The novel coronavirus disease 2019 (COVID-19), which arose in China and swept around the globe, has devastated the lives of hundreds of thousands. But however large the health impact of COVID-19 ultimately is, hundreds of millions more have already felt its economic impact. With people worldwide ordered to social distance and stay at home, entire industries have been shuttered. And though national economies will recover in time, fully restoring them may prove to be a slow process. No doubt, the longer the disease lingers, the longer an economic recovery will take. That could create one more economic casualty: China’s Belt and Road Initiative (BRI).
The BRI has provided loans for the construction of over $200 billion-worth of infrastructure projects that China envisioned would become a new globe-spanning trade network—one that put China at its center. But after the initiative acquired a reputation for corruption and ensnaring borrowers in “debt traps,” Chinese General Secretary Xi Jinping was forced to reboot it 2019. Going forward, he promised the BRI would be more transparent; ensure its projects follow international procurement guidelines; and more carefully scrutinize prospective borrowers and projects based on their ability to repay. In short, the BRI would tighten its lending standards. But doing so at a time of contracting global demand will surely delay and possibly derail any big expansion of the BRI.
The Supply of Demand
Even before COVID-19 spread beyond China’a borders, the International Monetary Fund (IMF) had already predicted that global economic growth would be sluggish in 2020. The trade war between China and the United States, the United Kingdom’s departure from the European Union, and rising tensions between Iran and the United States had each taken a bit of steam out of growth. But the IMF believed that the world’s developed economies would get a boost from a rise in anticipated business spending this year. Needless to say, the COVID-19 pandemic snuffed out that belief. Most economists, at this writing, think that the economies of Europe and the United States will contract between four and seven percent in 2020.
Central banks around the world have responded to the pandemic with monetary stimulus. The People’s Bank of China was the first to do so. Since February, it slashed its bank reserve ratio requirements, lowered its prime lending rates, and pumped $243 billion into various lending facilities to prevent its banking sector from seizing up. In March, the U.S. Federal Reserve cut its short-term lending rates to near zero percent for the first time. It also started a new quantitative easing (QE) program, pledging to buy up to $700 billion in U.S. Treasury and mortgage-backed securities. Just two weeks later, the Federal Reserve removed the upper limit on its purchases and extended them to include corporate and municipal assets. Meanwhile, the European Central Bank lowered its bank lending rate to -0.75 percent and enlarged its existing QE program for the year to over €1.1 trillion.
National governments chipped in with fiscal stimulus. In contrast to its initial restraint during the 2008-2009 financial crisis, Washington rushed through a $2.2 trillion relief package to aid American businesses and, a week later, $3 trillion more to directly support American workers. The countries of the European Union acted more incrementally, but together pledged a total of some €3.2 trillion by April. China, wary of the financial risks of more debt, had been slower to unleash fiscal stimulus, but it eventually chose to issue several hundred billion dollars’ worth of new special national and local government bonds.
Such tremendous stimulus efforts will surely cushion the worst of the economic pain from the coronavirus pandemic. But with interest rates at or below zero percent, conventional monetary policy has rapidly reached its limits in the West. And, for most of the world, fiscal policy is nearing its limits, too. Plus, the massive amounts government borrowing needed to fund the many fiscal stimulus packages may ultimately dampen long-term demand. One need only to look at Japan, where decades of pump-priming have created barely enough demand to lift its economy above stall speed.
The Demand for Demand
With global demand savaged for at least one year and, after a short recovery, perhaps dulled for several more, a quick return to booming global trade seems unlikely. But that is precisely what is needed to ensure that new BRI-financed infrastructure is sustainable. Otherwise, any new BRI-funded road, railway, port, or airport would merely compete against existing transportation infrastructure, which could make both unprofitable. That, of course, would leave borrowers worse off.
Already, shortages in demand have caused problems for countries that took out BRI loans. The most widely known case is that of Sri Lanka. Able to attract only a tiny number of ships to its BRI-financed port at Hambantota, it could not pay the interest on its loans. As a result, Sri Lanka was forced to give a Chinese port operating company a 99-year lease to the port and 15,000 acres of land around it so that Colombo could repay its Chinese creditors. There are now concerns that something similar could befall Djibouti and its strategic port near the Horn of Africa, as the country’s debt to China has spiraled to over 100 percent of its annual GDP. In April, rumors surfaced that Zambia was considering offering its copper mines to its Chinese creditors in exchange for debt deferral or forgiveness. Naturally such news makes developing countries uneasy. For whether China is pursuing “debt trap diplomacy” or not, the end result may be the same.
More developed BRI countries are also likely to face demand challenges. Nowhere is that truer than in Italy. Italy was the first European country to join China’s BRI in early 2019. One year later, it was the first European country to experience the rapid spread of COVID-19. But even without the economic fallout from the coronavirus pandemic, Italy’s economy had already been laboring under a huge debt burden that it has carried since the last recession a decade ago. Today, with a new recession likely, Italy may require some sort of help from the rest of the European Union to refinance its debts before it can generate any meaningful demand of its own. China may have hoped that Italy—with Europe’s third largest economy—would be a cornerstone for the BRI. But for now, Beijing may have to be satisfied with Hungary, which remains keen on a BRI-financed railway to Serbia.
In Need of Demand
For the BRI to reorient global trade towards China, more infrastructure will have to be built. But for that new infrastructure to be sustainable, there must be enough trade to keep it profitable. And, for that to happen, there must be enough demand to give rise to that trade. Without strong demand, there will not be enough trade to support the profitable construction of new infrastructure, leaving BRI borrowers with debts they cannot repay.
Given the weakening of the global economy from the COVID-19 pandemic, Beijing will have to shoulder more financial costs if it wants to the BRI to make significant headway in the near term. Rather than only allowing borrowing countries to defer payments on their BRI loans, it may have to restructure or forgive far more of them. China may also need to find ways to divert more trade to BRI routes and away from traditional routes, like the Malacca Strait. Finally, China could help create demand by dropping its import barriers and encouraging other countries to export goods to it.
Of course, none of that is easy for Beijing to do, if for no other reason than because it has rarely shown a willingness to accept losses. That much was made clear in how it dealt with Chinese loans to Venezuela’s chavista government, supposedly one of China’s “comprehensive strategic partners.” Besides, at the moment, China has its own problems with demand. After Beijing lifted its stay-at-home restrictions and Chinese factories reopened, only a trickle of new orders has materialized. Gone are the days when every BRI-financed project seemed like a riskless “win-win.” Going forward, someone will have to bear the risk and costs of BRI loans. Unless China is willing to accept more of both, Xi’s dream of creating a new global economic order centered on China may have to wait a while longer.
The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.
 “Economic Forecasting Survey,” Wall Street Journal, Apr. 18, 2020, https://www.wsj.com/graphics/econsurvey/#ind=gdp&r=20; Federal Reserve Bank of New York, New York Fed Staff Nowcast, Apr. 17, 2020; and European Central Bank, The ECB’s response to the COVID-19 pandemic, Apr. 16, 2020, p. 8.