Expert Speak Raisina Debates
Published on May 28, 2020
The fallout from Covid-19 makes imminent two crises for BRI’s continued progression: a crisis of credibility and a crisis of viability.
The BRI and Covid-19: A tale of two crises This is the 96th article in the series The China Chronicles. Read the articles here.

Covid-accelerated de-globalisation, power competition, and political warfare is fostering an active debate on the power outcomes in the times to come. As China’s role and weight in the world is brought into sharper relief, what does this mean for the “new era of Chinese power” expected to usher China towards global leadership?

A key driver of China’s outbound bid for power, its Belt and Road Initiative (BRI), has unsurprisingly seen delays and disruption due to quarantine and containment measures. A slowdown is expected to persevere in the near future as countries experiment with different levels of lockdown amidst uncertainty about future surges, yet the Chinese government remains “as confident and determined as ever” to advance BRI cooperation as an engine of growth in a global economy facing a prolonged recession.

But the fallout from Covid-19 makes imminent two crises for BRI’s continued progression. These two crises speak to BRI’s failing credentials as a “global development strategy” meant to revive globalisation and promote sustainable development through mutual benefit.

Crisis of credibility 

This pandemic is turning out to be a moment of reckoning for China’s role in the global economy, particularly in two areas: its dominance and control of supply chains, and its position as the world’s largest official creditor. Calls for self-reliance and economic independence litter government responses to the global health crisis. Manufacturers have been for years shifting production out of China, the world’s factory; more are looking to diversify faster. Crisis-hit countries are requesting debt-relief from China.

With BRI failures eclipsing successes, anxiety over unequal project gains render hollow BRI’s claim of win-win cooperation, and an unfettered infrastructure spending and creation spree bring to question the quality of China’s approach to development that it is exporting.

The BRI is implicated in both respects. It has already been facing backlash from participating countries over BRI’s ‘terms of engagement’ (think Chinese money, Chinese contractors, Chinese workers; high-interest loans with Chinese version of conditionalities; trade connectivity that facilitates export market creation for China) that exacerbate reliance on China and exposure to Chinese political influence and interference.

The BRI is also the poster child for unsustainable debt creation in participating countries, a list that includes high-risk states with the weakest credit profiles, that brings to question China’s “opaque and chaotic debt binge” while also prompting apprehension over Chinese aims. Indeed, the wave of countries requesting China to waive off loans are BRI participating countries asking for BRI project debt relief. With BRI failures eclipsing successes, anxiety over unequal project gains render hollow BRI’s claim of win-win cooperation, and an unfettered infrastructure spending and creation spree bring to question the quality of China’s approach to development that it is exporting. National security concerns and loss of sovereignty pepper criticism.

Furthermore, the political and economic fallout from the coronavirus pandemic will exacerbate the inherent tension that exists between the BRI as a “state strategy” and the need to course-correct BRI implementation for increased buy-in across the globe. A governance model that prizes control over other objectives — through for instance bilateral deals, opaque procurement process and loan terms, and reliance on its public banks and state-owned enterprises — has been at odds with the rhetoric to multilateralise the BRI, thereby increasing its legitimacy as a project for “common development.” Triangular cooperation, multilateral development banks co-option, and private sector involvement have been mooted; there have been instances of informal consultations with western multilateral officials; and the 2nd Belt and Road Forum saw Xi projecting a more transparent, sustainable, and consultative BRI to the world.

The impact of the ongoing pandemic raises the bar for BRI’s credential as a development strategy/model that bears sustainable outcomes — and not an endeavour that prioritises gains for China at the expense of creating risks for the partner country.

China is currently doubling down both on multilateralism and leadership rhetoric. But the fallout of the pandemic in its own home means that the continued legitimation of the CCP becomes a priority. As an increased Chinese assertiveness does the global rounds (e.g., an escalating “wolf warrior diplomacy” and trade weaponisation), the BRI going forward will see reinforced its status as a Chinese project. To wit, China’s plans to accelerate the Digital Silk Road and resuscitate the Health Silk Road: the first advances a China-centered global information network, but also aggravates a different set of risks in partner countries; the second, for now, serves more as a platform for China’s “benevolent” mask diplomacy and image-building.

In sum, the impact of the ongoing pandemic raises the bar for BRI’s credential as a development strategy/model that bears sustainable outcomes — and not an endeavour that prioritises gains for China at the expense of creating risks for the partner country. Delivering on the claim of realising “diversified, independent, balanced and sustainable development” in participating countries becomes more critical given that the world faces a recession “way worse” than the 2007-08 global financial crisis.

Inevitably, as countries the world over re-think their levels of openness and resilience as they battle the coronavirus, the BRI proposition — continued dependence on Chinese non-concessional lending for infrastructure connectivity that links up a participating country as another economic, political, and strategic spoke to China’s hub — looks less attractive than ever.

Crisis of viability

The ultimate test of the BRI was always going to come when the global economy became less forgiving.” The Covid-19 pandemic has created just such a condition, and in so doing, has sharpened existing concerns over China’s capacity to shoulder the long-term burden of an undertaking now enshrined in its constitution.

The BRI is not an aid but an investment initiative that seeks returns on its investment: “We need to at least recoup principal and a moderate interest.” Yet, according to OECD data, China’s non-performing assets had reached $101.8 billion by the first half of 2018, a figure that will have ballooned since. This represents a significant share of China’s total BRI lending since 2013, which estimates peg anywhere between $450 and $600 billion.

China’s practice of indiscriminate lending is unsustainable. Note that even as BRI investments have decelerated, the initiative continues to expand.

On the one hand, BRI lending peaked in 2015. Last year saw not a single infrastructure loan issued by any of the four biggest lender (all Chinese banks). A backlash from BRI participating countries, but also a diminished appetite for risks to China’s own coffers have prompted greater discretion. Projects have also been cancelled, renegotiated, scaled back, delayed, or simply put on hold.

China’s practice of indiscriminate lending is unsustainable. Note that even as BRI investments have decelerated, the initiative continues to expand. Beijing has attempted to tighten capital outflows in recent years, in turn implicating BRI funding. There has also been some movement on engaging with non-Chinese banks and financial entities, even the launch of a few bilateral funds.

On the other hand, however, all this has come too little, too late. Chinese officials have privately acknowledged BRI as a loss-making enterprise; Chinese bankers and researchers have recognised the inability of BRI countries to fund projects or repay debts. With the Covid-19 pandemic prompting fears of recessions and sovereign debt crises, many BRI countries are in no position to repay project loans. Despite much criticism, China is not likely to forgive these debts, seeing as it has reportedly already faced losses through loan restructuring, write-offs and deferments.

There are claims of an annual BRI funding gap of $500 billion, revealing concretely the scale of China’s ambition. But who will foot the bill — or even simply sustain existing projects? The BRI’s potential to earn returns, given a faulty financing approach that remains to be course-corrected from the top down, remains limited. Even counting for political and strategic dividends that guide Beijing’s calculations on some projects at the expense of commercial and financial viability, China’s capacity to financially sustain an ever-sprawling BRI is not unlimited.

Expectations of a drawn-out recovery are compelling — China has not set a GDP target this year, for the first time ever — particularly in the event of a resurgence of the virus and US-China trade-war escalation.

As the Chinese economy re-opens its shutters, rosier outlooks of China’s economy as a bright(er) spot in a post-pandemic world<1> compete with pessimistic accounts of how China’s economy has been dealt a body blow that is only just beginning. A dismal first quarter into the year, the full economic impact remains to be seen as China’s “three-horse growth carriage<2> navigates a severe demand shock. Expectations of a drawn-out recovery are compelling — China has not set a GDP target this year, for the first time ever — particularly in the event of a resurgence of the virus and US-China trade-war escalation.

The longer and more extensive the recovery period, the more it will put pressure on Beijing’s ability to financially sustain the BRI. Fundamentally, the recovery puts in spotlight the deeper, structural malaise in the Chinese economy, already a pressing concern pre-Covid. Debt-driven growth, led by infrastructure and real-estate creation, has been increasingly propping up a slowing Chinese economy.<3> In so doing, China has seen bad loans rise and debt soar.

China’s fiscal response to revive its economy is necessary tempered by the existing level of debt, but is and will of course still see (bad) loans increase and debt rise. And ultimately, the sum of what has been announced seems to be pointing to an acceleration of state-backed infrastructure investment. However, its “new infrastructure” push into digital investments is trying to seed future economic growth (and also contribute to economic rebalancing) by fostering supply and demand in higher value-added sectors.

Whether China comes out of this with a cleaner balance sheet or ends up over-burdening its debt-laden public sector will dictate China’s own financial health to sustain the BRI.


<1> UNCTAD has said that the world faces a recession except possibly for China and India.

<2> The three “horses” being exports, consumption, and investment.

<3> China pumped in over half a trillion dollars’ worth of stimulus during the global financial crisis, most of which was fed into government-backed infrastructure projects.

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Contributor

Ritika Passi

Ritika Passi

Ritika Passi works at the intersection of economics and security. Her research focuses on regional connectivity initiatives and power shifts in global economic governance. She ...

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