New era of China’s Belt and Road Initiative will see less risk and more focus

Many countries that host belt and road projects are struggling, partly because of global economic conditions but also from dubious governance
The new era of China’s initiative is likely to see a more focused portfolio, greater international cooperation on finance and repaired relationships

Winston Mok

Published: 3:30am, 13 Oct, 2022

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Some of China’s Belt and Road Initiative projects have not been doing well, and it is not all China’s or the host countries’ fault. From the Covid-19 pandemic to Russia’s invasion of Ukraine, many developing economies are struggling. Add to this the environmental disasters from climate change, such as the massive flooding in Pakistan.

Since the initiative’s inception, China has disbursed about US$1 trillion across almost 150 countries, becoming the global leader in providing financing to developing nations. However, China’s outward foreign direct investment (FDI) only ranked fourth in 2021, behind the United States, Germany and Japan.

Borrowers’ capacities to repay debts are hampered by inflation and rising interest rates in an environment of high energy and food prices. According to the International Monetary Fund, about 60 per cent of low-income countries are struggling with debt distress.

While no one could have anticipated today’s adverse global economic climate a decade ago, many countries China ventured into are not well-governed or resilient economies. Guided by a grand vision and geopolitical considerations, some of China’s projects have not been sound business based on prudent economic analyses. Some countries facing particular challenges are in Central Asia and South Asia, including Tajikistan, Kyrgyzstan, Pakistan and Sri Lanka.

China’s approach of extending the maturity of distressed loans might not be sustainable. This often just delays the inevitable rather than confronting underlying problems. The time has come for writedowns which can reveal the true performance of belt and road portfolios, providing the basis for course corrections.

China’s engagements have been most visible in energy and transport. However, transport has been more in the form of construction projects rather than investment. As a sign of greater prudence, China’s belt and road construction contracts are getting substantially smaller.

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China-Laos railway set to open in latest advance for Beijing’s Belt and Road Initiative

Resources such as energy and metal have dominated China’s investments, in line with its national development needs. This year, the Middle East displaced Central Asia as a top destination for belt and road engagement.

Perhaps isolated by the West’s technology restrictions, China has increased its engagement projects in the tech sector, including in digital infrastructure. In the context of all this, what might the Belt and Road Initiative 2.0 look like?

First, China is likely to prune its portfolio of risky investments and contracts in countries of dubious governance. Second, China might change its bilateral approach and seek broader international cooperation in financing belt and road projects. Importantly, it is likely to redouble its strategic priorities in securing energy and other resources important to its national development.

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While railways might still be important, China will focus on a few of the most strategic ones, such as the new connection to Europe and the pan-Asia railway network, which has been fraught with challenges. A high growth area will be technology investments in non-Western countries.

Finally, the globalisation of the digital yuan, including the petroyuan, will have significant long-term strategic implications for China. After a decade of experimentation, the initiative’s mixed results are hardly surprising. Some of its destinations represent some of the most challenging investment environments. Some of these countries received little inward FDI before the initiative, and for good reason.

Workers at a booth promoting the digital version of the Chinese yuan in Beijing on September 2. The globalisation of the digital yuan will have significant long-term strategic implications for China. Photo: AP

China’s strategy can be understood as a frontier FDI programme, albeit not exclusively so. The more frontier the destinations, the riskier the outcomes. For example, some countries with belt and road projects are ranked below 100 in the World Justice Project’s Rule for Law Index. They include Russia (101), Philippines (102), Bangladesh (124), Myanmar (128), Pakistan (130), Egypt (136), the Democratic Republic of the Congo (137) and Cambodia (138).

It is fine that China does not attempt to interfere with the domestic affairs of host countries, but the inescapable reality remains that institutions shape economic performance in fundamental ways.

China itself is ranked low in the Rule of Law Index at 98th, but mainly because of low scores for constraints on government power, open government and fundamental rights. China is ranked respectably in order and security (36) and absence of corruption (55), as well as moderately for criminal justice (69) and civil justice (74).

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China could achieve better outcomes if it prioritises investments in destinations with higher rankings in the Rule of Law Index. These include Chile (32), Italy (34), Poland (36), the United Arab Emirates (37), Rwanda (42), South Africa (52), Malaysia (54), Kazakhstan (66) and Indonesia (68).

Other than China – including Hong Kong – and Singapore, the top recipients of FDI tend to be North American and European countries with strong economies and sound institutions. This is the culmination of countless decisions made in corporate boardrooms.

State-owned enterprises have been the key actors for China’s belt and road strategy. Chinese private companies’ increasingly important roles could represent a potential redemptive turn for the initiative. Instead of the state leading, Beijing could switch its focus to facilitating private sector participation.

A public screen displays stock figures in Shanghai on October 10. State-owned enterprises have been the key actors for China’s belt and road strategy. Beijing could switch its focus to facilitating private sector participation. Photo: Bloomberg

China’s new-look initiative must be seen in the broader context of its global FDI portfolio. Its cumulative FDI stock overseas is only about 30 per cent of that of the US, even with Hong Kong included.

Its FDI portfolio should be anchored in the most successful economies in North America, Europe and East Asia. China faces formidable geopolitical headwinds of negative perception in developed countries as it pursues this.

Leaving aside the US, repairing relationships with Western and northeast Asian economies is not just a political challenge but an important economic one. Next month’s Group of 20 summit in Indonesia would be a good place to start.

Winston Mok, a private investor, was previously a private equity investor