An increasing number of developing countries that have joined Beijing’s “New Silk Road” initiative are facing economic problems sparked by the coronavirus crisis. China now finds itself facing a dilemma between trying to salvage its own economy or forgiving and renegotiating its partners’ loans.
Xi’s signature infrastructure project aims to connect business between Asia, Europe and Africa. But the Belt and Road Initiative (BRI) – dubbed "The New Silk Road" – is putting China in a very uncomfortable position. With an increasing number of countries reporting difficulties reconciling their economic support plans with loan repayments to China, Beijing must now avoid fulfilling the prophecies of sceptics who have warned the project is merely a debt trap in the guise of assistance.
The initiative, launched in 2013 by Xi, has already led China to invest more than $450 billion in nearly 140 countries in Asia, Europe, South America and Africa. There have been project name adjustments along the way: the initial One Belt One Road (OBOR) name was changed since the word “one” was deemed misleading for a project prone to mission creep. But the promise of the project has been consistent: Beijing lends money to its partners to build vital infrastructure – railways, roads, ports, factories – in exchange for Chinese companies finding new overseas markets.
But since the pandemic, clouds have started to gather over the programme.
The problems first came to light when Pakistan sent an official letter to China in mid-April calling for a review of the terms and conditions of repayment of over $100 million, set for May. Beijing assured Islamabad on May 17 that it would make an effort for its “Pakistani friend". But there was no follow-up or details on the promised goodwill gesture.
‘Tricky balancing act’
"We understand a lot of countries are looking to renegotiate the terms of these loans; it is a process that will take time," a researcher at the China Development Bank – a “policy bank” that spearheads several BRI project loans – told the Financial Times. “But it takes time to strike a new deal and we cannot even travel abroad right now. The BRI loans are not foreign aid. We need to at least recoup principal and a moderate interest,” said the researcher, who did not want to be named.
Most of these requests come from African countries, which are at the heart of China's investment programme but are also economically weak and among the least prepared to cope with the current crisis, the New York Times noted in a May 18 article.
For China – facing questions about its handling of the viral outbreak in Wuhan and under pressure from US President Donald Trump’s trade threats – this comes at an inopportune moment.
None of the choices available to Beijing are good ones. On the one hand, China can hardly refuse to renegotiate loans to its partners without further tarnishing its image on the international stage. On the other hand, conceding repayment extensions or even debt relief, as the International Monetary Fund (IMF) has done to its 25 poorest member countries, is costly for China.
It's "a tricky balancing act", said Mary-Françoise Renard, director of the Institut de recherche sur l’économie chinoise (IDREC), in an interview with FRANCE 24. China "already put in place a number of measures to support its economy last year, and the pandemic has forced it to spend even more, which reduces its budgetary room for maneuver", she noted.
A problem for Xi
Beijing is caught between two imperatives: supporting its economy, which has been hard hit by the health crisis and "which remains its No. 1 priority", according to Renard, and helping its "Silk Road friends", to whom the Asian superpower has promised much in exchange for their BRI membership.
Renard notes that, fortunately for China, the country still has the means to make this great financial leap. But to do that, Xi will have to manage two problems: repayments that won't arrive when Beijing needs them most and infrastructure projects that will be delayed due to slowing economies.
"The railway between China and Malaysia and the high-speed train project in Thailand, financed by Beijing, have already had to be put on hold," noted an April report by Fitch Solutions, the research department of the Fitch rating agency.
These are setbacks that may also have a political impact for Xi. The Chinese leader has made the initiative the economic pillar of reign. Beijing has already faced criticism in recent years for the lack of transparency on loan terms and the questions about the real benefits for countries participating in the project.
Following these complaints, Xi "was forced to reboot” the programme in 2019, promising, in particular, greater transparency by ensuring its projects “follow international procurement guidelines”, wrote Felix Chang, China specialist for the US-based Foreign Policy Research Institute. Xi needs results to justify the money invested, and with the Covid-19 crisis, that will take longer than expected, added Chang.
‘Health Silk Road’
Above all, these difficulties – coupled with Washington's anti-China campaign – could lead some countries to reconsider their BRI participation or deter others from signing up, the New York Times suggested. This would be particularly damaging for China in Africa, where Beijing is locked in stiff competition with the US and Europe.
Renard, however, says Beijing could overcome these challenges in Africa. The majority of African countries "believe there’s more to be expected from China, which has so far helped them to develop, than from the United States or Europe", she said. These African countries, she noted, would only slam the door on BRI “if they had problems directly with Beijing or thought that the benefits, especially in terms of jobs, of these infrastructure projects would not materialise". Hence the importance of Beijing waging a perception campaign to placate and cajole countries in its New Silk Roads initiative.
The Covid-19 pandemic could also present opportunities for China. On Monday, at a virtual meeting of member states of the World Health Organization (WHO), Xi reiterated that his country would not let down its "friends".
In addition, the crisis could also push China to “implement a Health Silk Road” initiative to create “opportunities in the construction of healthcare facilities and increase trade in healthcare-related goods between China and BRI countries”, noted the Fitch Solutions report.
Instead of building only roads, railways or ports, the Health Silk Road could be “an extension of the BRI”, the rating agency’s analysts noted, “which focuses on improving healthcare infrastructure, enhancing the flow of healthcare-related goods and services and the exchanging of medical ideas and practices between BRI countries”. China proposed a similar extension of the project at a WHO summit in 2017.
This article has been translated from the original in French