In 2013, Chinese president Xi Jinping officially charted the idea of the Belt and Road Initiative (BRI) during an official visit to Kazakhstan. From mines to railways, China embarked in a large number of infrastructure projects to enhance land and maritime trade connectivity. There was never a clear target in terms of the amount of investments needed for the BRI to be successful, though official estimates hovered between 4 and 8 trillion USD.

During the first years after BRI was announced, it was further clarified and pushed by the Chinese leadership in 2015, and the first BRI Summit took place in Beijing in 2017, with Chinese policy banks stepping up their funding of BRI projects and reaching very large figures. Since 2019, however, funding has decelerated, especially so during 2020 (Chart 1).

From a sectoral point of view, energy has always been the key focus for BRI, followed by transport. Between 2014 and 2020, energy and transport accounted for 42% and 27% of BRI investments respectively (Chart 2). Despite escalating geopolitical tensions, an important trend is that of China trying to push the usage of green energy. The share of renewable energy within Chinese investments towards BRI increased from 29% in 2014-2016 to 41% in 2017-2020.

From a geographic perspective, Africa and the Middle East are the largest recipients of BRI investments, though the importance of East and West Asia has also grown in recent years (Chart 3). This is fostered by the closer trade relationship between ASEAN and China for transportation and the need for energy security in West Asia, especially from Russia and Pakistan. The government’s policy decision to replace the usage of coal with natural gas means the pipeline from Russia is key, while the China–Pakistan Economic Corridor (CPEC) is one of the biggest projects within BRI. In contrast, the exposure on Europe and America have been limited, despite a boom in Latin America in previous years. Compared to other regions, Europe has a more diverse distribution sector with a higher emphasis on finance, agriculture, and technology. This trend reflects the unique advantages that China can gain from investing in Europe, which is probably hard to find in other markets. This is an important issue for Europe to reflect upon as the region, especially the European Union, has excess savings and does not really need financing for infrastructure projects. The question, thus, is whether overseas financing goes to the right projects and whether European investors are simply too risk-averse, or whether something else is happening.

While the opaque disclosure of the projects and their financing (as has been highlighted in a recent project analyzing the financing of 100 Chinese projects overseas^[1]) will continue to be an obstacle in estimating the real size of China’s BRI loan book, we can still draw two implications. First, China has continued to lend money overseas faster than any measurement of BRI investment. Foreign loans by Chinese commercial banks expanded by 21% during 2020 amid the Covid-19 pandemic, the fastest pace since 2016. Second, China may have switched how it runs BRI through project-based infrastructure, which could include direct lending to government-related entities or through the arms of state-owned enterprises. More commercial banks may also be involved beyond policy banks in the traditional way (Chart 4). This might be related to the risk that China runs in financing BRI projects solely with policy banks as they are considered official, which has a number of implications as shown by the Debt Service Suspension Initiative (DSSI) agreed at the G20 and by the struggle to keep China Development Bank off the official sector. In other words, it seems likely that the reduction in Chinese financing of BRI projects is not as extreme as the data might suggest. In this regard, it is important to note that the sheer size of China’s banking sector (by now bigger than the EU’s with over 45 trillion USD) makes its rapidly increasing overseas lending very relevant for the rest of the world. This relevance extends to global financial stability as leverage in China continues to increase, even more so as its financial leverage has an obvious increase to systemic risk.

All in all, the BRI remains an important project for China and it is not going to disappear any time soon. The slowdown in financing is partially related to China’s need to keep its credit domestically but also to a change in the composition of financing, which is moving away from policy banks towards more private investors, namely China’s state-owned commercial banks. In other words, it is unlikely that China will roll back the red carpet of its grand infrastructure plan, especially in a world wherein geopolitical influence is increasingly important. Therefore, the most likely case is that China has become more selective in its BRI investments and has changed its implementation and financing methods. Still, the dual circulation strategy may pose challenges to the rest of the world as China seeks to substitute its imports. If there is a need to support its domestic economy, external circulation is now going to take the back-seat, which draws a big difference in mentality compared to the period after the Global Financial Crisis (GFC).

NOTES

[1] Gelpern, Anne et al. (2021) How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments, Peterson Institute for International Economics, Kiel Institute for the World Economy, Center for Global Development, and AidData at William & Mary.