Chinese Perspectives on BRI Challenges and Retrenchment
The Belt and Road Initiative (BRI) is frequently described in Washington as a harbinger for a new Chinese-led economic order. Numerous politicians and Beltway experts have expressed growing worry about China’s accumulation of geopolitical influence via the BRI and so-called debt-trap diplomacy. This has led to widespread calls for the US to create, fund, and maintain a large-scale viable alternative to the BRI. These calls, however, are often based on the erroneous assumption that the BRI is a sustainable initiative through which China can continue to reap strategic gains. In reality, the BRI is in marked decline, and faces increasing prospects of retrenchment in the context of scarce investment returns, substandard security conditions for infrastructure projects, and the lingering economic effects of COVID-19. A sizable number of Chinese academics and policy elites have documented the substantial challenges associated with maintaining or expanding the BRI, contrary to the official party line. In some cases, they have even called for the BRI to be scaled back. A thorough understanding of the constraints hindering the BRI, in addition to the initiative’s dismal future prospects, enables American policymakers to more accurately gauge the threat the BRI poses and respond proportionally.
Scarce Investment Returns, Inadequate Financing, and Declining Investment Trends:
First, Chinese scholars, officials, and policy elites have noted that scarce returns on investments via the BRI and an overextension of Chinese investment more broadly present substantial challenges to the sustainability of the initiative. Huang Yiping (黄益平), an influential Professor of Economics at Peking University, has noted that inadequate investment returns have been a long-standing issue for Beijing. Huang has written, for example, about how development in China’s western regions has traditionally been challenging due to state authorities neglecting returns on investment. [1] A 2021 report published by China’s National Institution for Finance and Development (NIFD) stated that when it comes to investment in infrastructure construction abroad, especially for “projects with low investment returns,” it is difficult to transform external benefits to the host country into “economic and social benefits” for China. The report stated that the “very long time period for investment returns poses significant challenges to the support capacity of China’s foreign exchange reserves” thus increasing uncertainty about whether “investment along the BRI can continue to be supported.” The report also stated that there is a “lack of evidence” to support the notion that there are “non-economic” investment returns on infrastructure in “so-called ‘strategic gains,’” and emphasized that even if there were, it would be difficult for them to be translated into “real economic returns” in a short time. Zhou Jianjun (周建军) of the State-Owned Assets Supervision and Administration Commission (SASAC) Research Center of the State Council and Zhang Youyi (张友谊), of the Development Research Center of the State Council, wrote in 2021 that “under the framework of the BRI, investment in and returns from relevant countries and regions are not balanced.” They asserted that “enterprises themselves must increase attention towards market principles when making decisions, clearly account for and calculate both investment and earnings,” and improve capabilities in risk-management to ensure that “foreign investment will be more sustainable.” Zhao Kejin (赵可金), an Associate Professor at the Institute of International Studies at Tsinghua University, stated in 2020 that “the biggest challenge” to the BRI “is that investments in projects are not profitable or self-circulating.” Zhao also noted a dilemma in securing investment returns, stating that “if we directly collect the debt, the project will die; if we forgive the debt, the cost is too high.” He noted that China has adopted a temporary solution in providing debt relief for certain periods of time, but that the existence of the dilemma demonstrates that “the difficulties confronting projects” are still “very large.” Chinese academics and journalists have raised this point previously. Chen Shaofeng (陈绍锋), an Associate Professor at Peking University’s School of International Studies, wrote in 2016 that the “mainstream view tends to believe that ‘China has over-extended itself with regards to capital investment.’” An editorial published by China’s leading financial magazine Caixin had publicly asked in 2015 whether the BRI will become “the overseas version of wasted four trillion dollar stimulus.”
Inadequate investment returns have caused broad reluctance among Chinese investors to commit funds to BRI projects. Zhang Ming (张明), the Deputy Director of the Institute of Finance at the Chinese Academy of Social Sciences (CASS), and Associate Professor Ge Tian (葛天) of Tongji University’s School of Politics and International Relations, wrote in 2021 that “due to low returns and high risks in infrastructure investment, private sector investors and investment via public-private partnerships (PPPs) are relatively difficult, increasing the risk of imbalance” given that investment from the Chinese government is disproportionately high vis-a-vis other sources of investment. Li Xiaojia (李小加), the former CEO of the Hong Kong stock exchange, noted in 2018 that “when construction of BRI projects is completed, nobody pays us back.” Li said that the BRI cannot be “the Marshall Plan '' and that there must be more emphasis on ensuring returns. Zhou Kunping (周昆平), Chief Researcher at China’s Bank of Communications, wrote back in 2017 that limited contributions from private capital had resulted in the government becoming the main investor in BRI projects. He stated that in the context of low returns on investment and a lack of “guarantees” for project security, existing efforts by the government to promote PPPs are insufficient in consolidating interest among private entities to fund BRI projects. Peter Cai, the former Director of Australia-China Relations at the Lowy Institute, conducted a private interview with the chief investment officer of a large Chinese state-owned financial institution which revealed that financiers prefer to invest in developed countries where safer returns can be accrued. The executive stated that when “ordered” to invest in BRI countries that they “will only allocate the minimum amount.” By 2017, Chinese bankers had already started complaining to Beijing about being compelled to finance BRI projects with limited prospects for returns. They pressed Beijing to designate their loans as “policy-instructed” so they would not be held accountable for defaults.
Chinese scholars and policy elites have also noted challenges with inadequate and unsustainable financing of BRI projects. Jia Weiqi (魏琪嘉), the Director of the Forecasting Department at China’s State Information Center, wrote in 2016 that financing is an “important bottleneck” in BRI construction. Jia noted that ADB assessments have indicated that total demand for infrastructure funding in the Asia-Pacific is at least USD $800 billion, and that investment levels cannot be sustained by “relying solely on the China Development Bank, AIIB, and Silk Road Fund.” A report published by the Capital Market Institute of the Shanghai Stock Exchange noted similar short gaps. Yin Yong (殷勇), the former Deputy Governor of the People’s Bank of China (PBOC), stated that between 2016 and 2020 “basic demand for investment” in the Asia-Pacific region was USD $503 billion, but that China was only able to supply USD $196 billion. Zhang Ming wrote that confronting such a large funding gap, China is unable to “sing a one-man show,” and emphasized that other countries must increase their funding of infrastructure ventures. Wang Yiming (王一鸣), deputy head of the Development Research Center of the State Council, discussed in 2018 how there is a funding gap of the BRI amounting to USD $500 billion a year.
Some Chinese scholars have gone as far to say that structural reform is direly needed to resolve issues related to poor investment returns and inadequate financing. Lu Gang (陆钢), the Director of the Institute of International Studies at East China Normal University, wrote in 2019 that it is necessary to re-confirm the “boundaries and scope” of the BRI. He wrote that the “BRI’s original goal was to ensure the security” of the region to China’s west and expand China’s strategic space in Eurasia. Afterwards however, the initiative started expanding to include “Central Asia, Southeast Asia, South Asia, Western Asia, Central Asia, Russia, Central Europe, Eastern Europe, Northern Africa, Eastern Africa” and has also “pulled in Latin American countries,” thus constituting expansion into the entire globe. Lu wrote that “such unlimited worldwide investment is unbearable for China’s current strength” and that “therefore, the border and core areas of the BRI must be re-defined.”
For contextual purposes, it is worth noting why Chinese elites are pessimistic about investment returns from BRI projects and inadequate financing. The sovereign debt of 27 BRI-member countries have been labeled as “junk” by three prominent credit rating agencies, while 14 member-countries have not been given ratings at all. A periodical published by the PRC Ministry of Commerce has noted that most BRI countries have weak credit profiles, and that 62 percent of BRI countries are considered “below investment grade” by ratings agencies. 60 percent of China’s overseas loans are currently held by countries in financial distress, an increase of 55 percent since 2010. Asian Development Bank (ADB) assessments show that in Pakistan, a top recipient of Chinese overseas development funding, Chinese losses have amounted to USD $8.2 billion alone as Islamabad struggles with problems related to debt. Pakistan is not an exception. Internal estimates by the Chinese government have shown that Beijing is expected to lose 80 percent of its investment value in South Asia, 50 percent in Southeast Asia, and 30 percent in Central Asia. [2] Li Ruogu (李若谷), the ex-head of China’s Export-Import Bank, stated in 2018 that many countries along the BRI are already “heavily in debt” and do not have sufficient funds to finance projects in which they are involved. He added that BRI “countries’ liability and debt ratios had reached 35 and 126 percent respectively, far above the globally recognized warning lines of 20 and 100 percent, and that “it would be a tremendous task to raise funds for these countries’ development.” A 2019 Bank of China report also stated that “the bottleneck” of the BRI is that the governments of countries along the BRI have “constrained financial capacity” to make large infrastructure investments. The report stated that a quarter of the countries along the BRI have reached dangerously high levels of debt, presenting increasing “medium to long term risks” that have become an “important factor restricting the advancement of the BRI.” Chinese lenders have already taken some action to impose more stringent loan terms to ensure adequate returns on investment, although these efforts have seen challenges. In Thailand for example, Chinese negotiators demanded a 2.5 percent return on a loan to build railway infrastructure. Bangkok, which would not pay more than 2 percent, decided to finance the project itself after negotiations broke down.
Poor investment returns, especially in the context of broader challenges in the Chinese economy, may have played a role in declining Chinese investment and financing trends overseas. In 2016, overseas Chinese investment saw 49.3 percent year-on-year growth, compared to 23 percent in 2017, 13.6 percent in 2018, and just 0.1 percent in 2019. Between 2019 and 2020, in the context of the COVID-19 pandemic, the value of Chinese investments in BRI countries fell 54 percent to its lowest point since the initiative’s launch in 2013. These trends are corroborated by Chinese sources as well. According to data published by Fudan University, total financing and investment in BRI projects in the first six months of 2020 fell by 40 percent when compared to the same period in 2019. Data has also shown that the China Development Bank and Export-Import Bank of China have decreased lending for BRI projects from USD $75 billion in 2016 to a measly USD $4 billion in 2019.
Declining trends in investment and financing are true across all regions. Lending by state-owned policy banks to countries in Latin America and the Pacific dropped in both 2018 and 2019, while Chinese lending to Africa dropped to pre-2012 levels in 2017. Between 2017 and 2020, Chinese bank financing of BRI projects in Africa decreased from USD $11 billion to USD $3.3 billion. In Southeast Asia, over 270 BRI projects constituting 32 percent of regional project value have been halted because of financial or logistical issues. Chen Zhiwu (陈志武), a Professor of Finance at Hong Kong University, stated that “retrenchment in Chinese banks’ overseas lending is part of a bigger picture of China cutting back on outbound investments and focusing more resources domestically.” He added that in “domestic Chinese media, the frequency of [BRI] topics occurring has come down a lot in the last few years, partly to downplay China’s overseas expansion ambitions” and that he expects such “retrenchment to continue.” In September 2018, Xi Jinping himself hinted at the necessity of tightening the reins over the BRI when he told a gathering of African leaders that Chinese investment must not be “spent on vanity projects, but in places where they count the most.” Across the board, Chinese investment has slowed significantly, reflective of either Beijing’s declining capacity to sustain existing BRI investment outflows or a growing unwillingness to do so.
Substandard Security Conditions and COVID-19:
Chinese scholars, officials, and policy elites have noted substantial challenges to the BRI in the substandard security conditions facing many infrastructure projects. Zhang Ming has written that BRI regions are “not only a hotspot of geopolitical conflicts, but also a focal region where major political forces compete in the world. This means that China’s foreign direct investment through the BRI will face great challenges in terms of investment security.” He noted security issues such as regime change in host countries and questioned sources of compensation in case projects are damaged during armed conflict. Major General Wang Weixing (王衛星), the director of the Foreign Military Studies Department at the Academy of Military Sciences (AMS), wrote in 2015 that “the BRI route passes through many geopolitically fragile areas, with complex historical issues, intense ethnic and religious disputes, and frequent armed conflict.” [3] The increasing prominence of such risks have motivated calls from Chinese scholars to implement an overseas insurance system for infrastructure projects abroad. Guo Chaoxian (郭朝先), a researcher at the Institute of Industrial Economics at CASS, wrote in 2020 that countries along the BRI often have to deal with threats to stability such as lack of “rule of law,” potential for armed conflict, and religious extremist forces. He wrote that as a result, it is necessary to improve overseas insurance programs for BRI projects given that they are insufficiently robust.
Chinese concerns about security conditions exist across all regions. Experts from the Center for Contemporary International Relations (CICIR) have observed that escalating conflict between Pakistan and India over Kashmir threatens the viability of BRI projects in the China-Pakistan Economic Corridor (CPEC) and the Bangladesh, China, India and Myanmar (BCIM) Economic Corridor. [4] Hu Zhiyong (胡志勇), a researcher at the Institute of International Studies at the Shanghai Academy of Social Sciences, has written that China “cannot ignore” risks such as low returns on investment and uncertainty about investment security in its investments via BRI in regions such as South Asia. Tian Wenlin (田文林), a CICIR research professor, has written that the Middle East is currently seeing its “most turbulent period since the end of the Cold War” and documented increasingly acute challenges in the Middle East that threaten infrastructure development such as rising tensions between Iran and Saudi Arabia. [5] Hu Bo (胡波), Director of the Center for Maritime Studies of Peking University, has written how continued refugee outflows from Syria “endanger eastern Europe, southern Europe, and even western European countries’ governments and social stability” thus further complicating BRI projects. [6] Senior Colonel Li Daguang (李大光) of China’s National Defense University has observed that investment in Southeast Asia constitutes “a very unstable strategic direction,” given territorial disputes in the South China Sea. [7] Numerous Chinese scholars such as Ding Chun (丁纯) and Huang Renwei (黄仁伟), the Vice President and Vice-Dean of the Fudan Institute of Belt and Road and Global Governance respectively, have discussed how Russia’s invasion of Ukraine will increase challenges to the BRI. Wang Yiwei (王义桅), Director of the Institute of International Affairs at Renmin University, has written how “triple risks” have motivated calls to “upgrade” the BRI. One of the risks Wang noted is “spatial risk.” Wang wrote that “the 65 countries along the BRI are very close to countries encompassing the ‘arc of instability’ (不稳定之弧),” and that they are vulnerable to “natural diasters, military conflicts, in addition to terrorist attacks.”
The advent of the COVID-19 pandemic has further jeopardized the sustainability of BRI projects. Fu Mengzi (傅梦孜), the Vice-President of CICIR, has written that the “deterioration in the economic environment will cause China to confront higher economic costs and operating pressures” citing problems related to the pandemic and associated issues in supply chains, supply shocks, and logistics. Xu Yifan (徐以汎), the Director of the Institute of Industry and Investment at the Fudan Institute of Belt and Road and Global Governance, and Liu Jianlin (刘建林), an Associate Professor at the Institute, wrote that in the international realm China is “facing shocks and an obvious rise in uncertainty that has created many new changes.” They noted how “territorial conflict” has impacted international logistics channels and trade, and how COVID-19 has contributed to supply-chain issues. These new changes constitute the need for “new thinking” and improvements in various areas of the BRI. The PRC Ministry of Foreign Affairs (MFA) has publicly admitted that 20 percent of BRI projects have been “seriously impacted” by the pandemic, while the Director-General of the International Economic Affairs Department at the MFA has stated that 30 to 40 percent of BRI projects have been “somewhat affected.” Other assessments, such as by Cheng Xiaohe (成晓河), an Associate Professor at Renmin University’s School of International Relations, have asserted that “more than 60 percent of BRI projects have been impacted by the pandemic” and that such an estimate was still “conservative.” He suggested that China should take the opportunity to “give up” and “cut down on unnecessary projects” while continuing to advance only “good ones.”
Conclusion:
As calls ramp up for the United States to more aggressively counter the BRI, it should be kept in mind that the initiative faces several challenges and is already in a state of marked decline. Chinese elites have already started discussions on major structural changes to the BRI- a tacit admission that the initiative in its existing form has not been a success story. Chinese officials, for example, are currently discussing the Belt and Road Initiative 2.0, a scaled-back version of the BRI that entails more rigorous criteria when evaluating new funding for BRI projects. Such discussions, in addition to the problems with the BRI identified by various Chinese scholars, researchers at state-affiliated think-tanks, and current and former officials, demonstrate some doubts in Beijing about aspects of Xi Jinping’s signature foreign policy initiative.
Policy elites, given political constraints, are unlikely to openly call for the retrenchment of the BRI given the potential for incurring personal risk. Problems with securing investment returns, inadequate financing, poor security conditions for projects, and the economic effects of COVID-19 however, may ultimately compel such retrenchment. Some of the sources cited in this article date back to 2015, demonstrating that these are long-standing concerns that have become harder to ignore. Taking into account Beijing’s increasingly acute economic slowdown and other long-term constraints in demography, natural resources, and a more threatening external environment, the prospects for a success in the BRI look even dimmer. Unless the BRI undergoes drastic reform, the US may not need to do much to counter the BRI- the initiative is imploding by itself. It is worth noting that the same problems confronting China throughout the BRI are not specific to Beijing. Should the US choose to create an alternative to the BRI that funds infrastructure investment in high-risk, low-return environments, it may very well encounter the same challenges that have caused China immense trouble.
References
Huang Yiping (黄益平), “一带一路战略下的对外投资新格局，读懂一带一路，国家智库顶级学者前瞻中国新丝路 (“New Overseas Investment Landscape against the Backdrop of One Belt and One Road Strategy)”, in Leading Scholars from National Think Tanks and Their Insights on China’s New Silk Road] (Beijing: CITIC Press, 2015), 138, 285 from Peter Cai, "Understanding China’s Belt And Road Initiative," Lowy Institute, March 22, 2017 at https://www.lowyinstitute.org/publications/understanding-belt-and-road-initiative.
Beckley, Michael. "Economic Trends." In Unrivaled: Why America Will Remain the World's Sole Superpower. Cornell University Press, 2018. 46.
Wang Weixing (王衛星) “‘One Belt, One Road’ Under Global Vision: Risks and Challenges [全球视野 下的’一带一路’: 风险与挑战],” Frontiers [学术前沿], no. 5 (2015), 10 from Joel Wuthnow, "Chinese Perspectives On The Belt And Road Initiative: Strategic Rationales, Risks, And Implications." China Strategic Perspectives. (Washington D.C: Institute for National Strategic Studies, 2017), 15.
Fu Mengzi (傅梦孜) and Lou Chunhao (楼春豪), “Some Thoughts on Building the 21st Century Maritime Silk Road [关于21世纪‘海上丝绸之路’建设的若干思考],’” Contemporary International Relations [现代国 际关系], no. 3 (2015) from Joel Wuthnow, "Chinese Perspectives On The Belt And Road Initiative: Strategic Rationales, Risks, And Implications," 15.
Tian Wenlin (田文林), “‘One Belt, One Road,’ and China’s Middle East Strategy [‘一带一路’ 与中国的 中东战略],” West Asia and Africa [西亚非洲], no. 2 (2016), 137 from Joel Wuthnow, "Chinese Perspectives On The Belt And Road Initiative: Strategic Rationales, Risks, And Implications," 15.
Hu Bo (胡波), “Three Major Maritime Security Issues Pose a Test for ‘One Belt, One Road [三大海 上安全问题考验’一代一路’],’” in Assessment of China’s Peripheral Security Situation 2016 [中国周边安 全形势评估2016], ed. Zhang Jie (Beijing: Social Sciences Academic Press, 2016), 193 15 from Joel Wuthnow, "Chinese Perspectives On The Belt And Road Initiative: Strategic Rationales, Risks, And Implications," 14.
Li Daguang (李大光) “Military Diplomacy Under the Strategic Idea of ‘One Belt, One Road [‘一带一 路’ 战略构想下的军事外交],’” Defense Industry Conversion in China [中国军转民], no. 11 (2015), 74 from Joel Wuthnow, "Chinese Perspectives On The Belt And Road Initiative: Strategic Rationales, Risks, And Implications," 15.
Daniel Fu is an Analyst at the Center for Advanced China Research (CACR). He has previously worked at the German Marshall Fund (GMF), BowerGroupAsia, American Enterprise Institute (AEI), and Project2049 Institute. His research interests are in international relations theory, East Asian security and Chinese foreign policy. Daniel received his M.A. in Political Science from Columbia University and is a graduate of Boston College.
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