China’s Belt and Road Plan Is Down, Not Out

Date: Tuesday, January 10, 2023
Source: Wall Street Journal

The Belt and Road Initiative—China’s gargantuan overseas infrastructure push which began gaining steam in the mid 2010s—has been the subject of some belt tightening recently.

It is too early to write it off entirely. The BRI’s retrenchment during the pandemic has been remarkable in Asia—where much of the funding was initially committed. It is however still expanding its footprint rapidly in Latin America, at least in foreign-direct investment terms. And even in some trouble spots such as Pakistan, Beijing is unlikely to abandon its megaprojects, given how much it has already invested.

The latest round of political headaches in Pakistan came at Gwadar, home to the BRI’s Gwadar Port project. Nikkei Asia reports that protesters angry over deep-sea trawling, security checkpoints around the port and other issues began blockading the port in late 2022, triggering a police raid in late December. Chinese nationals in Pakistan have been targeted in violent attacks in recent months.

Pakistan was supposed to be a politically easy place for China given the countries’ common history of conflict with India. But it has instead become a symbol of the BRI’s broader problems: many lower-income governments are no longer sure such expensive projects are worthwhile, and are wary of the indebtedness and local opposition they often create. High global interest rates, falling emerging market currencies and the economic damage from the pandemic have all strengthened the hand of BRI skeptics.

It is no surprise then that both China’s lending to and direct investment in BRI countries have plummeted in recent years, according to French bank Natixis, which analyzed data from Mergermarket and the American Enterprise Institute. Partly that reflects a pullback in Chinese financing globally as most economies, including China’s, struggled during the pandemic. China’s average annual outward foreign-direct investment fell 72% in 2020-2021 from 2015-2019 average levels. China’s FDI in BRI countries fell slightly less sharply—by 62%.

Still, the dropoff in investment hasn’t been uniform. In the U.S.’s backyard, China’s average annual direct investment in Latin American countries actually quadrupled in the 2020-2021 period compared with the five-year period before, according to Natixis’s data. Much of that has been mergers and acquisitions of Latin American state assets such as utilities. Some governments in Latin America, which Natixis says took the worst overall economic hit from the pandemic of all BRI regions, might have decided that direct asset sales were a way to gain some fiscal space after the hit from Covid-19.

China has clearly been burned by some of its most high-profile greenfield overseas infrastructure projects such as Gwadar in Pakistan and Hambantota port in Sri Lanka. Direct investments in infrastructure assets already producing income streams might be one way to build credit with local governments without the financial and political risks that come from lending to new megaprojects in unstable regions. And Latin America’s abundant agricultural and mineral resources are obviously of interest to a Beijing which appears ever more obsessed with food and supply-chain security as its relations with developed democracies deteriorate.

Regardless, it is probably unrealistic to imagine that Beijing will abandon projects such as Gwadar. Michael Kugelman, director of the South Asia Institute at the Wilson Center in Washington, D.C., believes Beijing isn’t about to give up on BRI, whether in Pakistan or anywhere else. Mr. Kugelman says that these infrastructure and connectivity projects remain critical for China’s economic interests and, if Beijing has any long-term plans to translate some of them into military assets, for its strategic interests as well.

Instead, what seems likely is a more discerning BRI more focused on financial returns—and on getting along with the locals.

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