The BRI, part of President Xi Jinping‘s ambitious plan, is also facing challenges due to a surge in defaults and the impact of Covid-19 pandemic.
According to a report on Nikkei Asia, Xi is looking to offset the setbacks by trying to boost the profitability of Belt and Road projects.
This comes just a month before China is set to host the third Belt and Road Forum in Beijing.
The rethink comes at a time when several nations are grappling with issues due to the debt burden caused by BRI.
Notably, Italy, the only G7 nation that was part of the project, said that it’s planning to exit BRI.
“The Silk Road [BRI] did not bring the results we expected,” Italian foreign minister Antonio Tajani said last week.
A lopsided deal
Many countries involved in the Belt and Road Initiative have been grappling with growing trade deficits.
Moreover, their hopes for expanded access to the Chinese market are also diminishing.
For instance, Italy witnessed its trade deficit with China doubling over the span of three years, up to 2022.
Most of these issues have been caused by the stringent conditions imposed by China regarding financing related to the projects.
Sri Lanka, which faced difficulties in repaying its debt, granted China a 99-year lease over its Hambantota port.
It was left with a series of white elephant projects built under BRI.
Countries are becoming increasingly cautious about falling into what is referred to as a “debt trap”, the report said.
Conversely, as a result of massive lending, China’s trade surplus with BRI countries has grown remarkably.
The figure totaled $197.9 billion for the first seven months of 2023 and is on track to a new full-year high, the report said.
Debt woes & write-offs
Covid-19 played a pivotal role in prompting China to reassess its strategy vis-a-vis BRI.
The pandemic inflicted significant damage on emerging economies, resulting in a surge of debt renegotiations and write-offs, the report said.
Between 2020 and 2022, loans involving Chinese lenders worth $76.8 billion essentially became non-performing, which is 4.5 times more than the period between 2017 and 2019, according to the US-based Rhodium Group.
While China has increased its financial assistance to Belt and Road countries, including currency swaps, there has been a decline in new investments.
Until 2019, approximately $100 billion was annually invested through the initiative, but recent data from the American Enterprise Institute indicates that this figure has hovered around $60 billion to $70 billion, the report said.
Furthermore, China’s economic deceleration has played a role in this decline, as its foreign reserves, which support new investments, have remained relatively stagnant at just over $3 trillion.
Internal policies that focus on domestic matters are also a factor.
Following China’s announcement of debt forgiveness for African nations in August 2022, there was a widespread online clamor urging the government to extend similar support to cover medical expenses and home mortgages for Chinese citizens within the country, Junya Sano of the Japan Research Institute told Nikkei Asia.
If frustration continues to mount due to China’s sluggish economy, it could become more challenging for the nation to allocate resources for international projects under BRI.
Now, Xi is under preessure to make good on his plans to rescue BRI lenders and improve profitability.
Anticipation is running high regarding the statements he will make at the upcoming Belt and Road Forum.
“China’s global influence is likely to decline unless its external loans and assistance return to peak levels,” Sano said.
A decade has passed since China initially introduced the Belt and Road Initiative, during which China’s substantial investments across the globe have contributed to the growth of international trade and its global sway. This infrastructure-centered endeavor is facing challenges due to a slowdown in the domestic economy and a rise in defaults caused by various factors, including the impact of COVID-19. Consequently, there seems to be a shift in China’s approach to overseas investments, with President Xi Jinping emphasizing the need to enhance the profitability of Belt and Road ventures.
In September 2013, President Xi Jinping introduced his vision of creating a Silk Road Economic Belt that would connect China with Europe while on a visit to Kazakhstan. Just a month later, he proposed the idea of a 21st-century Maritime Silk Road, extending through the Indian Ocean and the South China Sea, which laid the groundwork for the Belt and Road Initiative.
Over 150 countries have subsequently signed memorandums of understanding with China, many of which involve collaboration on investment projects. China is set to host the third Belt and Road Forum in Beijing this October.
According to China’s customs agency, the country’s trade with Belt and Road participating nations saw a remarkable 76% growth from 2013 to 2022, surpassing the overall trade increase of 51% for China during the same period.
Strengthened economic connections with emerging nations have also enhanced China’s influence on the global stage. Junya Sano, analyst at the Japan Research Institute, pointed out that the Belt and Road Initiative prevented China from becoming isolated within the United Nations.
Between 2019 and 2021, Western countries jointly issued four statements to the UN Human Rights Council expressing concerns about the situations in Xinjiang and Hong Kong.
Each time, a greater number of countries sided with China rather than Western nations, said Sano.
China’s trade surplus with countries participating in the Belt and Road Initiative has also seen significant growth. For the first seven months of 2023, this surplus reached $197.9 billion and is on a trajectory to set a new annual record. This surplus, constituting approximately 40% of China’s total trade surplus, has allowed China to reduce its dependence on trade with the United States, particularly amid escalating bilateral tensions.
Countries involved in the Belt and Road Initiative are now grappling with growing trade deficits, and their hopes for expanded access to the Chinese market are diminishing. Italy, the sole Group of Seven member to join the initiative in 2019, witnessed its trade deficit with China doubling over the span of three years, up to 2022.
Italian Foreign Minister Antonio Tajani recently expressed disappointment, stating that “The Silk Road did not yield the anticipated results.” Italy is currently contemplating a decision, likely by the end of the year, on whether to exit the initiative.
Stringent conditions imposed by China regarding financing related to the Belt and Road Initiative have caused issues. Sri Lanka, facing difficulties in repaying its debt, granted China a 99-year lease over the Hambantota port. Countries are becoming increasingly cautious about falling into what is referred to as a “debt trap,” although China rejects this characterization.
COVID-19 played a pivotal role in prompting China to reassess its strategy. The pandemic inflicted significant damage on emerging economies, resulting in a surge of debt renegotiations and write-offs.
Between 2020 and 2022, loans involving Chinese lenders worth $76.8 billion essentially became non-performing, which is 4.5 times more than the period between 2017 and 2019, according to the US-based Rhodium Group.
While China has increased its financial assistance to Belt and Road countries, including currency swaps, there has been a decline in new investments. Until 2019, approximately $100 billion was annually invested through the initiative, but recent data from the American Enterprise Institute indicates that this figure has hovered around $60 billion to $70 billion. China’s economic deceleration has played a role in this decline, as its foreign reserves, which support new investments, have remained relatively stagnant at just over $3 trillion, and there are no significant expectations of a substantial increase in China’s ability to invest in emerging nations.
Internal policies that focus on domestic matters are also a factor. Following China’s announcement of debt forgiveness for African nations in August 2022, there was a widespread online clamor urging the government to extend similar support to cover medical expenses and home mortgages for Chinese citizens within the country, as mentioned by Sano.
If frustration continues to mount due to China’s sluggish economy, it could become more challenging for the nation to allocate resources for international projects.
China is currently exploring more sustainable approaches to providing economic assistance. In 2021, President Xi underscored the significance of profitability in Belt and Road initiatives and outlined plans for collaboration with development banks. Anticipation is running high regarding the statements he will make at the upcoming Belt and Road Forum.
As Sano said, “China’s global influence is likely to decline unless its external loans and assistance return to peak levels.”