How Covid-19 will affect China's Belt and Road Initiative

The Belt and Road Initiative (BRI) is a far-reaching plan for transnational infrastructure development, linking five continents through land and sea corridors, and industrial clusters. Launched in 2013, it was initially planned to revive ancient trade routes between Eurasia and China, but the scope of the BRI has since extended to cover 138 countries, including 38 in sub-Saharan Africa, and 18 in Latin America and the Caribbean.

Financing Needs

Prior to the Covid-19 pandemic, the Asian Development Bank estimated that the infrastructure financing needs of emerging Asia alone would amount to $26trn through 2030. It is thus unsurprising that many low- and middle-income countries came to see the BRI as a vehicle for catalysing muchneeded investment in capital projects. By early January 2020, 2951 BRI-linked projects valued at $3.87trn were planned or under way across the world. Although the criteria for what actually constitutes a BRI project are not formally defined, linking a project to the BRI through a memorandum of understanding (MoU) or another agreement provides access to finance from Chinese policy banks and specialist funds, as well as connections to Chinese contractors and suppliers eager to make use of their excess capacity. However, as borders began to close in response to the pandemic, and governments shuttered non-essential industries and asked citizens to stay at home, progress stalled on a number of major BRI developments. “Some BRI projects are in poorer nations, which may require medical and health care assistance to be a priority ahead of continuing infrastructure projects, and this will vary from country to country,” Chris Devonshire-Ellis, founding partner of Dezan Shira & Associates, told OBG.

Multilateral Approach

With China’s economy contracting in the first quarter of 2020 for the first time in decades, Chinese capital is likely to be mobilised to meet domestic needs in the short term, which could translate into reduced investment in the BRI’s more peripheral markets over the 2020-22 period. Combined with the fact that many countries signed up to BRI projects face escalating foreign debt pressures, the stage may be set for a long-term reorientation towards more strategic and cost-efficient infrastructure projects.

BRI projects in the pipeline could be made more open to varied financing options involving multiple stakeholders, such as multilateral institutions, foreign banks, private equity and green bonds. This could help to spread financial risks and promote greater levels of transparency, efficiency and innovation. Even before the pandemic, private financing and co-financing had been playing a growing role in BRI projects. Efforts have been to adopt formal lending rules similar to those of multilateral development banks (MDBs), and in March 2019 China’s Ministry of Finance signed an MoU with several MDBs to establish a Multilateral Cooperation Centre for Development Finance.

As of December 31, 2019, project financing was the main source of funds for 676 out of 1015 projects analysed in the Refinitiv BRI Database. Private sector finance accounted for 20.5% of the total funding for all projects in the database, while publicly listed firms contributed 6.8%. However, these totals are still less than the 46.1% of finance attributed to government institutions. “China was increasingly open to the multilateralisation of the BRI prior to the pandemic and that will no doubt continue, with capital from multilateral institutions and private sources needed for certain projects to be sustainable,” Parag Khanna, founder and managing partner of FutureMap, told OBG.

However, Khanna, does not believe China’s domestic obligations will detract attention from the BRI. “The BRI will not lose importance for China, because it is a significant portion of its grand strategy. Much as we see China continuing its military doctrine of probing for opportunities, it will still seek to use BRI as an umbrella for increasing its geographic connectivity, supply chain efficiency and commercial leverage with key states in Asia, the Middle East, Africa and beyond,” he added.