

But the most direct opposition comes from the United States. As part of its great power rivalry with China, the United States established the International Development Finance Corporation, a mechanism that will distribute $60 billion in capital for infrastructural development. In part, the United States wishes to work with Japan and Australia, as well as the European Union and Canada, to offer alternative infrastructure investments in the Indo-Pacific to counter China's ambitions. Accordingly, Washington has begun engaging in talks with countries involved in large projects, offering consultation on risk assessment and project viability. Indeed, officials from the United States have reportedly assisted Myanmar's government to downsize the deep-water port of Kyaukpyu amid Naypyidaw's concern that its indebtedness to Beijing could compromise the port — something that Sri Lanka has already faced with the Hambantota Port as a result of Colombo's inability to repay its debt to Beijing.

A map showing China's port investments around the world.

As noted in a previous Stratfor analysis, none of these alternative proposals are likely to sideline China's enormous and well-funded infrastructure plan, as they all "lack China's capital, human resources and moral flexibility." But Beijing's willingness to adjust its approach to sustain the initiative, the increased external scrutiny on Chinese projects, as well as rival offers from China's competitors, will provide the developing world with more alternatives for partners. While Beijing has a head start in terms of the BRI, Washington has signaled its intention to muscle in on its major rival's preserve. And over time, as the two expand their competition into the realm of infrastructure, smaller countries will increasingly face a choice between the globe's major superpowers.

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview

OUR COMMITMENT

To empower members to confidently understand and navigate a continuously changing and complex global environment.

GET THE MOBILE APPGoogle Play