EBRI Q4 2020 results: Pandemic forces China to refocus
Rumours of the Belt and Road’s demise are overblown, but Covid has encouraged China’s policymakers to reevaluate the strategy.
The global crisis has had a huge impact on investment flows, undermining
pre-existing projects and future plans for China’s new Silk Road. But this is nothing
new.
Last summer, China’s Wang Xialong, director-general of the foreign
ministry’s international economic affairs department indicated that a fifth of all
Belt and Road Initiative (BRI) projects in existence had been “seriously affected”
by the fallout from the pandemic, with up to 40% of projects “somewhat affected”.
Many under the BRI banner in Africa and Asia were stalled or delayed, with
the data suggesting the impact was even harsher than authorities were perhaps willing
to admit. Total investments were pared down to $23 billion in the first half of
2020 – roughly half the total for the same period in 2019.
With the world struggling with the economic impact of the pandemic, China
is naturally closely scrutinizing its investments, not least because projects underwritten
in its early years subsequently made woefully low returns.
And the tide was turning well before Covid-19 struck.
“The value of new Chinese overseas construction contracts flattened out at
$256 billion between 2017 and 2019,” says Constantin Gurdgiev, a professor at the
Middlebury Institute of International Studies and a contributor to Euromoney’s country
risk survey, who takes a close interest in BRI matters.
“The number of overseas construction contracts involving Chinese contractors
fell from 175 in 2017 to 94 in 2019, before collapsing to just 15 in 2020,” he adds.
Priority shift
The Belt and Road Initiative unveiled by Xi Jinping in 2013 is China’s grand
development strategy aimed at underpinning the superpower’s political and economic
prowess. Since its inauguration, many countries taking part have undergone substantial
transformations to their investor environment and/or maintained strong GDP growth
before Covid-19, resulting in high values in Euromoney’s Belt and Road Index.
Among those showing the biggest improvements are the Maldives, Nepal, Bhutan,
Ethiopia, Bangladesh, Laos and Cambodia, according to the latest survey for the
fourth quarter 2020. They comprise the tier-1 countries among the five categories
into which Euromoney classifies all 68 countries.
Overall, Asia is currently the only region showing an overall improvement
despite its index value slipping, with many large-scale infrastructure projects
rolled out under the Belt and Road umbrella.
Yet the pandemic has led to China rethinking the types of projects it should
be involved with. Also, its lending practices have created balance of payments and
sovereign debt problems among many countries in receipt of Chinese philanthropy.
The Belt and Road has now been in existence for seven years and both the
Chinese economy and the world economy have experienced dramatic changes in that
time.
Given this experience, China is now proposing a “dual circulation” of economic
activities, according to Yue Jiang, a teaching fellow at the International Business
School Suzhou, Xi’an Jiaotong-Liverpool University, balancing the ‘internal circle’
with the ‘external circle’ of global integration.
“With the additional reliance on the internal circle, priorities have been
given to strategic values of technology enhancement, autonomous industrial supply
chains and enlargement of domestic demand, particularly at the start of the 14th
Five Year Plan [2021-2025].”
She goes on to explain that quality enhancement has been promoted in areas
such as the manufacturing sector, as well as macroeconomic policy refinements and
educational development, plus measures to support and stimulate private-sector competition
and its contribution to the economy.
China has already signalled its intention is to develop a Digital Silk Road
and, moreover, as the Financial Times has also reported, this refocus is leading to a growing role for renewable energy projects.
According to Gurdgiev, the biggest beneficiaries from the pivoting of the
BRI will be the Asia-Pacific and southeast Asian partners.
“The reason for this is that they are becoming a major auxiliary entrepôt
for China into American and Australian markets, where Chinese manufacturers are
feeling some pressure from geopolitical realignment ongoing in Washington DC.
“Even though the new White House administration is less confrontational in
its evolving China strategy, president Biden is unlikely to return China-US relations
to the status quo ante-Trump,” he says.
By contrast, the losers from the BRI realignment are likely to be central
Asian states. They present little opportunity for China to generate significant
commercial returns on investments, believes Gurdgiev.
“They are also effectively captured within the China-centric trade system
which de facto guarantees China preferential access to their natural resources.”
That said, tier-1 Bangladesh and tier-2 Pakistan have both shown considerable
potential to date and Gurdgiev believes they are more likely to return to the BRI
development orbit later in 2021/2022.
These countries, along with Egypt and Vietnam, are looking to develop environmentally-friendly
economic recovery plans to ensure they benefit from China’s refocus. And, as Euromoney’s
index shows, there are many more that could appeal.
This might be just the time for them to step up.
