Belt and Road Initiative and COVID-19: A double edged sword?
Belt and Road Initiative and COVID-19: A double edged sword?
WRITTEN BY MICHAEL TRINKWALDER AND SARAH AVER
2 June 2020
The Belt and Road Initiative has the potential to become to the post-COVID-19 world what the Marshall Plan was to a devasted Europe – if one is inclined to believe Chinese state media. Although China was the first major economy to experience a virus-related downturn, Beijing’s relative success in stamping out the virus now puts the country in a unique position to lead the global economic recovery. It is now one of only two major economies that are expected to register a positive growth rate in 2020, with the IMF predicting China’s economy to grow by 9.2% in 2021. Consequently, China is one of the very few international actors, that has the financial capacity to actually make investments abroad. Moreover, as the economic situation deteriorates, Chinese investments will go much further in achieving Beijing’s strategic ambitions, than they ever could in the past.
Additionally, the Chinese government is keen to promote the “effectiveness” and “resilience” of its authoritarian political system in the face of a global pandemic. Both in an attempt to shift the blame away from Beijing and to demonstrate that China can be a responsible global stakeholder. In the battle of narratives currently at play, the Chinese authorities have thus resorted to heavily propagandize their deliveries of medical goods to various countries. This propaganda campaign has involved official messaging and extensive disinformation efforts, but China’s most effective tool has undoubtedly been its “mask diplomacy.”
COVID-19 could significantly boost the “non-physical aspects” of the BRI such as the so-called Health Silk Road and the Digital Silk Road
China is the world’s leading producer of personal protective equipment, the Chinese government has skillfully exploited this position to make highly photogenic “aid” deliveries of face masks, protective suits, ventilators, and test kits to affected countries. In contrast, many countries in the West have limited or stopped their export of medical goods abroad. Beyond providing the tools, Beijing is also training governments around the world on how to enact Chinese style information control – a model that could grow in attractiveness as the challenge of the pandemic intensifies. Yet, COVID-19 is at least as much of a threat as it is an opportunity for the Belt and Road Initiative.
Essentially, the economic impact of the pandemic will dampen global demand, leading to a reduction in trade, which will make new infrastructure construction unsustainable. Thereby, leaving BRI borrowers with debt they cannot repay. As the world is heading for one of its worst economic recessions in living memory, many of China’s BRI partners and its other debtors are already struggling with their debt burden and are calling for debt relief. A situation that is sure to get worse before it gets better – if it gets better. Not to mention, the distinct possibility of COVID-19 leading to a “deglobalization” of critical supply chains. In case of default, Beijing could always seize strategic assets of non-paying countries like it did in the case of the Hambantota port in Sri Lanka. However, such a move would certainly generate enormous resentment in the affected countries and lend further credence to accusations of “debt-trap diplomacy.”
To be sure, Beijing is still capable of financing BRI projects even at the pace of the 2015-2016 peak of $50-60 billion. Yet, Chinese loans have been most attractive to countries that could not or did not want to meet IMF or World Bank standards, resulting in a renegotiation rate of China’s overseas lending of 16-25%. In fact, the growth of BRI project activity in most countries had been declining well before the outbreak of COVID-19. Considering, Beijing’s reluctance to forgive debt and its presumable prioritization of stimulating the domestic economy, the BRI is likely to be put on the back burner, at least temporarily.
For now, this cash crunch will probably be limited to capital intensive infrastructure projects, since Chinese companies are doubling down on plans to acquire or invest in distressed foreign assets in strategic locations. The outbreak of COVID-19 in Wuhan initially brought Chinese outbound investment to a standstill, but since then, there has been a sharp increase in Chinese outbound acquisitions and investments. With several media reports suggesting additional growth in the future.
However, several key target countries have tightened their FDI screening in response: India, Canada, Australia and several European countries have already implemented additional screening measures, mainly aimed at Chinese companies. Particularly, the European Union has emerged as a leader in tightening investment security, releasing updated FDI screening guidelines, urging member states to take ownership stakes in distressed companies, and is now even planning to do so itself. Similarly, the pandemic has also rekindled debates in Europe about the need for a tougher stance on China, and particularly whether to allow Chinese companies to build 5G networks in Europe. Therefore, it seems unlikely that Chinese companies will go on a “post-pandemic asset shopping spree” – at least to the extent that some fear.
This hardly means that Beijing will abandon the BRI, which has been included in the Chinese constitution and more importantly remains one of President Xi’s top priorities. Instead, COVID-19 could significantly boost the “non-physical aspects” of the BRI such as the so-called Health Silk Road and the Digital Silk Road (DSR). The pandemic has clearly shown the benefits of enhanced health cooperation within the framework of the Health Silk Road, but it is the DSR that could profit most from the outbreak of the virus. COVID-19 is transforming economies around the world with many activities that had hitherto been physical, by necessity being moved online. This puts Chinese domestic tech-giants like Alibaba, Tencent, or Huawei into an ideal position to benefit from the pandemic and capture new markets outside of China – especially in BRI countries.
The Chinese word for “crisis” is composed of two characters, one representing danger (Wēi 危) and the other opportunity (jī 机). This sentence may have become a bit of a cliché in recent years, but when it comes to the potential impact of COVID-19 on the BRI it still applies. However, which of the two directions the Belt and Road initiative will take remains the one trillion-dollar question.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
Michael Trinkwalder is a Research Assistant at the NATO Parliamentary Assembly where he focuses on EU-NATO cooperation, defense innovation, the implications of the rise of China as well as COVID-19 and Euro-Atlantic Security. Previously, he has worked at the Center for Public Affairs of the German Armed Forces, AICGS at the Johns Hopkins University as well as the Aspen Institute Germany.
Sarah Aver is a Research Assistant at the NATO Parliamentary Assembly where she focuses on topics such as the implications of China’s rise for Euro-Atlantic security and Women, Peace and Security within the context of NATO. Previously, she has worked at The Brookings Institution, John L. Thornton China Center as well as the European Union Delegation to China.
The views expressed in the article are those of the authors alone and do not necessarily reflect the official position of the NATO Parliamentary Assembly or any of its members. Image credit: United Nations/Flickr.