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Since 2013, the Chinese leadership has successfully made a splash on the world stage by selling the Belt and Road Initiative (BRI) as the “project of the century.” More than 150 countries joined the BRI, with hundreds of agreements signed. By 2019, more than 3,100 connectivity projects valued at billions of dollars total were undertaken by Chinese state firms. Overnight, the BRI became a heated phenomenon. Given the sheer scale and scope of the BRI, the Economist once commented that “all roads lead to Beijing.”
Now almost a decade since Chinese President Xi Jinping announced the sprawling plan, the momentum behind this “gala” appears to be slowing thanks to the repercussions of debt sustainability, the coronavirus pandemic fallout, and China’s own economic slowdown.
Facing headwinds, China will use two big political events this year to try to boost public confidence in the BRI: the annual session of the country’s parliament on March 4–5 and the third Belt and Road Forum for International Cooperation (BRF) to celebrate the tenth anniversary of the BRI. Both events will likely highlight the BRI’s achievements and future plans for collaboration. But three factors may affect these plans: the urgency of domestic imperatives for Chinese state firms, complications from doing business overseas, and shrinking international space for firms bankrolling the BRI.
Domestic Economic Imperatives
After three years of its Zero COVID policy, China needs to remedy its economic malaise, as its GDP grew only 2.7 percent in 2022, marking the lowest growth since 1978. Now, after an abrupt exit from Zero COVID, China’s priorities are to ramp up domestic quality economic growth, restore investor confidence, stabilize the ailing property market, revive the suppressed platform and high-tech sector, and resolve a potential debt crisis for local governments, according to the 2022 central economic work conference. As a result, China’s deep pockets for overseas spending may be constrained by the shift to domestic economic revival.
In addition, as Chinese state businesses tend to be inward-looking, their interests in overseas investments are sidelined when they are tasked with more pressing domestic missions. As China-U.S. competition has intensified in recent years, the U.S. pressure to decouple has forced Chinese state businesses to become more self-reliant. State businesses must help maintain the security and stability of the industrial chain and supply chain by investing more in critical areas at home, the party secretary of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) noted in the official mouthpiece Qiushi.
Against this background, the task of building autonomous technologies in key areas has become the top priority of China’s domestic agenda. As outlined in the 14th Five-Year Plan (2021–25), the government aims to dominate in the development of new technologies and thus state firms will be directed and incentivized to invest in the domestic market.
Therefore, in light of strain on public funding and new focus on domestic circulation, large-scale cash handouts to state firms for the BRI are off the table.
Liability of Foreignness Issues
Like other foreign companies, Chinese state firms also have liability of foreignness issues—the additional costs that companies incur when operating in overseas markets. Chinese state agencies, including the Ministry of Commerce and the SASAC, have introduced state directives in an attempt to address such liability issues. But unlike other foreign firms that conduct adequate due diligence, Chinese state firms have consistently relied on state-to-state relations to carry out their investment strategies.
Because Chinese state firms enjoy government support, they can safely foster relations and increase investment opportunities by working with local agencies, partners, and political elites in the host country. In most cases, these elite approaches have been working well to secure Chinese investments abroad.
Nonetheless, such a top-down approach could create increasing political risks for Chinese overseas investments in the long run. First, Chinese state firms may be unable to make responsible or viable decisions because of their heavy reliance on local institutions and partners. Information regarding potential conflicts between local institutions, partners, and society may not be equally shared with Chinese state businesses, thus increasing investment risks for the Chinese. For instance, the Myitsone dam, backed by China Power Investment, was cancelled overnight during Myanmar’s democratization transition in 2011, resulting in losses of millions of dollars.
Second, the BRI is more likely to be politicized when Chinese overseas projects are closely tied to the local elites in the host country, and when these local political elites associate their political legitimacy with the ability to attract Chinese investments. For instance, unlike other multinational corporations that withdrew from the Myanmar market, Wanbao, a Chinese state mining company, continued to invest in Myanmar after the 2021 military coup. Chinese state businesses even quickly resumed BRI cooperation (which began with the overthrown civil government) with the military government, resulting in a huge image crisis.
Further, because of its top-down elite approach and the lack of adequate public participation, the BRI became known for its lack of transparency, compounding the problem for Chinese state firms. By tying themselves with the BRI, Chinese state firms may face more political risks and image issues. If BRI continues this elite approach, China’s economic foreign policy will become less predictable in emerging democracies, with far-reaching consequences for China’s foreign policy and state businesses.
Shrinking Space for Bankrolling the BRI
Realizing these problems, the Chinese leadership toned down the BRI hype and pledged to reform the BRI into an “open, green, and clean” initiative at the second BRF in 2019. But after years of wolf-warrior diplomacy and conflicting policies on being an open economy but reiterating the role of the Chinese Communist Party and the Chinese state in economic foreign policy, the international space for China to navigate its BRI is shrinking.
First, as globalization retreats and protectionism advances, the whole concept of BRI-connectivity is changing. Now it is not just about efficiency but also about security. China’s behavior in the past few years shows that its BRI is unable to achieve both. For one thing, its arbitrary Zero COVID policy and lockdowns severely impacted the security and efficiency of the supply chain. More concerning for the investors is the fact that China’s disruptive economic policies increased the odds of doing business with China.
Second, the Russia-Ukraine war and the potential Sino-American clash over Taiwan serve to remind countries that are relying on China’s supply chain that their reliance could incur crippling bills for their economy. Moreover, heavy reliance on the Chinese market may increase their vulnerability to Chinese economic coercion. Therefore, China’s partners, like Southeast Asian countries, are likely to become warier participants in the BRI.
Third, the downward-spiraling relationship with the United States has clouded BRI implementation for Chinese state businesses. In December 2021, the United States imposed security-related sanctions on hundreds of Chinese state firms, many of which have been active participants in BRI projects. For instance, one sanctioned firm, the China Communications Construction Company, and its subsidiaries were involved in the China-Pakistan Economic Corridor, Colombo Port City, and Kyaukpyu deepsea port projects.
Cutting off Chinese state firms from global economic networks will be challenging, because many of them are already embedded in supply chains. But the U.S. sanctions on Chinese firms that are heavily involved in the BRI will make third parties reconsider the risks of collaborating with the Chinese. Beijing has been calling for third-party market collaboration to lower the cost of BRI financing. It has also made a few attempts to collaborate with France, Italy, and Singapore. But now, third parties that desire to work with Chinese state firms need to review the potential geopolitical impact on their operations, technology, and reputation.
Most importantly, changes in global economic governance have complicated implications for the BRI and the world. Other countries now seem to pursue economic security through rampant protectionism and state intervention in the market. The United States, for instance, passed the United States Innovation and Competition Act of 2021 to compete with China. President Joe Biden’s administration’s attempt to form a multilateral coalition against China (e.g., leading Build Back Better World and the Indo-Pacific Economic Framework) will strengthen the trend of drifting away from China-based supply sources centered around the BRI.
Notwithstanding all the problems stated above, China will not abandon the BRI despite years of disruption. The two events— the annual parliamentary session and the third BRF—this year are expected to yield reassuring measures from Beijing to restore public confidence in the BRI. As long as the events can continue to make splashes, Beijing will host the BRI. But over time, audiences may just not be as excited as they were before.
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
