In addition to partners in the continents of Asia, Europe and Africa, countries across Oceania, the South Pacific, Latin America and the Caribbean signed up for BRI cooperation, giving the Chinese more secure access to all key geographies, markets and resources around the world. The BRI also gave China the status and material influence of a global power that had signed bilateral partnerships with 140 countries which gave their backing in hopes of attracting trade, investment, finance and technology. Beijing expected these nations to support China’s leadership in regional and global forums and institutions.
The BRI also had tangible effects on global trade. Whereas in 2001, 80 percent of countries traded more with the US than China, BRI helped engineer a shift under which by 2018 128 of 190 IMF members traded more with China than with the US. From 2013 to 2019, China’s trade with BRI partners totaled US$7.8 trillion. In 2019 this trade grew by 10.8 percent (compared with only 3.4 percent growth in its total trade) to reach US$1.34 trillion, or almost 30 percent of the total.
China’s annual direct investment in BRI countries remained above $100 billion from 2014 to 2019 before dropping to US$47 billion in 2020. Investment in non-BRI countries in this period was more volatile, well below the BRI figure every year except 2016-17, then falling to only US$17.1 billion in 2020. This suggests that the BRI has augmented and sustained Chinese investment in partner countries relative to the rest of the world.
Mounting costs and risks
But for all the progress the BRI had made, in 2019, it was clear that the risk-accumulating mega-project cooperation formula needed revision.
The success of the initial phase of offering huge loans to attract countries to the BRI and start projects was undeniably a great success. But by 2017, the mounting costs and risks of this strategy began to draw official concern. Beijing faced diminished foreign reserves, debt-distressed borrowers, a growing list of troubled projects, increasing domestic and overseas public scrutiny of opaque BRI lending, and new demands for domestic financing and financial de-risking. Authorities then throttled official overseas lending, which plummeted from US$76 billion in 2016 to only US$4 billion in 2019.
A recent study of 52 BRI economies by the Green Belt and Road Initiative Center – part of the International Institute for Green Finance of the Central University of Finance and Economics in Beijing – shows that in 2014 they held US$49 billion in official loans from China. By 2019, this figure had doubled to US$102 billion, accounting for 62 percent of what they owed to all official bilateral lenders.
These countries tended to be poor credit risks. A 2018 Organisation for Economic Co-operation and Development (OECD) report found that, of 60 BRI loan recipients, 29 were rated below investment grade and 14 had no rating at all. Only 17 were at or above the minimum investment grade rating (BBB-). And the bulk of BRI loans were pledged to the riskiest borrowers. Of the 20 top recipients of BRI loan commitments in 2019, 12 were high risk (rated six or seven on a seven-point scale). Among the top seven in this group were high risk Pakistan, Iran, Nigeria, Venezuela, and Ecuador. The other two – Russia and Indonesia – were rated at moderate risk.
There were also reputational costs and risks to consider. By 2017, the BRI “brand” was associated with commercially unviable projects and “debt trap diplomacy”. Rising awareness of environmental, social and governance, or ESG, investment compliance norms cast a spotlight on problems with sustainability and chronic issues of corruption and the misuse of loan funds. Combining these concerns with BRI’s strong element of Chinese mercantilism led to charges of neo-colonialism that reverberated through media, think-tank, and academic discourse. Beijing could ill afford this cost, which was undermining the effectiveness of its set-piece soft-power foreign policy initiative. After all, the BRI was inextricably linked to Chinese Communist Party General Secretary Xi Jinping’s signature concept of the “Chinese Dream” of the “great rejuvenation of the Chinese nation” and his rallying-cry rhetoric for a global “community of common destiny for mankind” under Beijing’s leadership.
The second phase
By the second Belt and Road Forum (BRF) in 2019, China had reacted to the negative risk-reward prospects of the initial cooperation phase by announcing a new “green and sustainable” era for the Belt and Road. Officials vowed to implement new programs and guidelines to incorporate ESG sustainability standards in heavy infrastructure projects.
Less noticed but perhaps more significant was a new focus on harmonizing disparate legal, policy and technical standards regimes among connected BRI countries. In his speech at the 2019 BRF, Xi emphasized that “we need to promote trade and investment liberalization and facilitation, say no to protectionism, and make economic globalization more open, inclusive, balanced and beneficial to all.” In concrete terms, this meant promoting uniform standards for free trade zones, intellectual property protection, technology transfer rules, tariff reduction, exchange-rate stabilization, trade treaty enforcement, and trade and investment dispute resolution.
“Second track” cooperation
A 2015 State Council report, “Visions and Actions on Jointly Building the Silk Road Economic Belt and the 21st Century Maritime Silk Road”, laid out five basic purposes and modes of BRI cooperation: policy coordination, infrastructure connectivity, trade and investment cooperation, financial cooperation, and communications efforts to win public support. This document had already signaled that China would diversify the BRI beyond its initial steadfast focus on hard infrastructure connectivity.
To realize “high quality development”, the focus would now be on “soft” areas of cooperation. China needed to strengthen policy coordination and pursue trade and investment agreements, financial and monetary cooperation, and close political, social, and cultural engagement according to standardized institutional norms, technical specifications, and strategies across the BRI footprint, essentially integrating partner countries (which generally have been insular and protectionist) under Chinese management.
A 2018 World Bank study estimated that physical connectivity alone would boost trade among BRI countries by only 4.1 percent but if accompanied by policy reforms, the benefits would triple on average. In other words, physical connectivity improves intra-BRI trade and investment flows but not enough to justify the cost and effort. This is why the BRI needs a new wave of agreements to streamline the flow of trade, investment, money, and digital information guided by a set of institutional norms and technical standards.