China’s BRI Dilemma

The Communist Party of China has announced its thirteenth National People’s Congress will be held on May 22^nd in Beijing. This annual event is important as it brings together the top brass of the CCP to discuss plans and goals for the year ahead. Its 2020 incarnation has extra significance – it’s the latest sign that Beijing believes the worst of the Coronavirus pandemic in China is over.

With the virus contained domestically, getting the economy up and running is the party’s top priority. Unfortunately, the lingering effects of the pandemic at home and abroad will make this a slow and arduous process. Domestic consumption remains low as some Chinese continue to avoid shopping malls and prioritize replenishing their savings. Mass lockdowns and soaring unemployment in the U.S. and E.U. have depressed demand for Chinese goods – bad news for an export-driven economy.

Across the globetrade disruptions and goods shortages have motivated governments to diversifysupply chains and ramp up domestic production. This will accelerate China’sdecline as the world’s factory, a process that is already underway ats a timewhen Beijing’s response to the crisis has soured relations with much of theWest. Reinhard Buetikofer, chair of the European parliament’s delegation forrelations with China, stated that “Over these months, China has lost Europe”,citing concerns over its honesty, aggressiveness, and propaganda.

Several E.U.members have intensified investment screening protocols to prevent Chinesecompanies, who often act on behalf of the CCP, from acquiring controllinginterests in industries vital to national security. Investing in Europe hashelped the Chinese garner political support on a variety of issues andfacilitated the transfer of technologies crucial to the Made in China 2025initiative. As the E.U. increasingly views China as a threat, Beijing’seconomic prospects in the region will suffer accordingly. In the U.S., DonaldTrump’s name-calling, accusations, and threats do not bode well for futureAmerican Chinese relations.

Faced with theseuncertainties, China needs alternative drivers for growth. The obvious choiceis the Belt & Road Initiative, the flagship project of Chinese leader XiJinping. At first glance, BRI seems like the perfect tool for the job. Itssprawling network of roads, airports, railways, ports and more will connectChina to emerging markets in Asia, Africa, the Middle East, and eastern Europe.These projects will provide countless jobs for Chinese workers, soak upsurpluses of domestic steel and aluminum, and ensure the flow of raw materialsinto China. It also allows the Chinese to partially negate one of its greatestgeopolitical vulnerabilities: the first island chain. In a conflict, the U.S. navy could use its bases inthe western Pacific to block the sea lanes through which most of China’s tradeflows. This would grind the Chinese economy to a halt, a threat Beijing takesseriously.

Building traderoutes over land across Eurasia provides it with an alternative should the worseoccur. Beijing promotes the BRI as a win-win scenario for everyone.Participants get shiny new infrastructure, improved connectivity, jobs, andaccess to more goods and services. In short, BRI seems like the ultimatesolution to Beijing’s economic conundrum.

But…. many of the BRIprojects are in countries with less than stable finances. They have taken outenormous loans from Chinese lenders to build infrastructure they otherwisecouldn’t afford. Even before Coronavirus ground economies to a halt, many werestruggling to service their debts.

Sri Lanka servesas a cautionary tale. After accepting huge loans to build a port at Hambantota,the government was unable to pay back the money. Following lengthynegotiations, Colombo seeded control of the port and surrounding lands toBeijing for 99 years. China gained control of precious territory in the IndianOcean, but it led to accusations of ‘debt-trap diplomacy’. Critics suggest thatChina was weaponizing debt to control strategically important real estate.Montenegro, Mongolia, Pakistan, Kyrgyzstan, and Djibouti may be among those atrisk of a similar fate.

COVID-19 threatensto expand that list. The pandemic induced economic crunch makes it impossiblefor some BRI members to service their debts. Calls for the postponement or cancellationof repayments are growing louder, especially among African nations. This putsthe CCP in a tight spot.

Chinese banks areunder pressure domestically and are unlikely to cancel loans outright. Chinahas signaled its willingness to suspend interest payments, and has agreed to aG-20 initiative to freeze loan repayments for developing countries. However,these steps will only provide a temporary reprieve.

However, China is waryof its reputation for debt-trap diplomacy. Adopting a hardline approach withpartners could collapse support for projects underway or proposed. Countriesthat remain on the fence about joining BRI will be watching closely to see howChina responds to the situation, as will strategic competitors like the UnitedStates and Japan. Any signs that China seeks to exploit its partners forstrategic gain will be noted.

All this leavesChina in a precarious situation. The BRI was meant to symbolize Chinesestrength, ambition, and desire to spread growth and prosperity throughout thedeveloping world. The Coronavirus threatens to shatter this veneer by makingChina choose between its internal finances, the stability of its partners, andits credibility as the leader of a new Eurasian economic order. Whatever decisionBeijing makes, someone is going to unhappy. The BRI is not such a win-win afterall.