The pandemic, the war in Ukraine and the desire for more green energy development are motivating factors for a strategic shift in Belt and Road Initiative project financing.
China is again stepping up its
investments as it seeks to reinvigorate and revitalize the Belt and Road
Initiative (BRI) project launched by president Xi Jinping in 2013, which took a
breather during the global pandemic.
The uncertainty over energy supplies
caused by Russia’s invasion of Ukraine – unleashing inflation and undermining
global economic growth prospects – is expected to make China more circumspect
and strategically driven, not least as it is also facing slower growth and
spiralling debts at home, worsened by the pandemic.
Belarus, Russia and Ukraine have all
crashed in the Euromoney Belt & Road Index (EBRI), along with
Taliban-controlled Afghanistan, forcing China to concentrate on its other
partnerships.
Constantin Gurdgiev, associate
professor of finance at Monfort College of Business, believes China will consolidate
more of its BRI-related investments in the Central Asia and Indian Ocean
regions, in line with the trend that has emerged in recent years.
“This consolidation is being
accelerated by the war in Ukraine, but it also predates this conflict and
reflects China’s response to the geopolitical and economic trend toward
regionalization that is displacing the globalization dynamics of the 1990s and
2000s,” he says.
China, he believes, will have an
interest in expanding the longer-term diversification of its key supply chains,
to cover not only its strategic partnership with Russia but also other Central
Asian and Asia-Pacific markets.
“This involves increasing the flow of
Chinese foreign direct investment over time to countries that provide an
alternative access to resources (than Russia), eg Kazakhstan, Turkmenistan,
Azerbaijan and Mongolia, as well as Pakistan and Iraq.
“A number of these countries are also
offering China alternative shipping routes for land-based goods transit to
Europe, routes that by-pass now-sanctioned Russian and Belarusian territories.”
Investments rise
Data released by its ministry of commerce
indicates that China made direct investments in BRI projects worth some $20
billion in 2021, a rise of 1.7% year-on-year. There was an increasing focus on
Africa and the Middle East, notably with regards to alternative energy and rail-led
transport sector developments.
According to Nada Awad Rizkallah, head
of risk management and strategy at Credit Libanais, 142 countries had signed a
cooperation agreement with China by the end of 2021, with total investments
exceeding $160 billion.
“These investments primarily comprise
Chinese engagements related to the energy (oil, solar, wind and gas),
construction, health and utilities sectors, with the aim of improving regional
integration, increasing trade and stimulating economic growth.”
The EBRI indicates that not only is
there enormous potential in Asia but also in Africa, and especially the Middle
East, where China has become much more engaged.
Since it was launched, China has
brought 21 Arab countries into the BRI, notes Richard Abdallah, a risk manager
at Arabia Insurance. He cites GIS Reports, which mentions that Chinese
investments in ports and other infrastructure in the Gulf amounted to more than
$177 billion in 2019 alone.
“Egypt is an important recipient of
BRI financing,” he says. “In 2018, the two countries signed several contracts
amounting to $18 billion.”
Egypt is an improving tier-two country,
along with Israel and Jordan, all of which have index values comfortably above
100, showing rising GDP and/or improving investor climates since the BRI was
inaugurated.
Iraq’s score is still below 100, but the
country is on the rise and it has finally moved back out of tier five to tier
four.
Wooing Iraq
Credit Libanais’ Rizkallah notes that
the largest recipient of Chinese investment under the BRI framework during 2021
was Iraq.
“The two countries cooperated
primarily in the energy sector, across oil, with the construction of the Al
Khairat heavy oil power plant for a total value of about $5 billion, gas in
terms of developing the Mansuriya field by Sinopec [the state-owned petroleum
and chemical corporation] together with Iraq’s Midland Oil Company, and also
solar, with a 2GW power PV [photovoltaic] project, currently in the permission
stage, developed and owned by the Power Construction Corporation of China
valued at $3.7 billion.”
Owais Arshad, global economic
sanctions expert at RBC, says that, cumulatively, Iraq is now thought to be the
third-largest recipient of BRI funding after Pakistan and Russia.
“Energy lies at the heart of this
relationship and Chinese firms, such as Sinopec, have won a number of important
contracts, including a project to build a $5 billion power plant in Karbala and
a deal to develop a gas field near the Iranian border,” he says.
Additionally, China has been willing
to provide much-needed infrastructure investments, ranging from schools to
airports, all of which will be paid for via Iraqi oil.
“This use of collateralized resources
to pay for projects has been a mechanism that has often been used by China,
particularly in Africa,” says Arshad. “Iraq, for its part, is desperate for
such investment as it slowly recovers from the ravages of the US occupation
and, more recently, the widespread violence engineered by Daesh’s self-styled caliphate.”
He goes on to discuss the growing
closeness between Beijing and Baghdad as reflecting the broader shifting power
dynamics of the Middle East, where Arab states, particularly in the Gulf, view
the US as disengaging from its traditional role of security guarantor.
China is seemingly expanding its
footprint in this emerging vacuum, says Arshad, adding: “Purportedly, Saudi
Arabia, another major source of oil for China, is even mulling accepting
payments in yuan, underscoring the success Beijing has had in deepening ties
with traditional American allies, including Israel.”
Iraq is the third-largest supplier of
oil to China, and Beijing’s BRI investments are likely to be attempts to
cultivate and secure critical energy sources that are independent of Western
control.
This has become critical, given the way
sanctions have recently been used to forcibly decouple the Russian economy from
Western markets.
“Investments in Iraq could therefore
serve as an insurance policy as China attempts to sanction-proof its economy,”
says Arshad.
He notes that from a broader
geopolitical perspective, by integrating Iraq into the BRI, Beijing is also
attempting to knit together nearby states into its orbit by connecting them to
its landmark China-Pakistan Economic Corridor (CPEC).
Iran and Afghanistan are potential
areas of expansion with regards to CPEC, says Arshad, adding that the inclusion
of Iraq would “result in an uninterrupted crescent of Chinese-dominated
infrastructure, energy and logistical assets that will further bind these
states to Chinese hegemony and bolster Chinese freedom to pursue its strategic
interests, be it with regards to Taiwan or, more broadly, its ever-expanding
dispute with Washington.”