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Economy

Assessing the Impact of Covid-19 on the Belt and Road Initiative

Jul 30 , 2020
  • Rene Zou

    China-focused policy analyst with a dual master’s from Sciences Po, Paris and Peking University

The advent of the Covid-19 pandemic presents both challenges and opportunities for China’s Belt and Road Initiative (BRI). As countries ease travel restrictions and border controls, is the BRI continuing as planned? Or has Covid-19 set it on a different path altogether? A survey released by China’s Ministry of Foreign Affairs in June revealed that 20% of BRI projects were seriously affected by the pandemic, while 40% of projects saw little adverse impact and 30-40% were somewhat affected. Most major projects, including the China-Pakistan Economic Corridor and the Jakarta-Bandung high-speed railway, resumed work in April. Ongoing projects will be finished (albeit with delays), while planned ones are being re-evaluated both in China and host countries. Some projects, such as Thailand’s Bangkok-Nakhon Ratchasima high-speed railway, have been postponed, but cancellations have been otherwise limited. 

The BRI has proven resilient despite the shock from the pandemic—emerging with renewed focus and openness to change, especially in areas that support course correction in the longer-term. 

Careful Selection of Projects  

With limited financial and domestic political capital to spend amid the Covid-19 pandemic, BRI lending activity has stalled, while business investments become more targeted. The value of new construction contracts signed in BRI countries fell 5.2% in the first six months of 2020, compared with a  33.2% increase last year. Still, Ministry of Commerce data shows non-financial outbound direct investment (ODI) to BRI countries increasing 19.4% in the first half of 2020, despite a 4.3% decline in overall investment. The total value of Chinese ODI is projected to decrease significantly this year due to domestic and global economic constraints, as well as increased regulatory scrutiny over Chinese investment flows, particularly in Western markets. Nevertheless, investment momentum along the Belt and Road has remained relatively stable, with the share of ODI in BRI countries on the rise. This reflects persistent demand for supply chain diversification among Chinese firms, especially in neighbouring countries in Southeast Asia and South Asia. 

Due to lockdown measures implemented at the start of the pandemic, Chinese workers were unable to reach construction sites in BRI countries. BRI projects, which primary rely on Chinese, rather than local materials and supplies, were also hampered by disruptions in Chinese manufacturing supply chains. Chinese firms are thus seeking to build capacity in neighboring countries to hedge against the risk of supply-chain disruptions. 

While the internationalization of Chinese firms is a structural trend, overseas lending is becoming a less popular form of BRI engagement. As a result of domestic economic stress (from factors such as the rise of non-performing loans and the need for government stimulus), cash-strapped state banks will be reluctant to offer more loans to BRI countries. Moreover, host countries will also be reluctant to increase debt burden in the wake of growing budget deficits. As risk appetite shrinks and supply and demand for loans decrease, steps taken to avoid over-capacity and wasteful spending will help increase the sustainability of credit-based infrastructure along the Belt and Road. 

New Areas of Focus

The pandemic has also highlighted a gap in health and ICT infrastructure in emerging economies, a space China is eager to fill through the “Health Silk Road” and “Digital Silk Road”. First launched in 2017, the Health Silk Road (HSR) has now become an extension of China’s “mask diplomacy”, providing medical assistance to BRI-participating countries via donations and consultations, but also commercial exports. Through the HSR, China seeks to limit economic disruption from the outbreak, but also transfer its experience and know-how of battling Covid-19. Looking beyond hard infrastructure, new rhetoric surrounding the Health Silk Road reveals China’s interest in developing the BRI’s soft infrastructure, while expanding its soft power.

The construction of the Digital Silk Road (DSR), which aims to expand China’s digital infrastructure abroad, has also accelerated since its initiation in 2015. The ICT sector will likely see a boost in investment activity, as China vows to increase investments in 5G networks in China and BRI countries. Cross-border e-commerce initiatives are also being prioritized to help accelerate economic growth in China. Meanwhile, China’s MedTech sector, combining health and digital expertise, may find increased opportunities to export public health-related high-tech. For instance, technologies that use AI and other innovations to identify and monitor virus carriers, especially in countries like India and Thailand, where Chinese technology is already being used to develop smart cities. A pivot towards developing projects in the tech and health sector is timely. Not only do these projects provide opportunities for higher value-added production in China and higher productivity in local economies, they are also generally cheaper, easier to deliver, and monetize than traditional infrastructure projects.

Renewed Impetus for Cooperation   

In response to the pandemic-induced global economic recession, China has agreed to coordinate debt relief under the G20’s debt service suspension initiative (DSSI)—the first time Beijing has participated in a multilateral debt relief programme. In June, China further announced the cancellation of interest-free loans to African countries amounting to US$3.4bn. While mass debt write-offs of commercial and concessional loans remain unlikely, debt restructuring discussions will be negotiated on a case-by-case basis, according to experts

The BRI’s state-backed actors are also likely to seek increased participation of domestic and foreign private actors in a bid to increase innovation and support for the BRI’s project financing model. In a recent testimony to the Chinese People's Political Consultative Conference (CPPCC), a representative from Chinese state-owned construction firm, China National Machinery Industry (Sinomach) said the business model of “general project contracting + financing” (EPC + F) has been impacted by China’s overseas project contracting enterprises, and remarked that “it is high time to increase support for enterprises to carry out third-party cooperation and invest/build/operate business.” While the former model favours SOEs and state-backed financing, the latter offers a more level-playing field for private actors, including foreign companies. Increased opportunities for foreign companies to participate in BRI projects in turn sound hopes for improved quality and standards of BRI activity. 

What’s Next?

In the short-term, the Chinese government faces a trade-off between public spending on domestic economic recovery and financial subsidies to the BRI in response to the current crisis. At present, Beijing is focusing on the former, as fresh BRI projects will be a hard sell to ordinary Chinese citizens. That being said, the BRI will not be abandoned. Projects will most likely pick up in the medium- to long-run, but the nature and scope of projects will be different in a post-Covid 19 BRI. Debt defaults and project delays pose additional problems the Chinese economy must account for, but opportunities presented by a shift in China’s approach to the BRI could outweigh costs arising from Covid-19. China’s capacity to respond and adapt to changed circumstances therefore carries the most important impact for the BRI beyond 2020.

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