China’s ambitious Belt and Road Initiative (BRI), launched a decade ago to build infrastructure trade links across Eurasia and beyond, is now facing significant headwinds, according to a report from CNBC. Observers are raising concerns about the sustainability and effectiveness of the mega-project that was once considered the centerpiece of Beijing’s engagement with the global economy.
Over the past decade, China has issued nearly a trillion dollars’ worth of loans for infrastructure projects across 150 countries. However, with 60% of China’s overseas lending portfolio now supporting borrowers in financial distress, the initiative is grappling with debt sustainability, the fallout from the COVID-19 pandemic, and China’s economic slowdown. In response, Beijing is pivoting from infrastructure project lending to emergency rescue lending.
Despite the challenges, China is unlikely to abandon the Belt and Road Initiative, as it is closely intertwined with President Xi Jinping’s legacy. This year’s third Belt and Road Forum aims to inject new momentum into the massive project, demonstrating China’s ongoing commitment to the project.
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The Belt and Road Initiative has seen a total investment of $962 billion, comprising $573 billion in construction contracts and $389 billion in non-financial investments. With many borrowers now struggling to repay their debts, China has issued 128 emergency rescue loans worth $240 billion to 22 countries, including Pakistan, Sri Lanka, and Turkey. However, these emergency bailouts come at a high cost, with interest rates averaging 5% – more than double the International Monetary Fund’s (IMF) average rate.
Changes to the Belt and Road Initiative have been in motion since 2020, with a shift in focus from ambitious economic outlooks to the importance of high-quality development. This adjustment reflects concerns that many BRI projects were not economically viable from the start and that the initiative has not been cost-effective overall.
A slowing global economy, rising interest rates, and high inflation have left many countries struggling to repay their debts to China. In South Asia alone, debt to China has risen from $4.7 billion in 2011 to $36.3 billion in 2020. Beijing now stands as the largest bilateral creditor to Maldives, Pakistan, and Sri Lanka.
China’s lending practices, along with the secrecy surrounding individual projects, have fueled the ongoing debate over “debt-trap diplomacy.” Critics argue that Beijing strategically ensnares borrowers with loans they cannot repay, intending to exert political influence over them later.
However, the Chinese embassy in Singapore has maintained that China attaches importance to debt sustainability and has never forced others to borrow or attached political strings to loan agreements. The embassy also emphasized that most BRI projects are commercially contracted, with the Chinese government not being a stakeholder.
As China’s Belt and Road Initiative enters its second decade, it remains to be seen whether a more pragmatic faction within the Chinese government will emerge to address concerns about lending quality and debt sustainability. So far, Xi Jinping’s tighter-than-ever grip on power has not inspired optimism for significant improvements to the initiative.