BRI in the post-Covid world

Earlier this month, a piece by Bee Chun Boo, Martin David and Ben Simpfendorfer discussed the challenges that the post-Covid world is likely to bring for China’s Belt and Road Initiative. They argued that “the reduced flow of Chinese capital and the economic fallout for the country’s financially challenged SME sector may bring about a less enthusiastic attitude towards the BRI over the next 12 to 24 months as China’s priorities shift to delivering results at home rather than abroad.”

They believe that “Central Asia, sub-Saharan Africa and Eastern Europe will accordingly see a short-term dip in BRI related activity, relative to Southeast Asia.” Despite this, the outlook from isn’t “bleak.” One could in the future see projects focused on healthcare systems, soft processes and in the digital domain.

What the above underscores is the breadth of BRI. Any question regarding BRI’s sustainability in the post-Covid world requires to take into account that the initiative is more than the sum of its parts. In other words, often BRI is viewed from the limited perspective of Chinese infrastructure or construction projects in third countries. However, doing so is misunderstands the scope of the initiative.

BRI is all encompassing from a Chinese foreign policy perspective. Officially, BRI has five major priorities: policy coordination, infrastructure connectivity, trade and investment, financial integration, and people-to-people connectivity. These are important nodes that must be kept in mind. Some of the lesser-reported or softer MoUs and agreements tend to create the ground for or actually start to structurally bind countries to the Chinese economy. For instance, the development of telecoms systems by Chinese firms, the increasing penetration of Chinese financial products like Union Pay, media partnerships, educational partnerships, joint environmental preservation projects, etc. Expect these nodes of cooperation to continue and even intensify in the post-Covid world.

Moreover, Chinese foreign trade is increasingly diversifying, with BRI countries becoming important partners. In 2019, trade with BRI countries totalled 9.27 trillion yuan ($1.34 trillion) in 2019, outpacing China’s aggregate trade growth by 7.4 percentage points. Expect BRI partners to grow all the more important for Chinese foreign trade in the event of new barriers being erected by developed economies.

On the other hand, yes there’s going to be a challenge with regard to BRI project execution and financing going forward. With regard to execution, the challenge is fairly straightforward. Countries around the world are at different stages in terms of dealing with the pandemic. This will delay work resumption. It’s also important to note that a significant number of BRI projects are located in low-income countries, with weak healthcare infrastructure. Thus, the risk of delays and even instability in states remains high.

Moreover, even if there are instances where project work resumes fairly quickly, expect stops and starts, given the threat of fresh waves of infection. What makes this all the more tricky is that there’s still much that is not known about the novel coronavirus. In all likelihood, most countries, including China, will encounter a second wave come winter. All of this could make execution much more complex than earlier.

In terms of financing, there are some trends that should be noted.

First, BRI lending was already slowing before the pandemic, with debt being a concern for Beijing. This was happening for a range of structural reasons, such as enhancement of lending standards amid global pushback, Beijing’s deleveraging campaign, etc. This is what a recent IISS study argued: “Risks in China’s own financial sector, an economic slowdown or a growing dollar deficit could motivate the Chinese leadership to lend more selectively and carefully in the BRI.” So the flow of investment isn’t what it used to be in any case. Expect this caution to continue in the post-Covid world. In other words, Beijing is unlikely to become profligate again.

Second, BRI lending has largely been funnelled through Chinese policy banks – China Development Bank (CDB) and China Export-Import Bank (EXIM). These remain fairly strong. Moreover, given that BRI projects enjoy Chinese state support, one can always expect the government to capitalise these banks using the nearly $3.1 trillion in forex reserves.

Third, in terms of BRI partners facing debt distress, in March 2018 a Center for Global Development study identified 23 countries that were significantly or highly vulnerable. Eight of these, including Pakistan and Maldives were identified as particularly vulnerable. How Beijing treats these 23 will be an indicator of future policy. But given past behaviour, expect some debt renegotiation.

But in general, expect China to renegotiate debt with BRI partners. This makes for pragmatic policy for a capital rich state that is eyeing strategic inroads. Under current circumstances, such generosity will go a long way in ensuring strategic depth. Moreover, there is precedent for China to do so.

There are a number of approaches that Beijing will likely use each of these on a case-by-case basis.

  1. Most analysis of Chinese behaviour shows that when it comes to smaller zero-interest loans, Beijing is far more amenable to simply writing off the amounts. So in cases where debt distressed countries have zero-interest loans that are reaching maturity on their books, China can resort to just writing them off.
  2. On renegotiation, a recent Rhodium Group study argues that as much as 16% of China’s overseas lending has been subject to renegotiation in the recent past. BRI loans tend to have a 5-6 year grace period, and payouts are expected to begin in the near future. But given the situation, Beijing could renegotiate some of the larger loans by extending the grace period, writing off interest for a specified period or even restructuring the terms of the deals.
  3. As part of restructuring, Beijing could seek new concessions in terms of rights to own, operate or extract resources. Already reports inform of Zambian officials negotiating the handover of copper-mining assets to Chinese lenders. This, however, would have to be carefully calibrated, given the potential sharpening of Sino-US rivalry and the threat of repeating the Hambantota-like PR disaster.
  4. Finally, another approach that Beijing could use and perhaps will choose to do so in certain cases is to look to secure co-financing for projects. This allows for renegotiation and risk spreading, while also providing opportunities for balancing amid deeper frictions with the US.

Finally, one key point to keep in mind is what’s made in the Rhodium Group study linked above. “Playing saviour is cheap.” China can spend less in the post-Covid world, but still have a significant political impact.