It’s been almost five years since Xi Jinping announced China’s Belt and Road Initiative. With the immensely ambitious infrastructure project, China seeks to expand its sphere of influence, to boost trade and stimulate economic growth across Asia and beyond. However, problems are emerging. BRI is dealing with economic challenges and resistance, slowing its momentum. After almost five years, reality has proved unruly and key projects are experiencing setbacks. 

In 1999, the Chinese government introduced the Go Out policy, encouraging Chinese companies to invest in countries abroad, which was further promoted under the BRI policy. Essentially, firms were incentivized to be active in countries where they did not necessarily have experience. The same counts for the investments made under the Belt and Road Initiative. Not only have BRI FDIs dropped in volume and number, aggregate returns on Chinese foreign investments are dwindling. The total return on Chinese foreign investments in 2016 was 0.4%, which is substantially lower than the usual 4% earned by foreign reserves globally. The International Monetary Fund is now actively supporting Chinese President Xi Jinping in preventing the infrastructural plan from investing in white-elephant projects. These projects were financed with cheap and easy credit from China’s policy banks. Beijing now recognizes how this lending poses a risk to the broader Chinese economy because it fuels risky projects. Furthermore, the country is currently putting efforts into reducing debt levels.

Projects that might be easy to execute in China face delays and cost overruns, growing debt and deficits, political opposition because of Chinese labor immigration, and the risk of being cancelled by new leadership in the country. Two BRI projects are particularly fraught with these challenges and are testing the BRI ambitions.

First, the China-Pakistan Economic Corridor, which is pivotal for China, is facing resistance. Pakistan has received $62 billion of investment pledges to build it. But the country is facing a high current account deficit and the imports of Chinese machinery for the project have pushed this. The country is dependent on cheap credit from China. Another risk is that if Pakistan’s new government were to seek a bailout from the IMF, this would include restrictions on borrowing and spending and thus limit the BRI program with China.

In Malaysia, the second-biggest recipient of Belt and Road loans after Pakistan, the new Prime Minister Mahathir Mohamad has promised to review the “unequal treaties” signed with the Chinese state-owned companies on BRI projects by his predecessor Najib Razak. Malaysia has halted Chinese projects worth $22 billion. Mohamad blames Najib’s relationship with China for corruption and bad decisions, including a controversial rail link along the country’s east coast.

As China is struggling economically and “flagship projects” are facing threats, the BRI ambitions seem further away from being realized than ever.

RISKS MARKED ON THE RISK RADAR AS NUMBER 1:

Chinese/other EM’s economic slowdown

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