The effect of COVID-19 on the Chinese Belt and Road Initiative

The Chinese led Belt and Road Initiative is now seven years old. The policy is one of the main features of modern Chinese foreign policy and the country is expected to invest over 1 trillion USD for infrastructure projects in over 70 countries. The policy is controversial, particularly in the West, for alleged ‘debt trap’ diplomacy, where a country lends to another to increase leverage and potentially extract economic or political concessions. Contrastingly, however, the policy has also been found to be beneficial to host countries. Nonetheless, the initiative has never faced a challenge such as the COVID-19 pandemic, which brings serious future economic implications. Reduced demand for infrastructure projects and increasing potential of debt defaults may hamper the initiative. Furthermore, the pandemic has increased environmental awareness globally and heightened distrust of certain Chinese organisations and activities.

The IMF had already predicted that 2020 would be a slow year for economic growth owing to factors such as the US-China trade war and Brexit. Now with COVID-19, many countries are facing recessions. With large monetary and fiscal stimulus packages being rolled out across the world, the Foreign Policy Research Institute (FPRI), an American geopolitical think tank, estimates a dampening of long-term demand and investment in infrastructure projects due to high levels of debt. One example of this could be in Malaysia, where the Belt and Road is helping build the East Coast Rail Link. Malaysia’s debt-to-GDP ratio is forecast to increase from 72% in 2019 to 77% in 2020, which could result in less demand for large scale projects due to budget constraints. The FPRI suggests solutions, which include China reducing import barriers or finding alternative trade routes. Moreover they highlight that attitudes to investment are changing and that the days of riskless ‘win-win’ investments are gone, meaning that more prudence is needed.

Another issue arising from COVID-19 is the potential for defaults on loans. This is particularly true in Sub-Saharan Africa. With increased public spending and reduced export revenue, many countries in the region are facing the chance of default. Robert Besseling, director at EXX Africa, a specialist intelligence company, suggested that the Republic of Congo, Zambia and Chad were the most likely to default soon. Kenya is also vulnerable to risky debt, owing 21.9% of its external debt to China. Kenya has also received large investments in projects such as its standard gauge railway (SGR) connecting Mombasa to Nairobi, the biggest investment in Kenya since its independence according to Euromoney. One response to this could be debt restructuring or forgiveness. However, mass cancellations of debt may damage the reputation and credibility of the whole initiative. The FPRI also argues that China has shown no willingness in the past to accept losses on investment, even for countries that have close political ties to them.

Chinese attitudes to debt are complicated. Steve Hanke, a professor of applied economics at Johns Hopkins University, suggests China wants to avoid further negative public relations with regard to the Belt and Road Initiative and it wishes to preserve strategically important relationships. According to the Africa Report, China has gone ‘over and above what was promised under the G20’s Debt Service Suspension Initiative (DSSI)’ in terms of debt relief for Angola. However, Chinese creditors are also trying to make Zambia pay arrears, a condition of pursuing debt talks, despite the country saying they are preparing for default. This highlights the difficult, contradictory nature of the Belt and Road, with some countries receiving different treatment based on their strategic importance to China.

The Belt and Road’s environmental effect is another concern. With countries from Sub-Saharan Africa to the US proposing ‘Green New Deals’, demand for large, polluting infrastructure projects may diminish. The Centre for Strategic and International Studies (CSIS) has argued that China uses the Belt and Road to export its environmental destruction globally and that despite recent pledges for new green initiatives it is simply ‘greenwashing’ to appeal to environmentalists. Along with increasing suspicion of Chinese cyber projects, such as Huawei and 5G, this change in attitude may shift demand elsewhere or force the Belt and Road to emphasise green investments and transparency.

2020 has been an unprecedented year for China and its Belt and Road Initiative. COVID-19 has frozen supply lines across the world and changed attitudes to investing. Depending on how China handles issues such as debt forgiveness and green investing it could also prove a pivotal year for the future development of Xi Jinping’s cornerstone foreign policy initiative.

 

By Gregor MacDonald

Sector Head: Jared Gibson

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