Belt and Road

Not quite to plan

Covid-19 chaos puts the brakes on BRI projects

Kenya-Railways-w

Court rules Kenyan railway illegal

Lending for infrastructure projects in China’s Belt and Road Initiative (BRI) is so opaque that there is no real consensus on the total loans outstanding. Best guesses start at $200 billion and often head sharply upwards.

What’s clearer is that the Covid-19 crisis is putting the brakes on the plan, with Wang Xiaolong, a senior official in the foreign ministry, acknowledging last month that at least a fifth of the projects under the BRI umbrella have been seriously set back by the pandemic.

In particular, supply chains have seized up, making it difficult for Chinese companies to ship equipment and labour to Belt and Road projects. In one example, construction of the $6 billion high-speed rail line between Jakarta and Bandung in Indonesia is said to have fallen further behind schedule after delays in shipments of materials.

Then there are the new strains on financing the plan as Beijing refocuses on China’s domestic economy in the wake of the pandemic. Zhou Xiaochuan, former governor of the central bank, tried to put a gloss on the situation last month by telling Caixin that Covid-19 has ushered in even lower interest rates, which should be beneficial to Belt and Road dealmakers. But the economic crisis will make it harder to find fresh funding from non-government sources in the way that Beijing has been trying to encourage.

Concerns about the financial viability of many of the projects were growing long before the virus struck. Policy lenders like China Exim Bank and China Development Bank were already throttling back their lending and the number of overseas deals signed by Chinese construction firms – a decent proxy for BRI-related lending – started to fall sharply from 2018.

Yet even when China’s economy starts to fire again there’s the question of whether Beijing will have the same appetite for Belt and Road loans, especially as it runs into further flak for so-called ‘debt-trap diplomacy’.

In April China was one of the signatories to a G20 commitment to freeze debt repayment for the world’s poorest nations until the end of this year, acknowledging that the pandemic has made it harder for countries to make payments on their loans. It was the first time that Beijing has participated in debt relief of this type, although it has fielded numerous calls from Belt and Road borrowers to renegotiate further concessions.

Countries like Pakistan are pushing hard for better terms on their power and transport projects and Islamabad stepped up its efforts in May with a new study alleging that Huaneng Group, one of China’s leading electricity producers, conspired with its local partner to inflate the costs of one of the flagship coal-fired power plants by about $3 billion. The broader argument is that renegotiation is even more important in a context in which the pandemic has paralysed Pakistan’s economy, something that other governments will be telling Beijing as well.

Late last month there was another setback when a court in Kenya ruled that a contract with China Road and Bridge Corporation for the construction of the multi-billion dollar Standard Gauge Railway was “illegal”. That line opened in 2017, but the verdict could give the government more leeway on its financial obligations, the South China Morning Post reports. The ruling could also complicate future fundings in Kenya, including a proposed extension of the railway to a city nearer the border with Uganda.

It’s not that BRI is heading for the political scrapheap, not least because it is imbued with so much significance as Xi Jinping’s signature foreign policy (and written into the constitution of the Chinese Communist Party for good measure). But we might see shifts in focus, such as the way that policymakers have been championing a ‘Health Silk Road’ of public health projects, and a ‘Digital Silk Road’ that delivers more of China’s advances in technology to other nations. That kind of narrative could take attention away from the slower rollout of the roads, railways, power plants and bridges at the heart of the infrastructure plan – with fewer new projects set to be announced and existing ones scaled back or left unfinished.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.