Has COVID-19 killed China's 'project of the century'?
Has COVID-19 killed China's 'Project of the Century'?
WRITTEN BY RAGINI KASHYAP
27 May 2020
China is known for its ambitious projects but the Belt and Road Initiative (BRI) dwarfs all the projects in the modern history of the country. Announced in 2013, Chinese President Xi Jinping called it “The Project of the Century”. The BRI represents China’s ambitions to revive the Silk Route, an ancient trading corridor that connected China to the Mediterranean via Eurasia. The BRI aims to boost China’s connectivity with the world, covering an extensive geographical area which includes old and new projects, aimed at consolidating hard infrastructure, soft infrastructure, and cultural ties. Beijing’s ultimate aim is to connect Asia, Africa, and Europe via road and maritime networks which aims to enhance regional integration, increasing trade, and stimulating economic growth.
The COVID-19 pandemic however has brought the global economy to a grinding halt, sparking the prospect of the worst economic crisis this century. The pandemic is also having an impact on China’s most ambitious project of all time. This article takes an inductive approach to examine the rumors about the death of BRI and its possible redemption.
Troubles around the Belt and Road Initiative
Even before the COVID-19 crisis there was growing skepticism around the BRI among different countries. Most of the deals were being made with the countries which have credit ratings of ‘junk’ (bonds carrying a high risk of default). The UNESCAP report released in 2017 stated how unviable these Chinese-led infrastructure projects are. Projects built on high-interest loans putting small economies in a debt trap have led to a massive increase in debt to China and is estimated to surpass 20% of GDP in some countries. This globally creates a perception that the project is not a development opportunity at all but a tool for Chinese imperialism, so much so that US Secretary of State Mike Pompeo referred to the BRI as a Chinese attempt to buy an empire. However the recent rumors of the death of BRI lies with the current global economic crisis sparked by the lockdown and China’s own domestic economic situation.
Morgan Stanley forecasts that China’s overall expenses along the BRI routes could reach up to 1.3 trillion by 2027. The World Bank's own estimates for the total project outlay till 2019 comes in around $545 billion alone.
The world is set to change dramatically post pandemic and the situation will depend on the efficiency of different governments to handle the crisis. We are witnessing global powers struggling with the the staggering effects of COVID-19 and their socioeconomic strategies to come out of this crisis aren’t proving to be enough. There is an expected change if not a complete overhaul in the global order and China’s most prestigious project will also get affected.
The world has seen the dark side and the risk of global interconnectedness. There is a high chance of increasing protectionism in the coming times as COVID19 diffusion includes important curbs on globalization and reassertion of states.
The International Monetary Fund has projected the global economy shrinkage of up to 3% in 2020, United Nations Conference on Trade and Development (UNCTAD) has predicted that COVID-19 will reduce the flow of Foreign Direct Investment (FDI) by 30-40%; world bank estimates the remittances to fall by 20%, WTO warns about falling of overall global trade. Even before the pandemic globalization was in trouble due to the rise in populism all over the world and rise in protectionist policies. Even the drivers of globalization who once believed in the concept of free trade and the invisible hand theory of Adam Smith, have backtracked in the current economic outlook.
The global health crisis has led to the sealing of borders' domestic and international across the globe, resulting in a slowdown in the flow of people, trade, capital, and a significant fall in demand altogether which isn’t a good-news for a mega project like BRI.
Countries that already had a high risk of default will now be worse off because of the ongoing economic situation, for example Pakistan which is a mega partner in China's BRI project via the China-Pakistan Economic Corridor (CPEC) is estimated to bear a loss of $8.2billion.
Similarly, many different countries remain vulnerable and it would be difficult for them to manage the public debt implications. China is already facing a lot of criticism over the origin of the virus from the wet markets of Wuhan and over the fact that they kept it hidden from the world until December. It has disrupted China’s economic and diplomatic programs and has made other countries wary of them. China supplied 42% of global Personal Protection Equipment (PPE) in 2018, 60% of ingredients for antibiotics for Japan, a major percentage of blood thinners for Italy. This exposes the over-dependence of different countries on China and the current situation will force countries to reduce this reliance in the future as they would want to diversify. The French President Emmanuel Macron has called for a more balanced cycle which is less dependent on a single exporter. At the same time Indian Prime Minister Narendra Modi exhorted India to go “vocal for local”.
China’s domestic challenges
The situation at home isn’t conducive either china’s economy has been hit by the health crisis, the country’s GDP declined by 6.8% from a year ago, the first contraction since 1992. They are struggling with a rise in the unemployment rate, the urban unemployment rate jumped to 6.0% in April, 5 million people in China lost their jobs in January and February, the number is expected to grow by the end of the year.
China’s outbound investment took a plunge even before the virus hit the country, in 2019 it was $68.4billion that is 41% less than what it was in 2018. The country's effort to engage participatory nations for its connectivity strategy has disrupted due to the outbreak. The current global and domestic scenario is going to affect the funding of projects. These funding were mainly done by China's policy bank and state-owned commercial banks which will be hard hit. The banks will be more careful in sanctioning the loans and avoid falling into the creditor's trap and will choose more strategic projects to sanction loans under the BRI.
Currently China claims that they have controlled the outbreak and the productions have started and the country is trying to get back to normalcy. But with the global slowdown and major importers of Chinese goods still struggling with the COVID 19 situation, china’s trade is going take a hard hit.
The political pressure on the Communist Party of China (CCP) to maintain social stability (and the need to avoid a situation of a middle-income trap) is severe. Amidst this the general public sentiment to fulfil the domestic needs over foreign engagements are likely to prevail and BRI will have to take a backseat. The country's labor and equipment supplies across the Silk Route have been troubled because of the pandemic. Morgan Stanley forecasts that China’s overall expenses along BRI routes could reach up to $1.2 trillion to 1.3 trillion by 2027. The World Bank's estimate for the total project outlay till 2019 is around $545 billion and with the current economic lockdown, Morgan Stanley’s prediction looks far from reality.
For a project which aims to connect 65 countries, the crisis surely has made things difficult. Once the global economic situation improves work on the BRI may be undertaken again, but for now the COVID-19 virus has surely put the Chinese Dream on hold.
Why the BRI won’t die
We are talking about the death of a plan that touches 138 countries as of 2019 that accounts for around 61% of the entire global population and a combined GDP of $29 trillion. The COVID-19 pandemic surely makes things difficult but to assume that China would let BRI die would be a mistake and the rumors of demise, premature. China stepped beyond its borders like never before. The project represents Beijing’s most important strategic foreign policy project and a symbol of its role as a global leader. With the BRI China is trying to gain economic and political leverage to assert its presence not just as a regional hegemon but a global leader in a new multipolar world order. Beijing's official stance has been that COVID-19 will have a temporary impact on the Belt and Raod and is more likely to resume post lockdown.
Currently China has revamped the project. They are pushing for projects like the Health Silk Route (HSR) and Digital Silk Route (DSR) under BRI which is a welcome step. They should try to bring non-physical aspects under BRI and use it to regain the lost trust of the countries. The countries are depending on surveillance apps all over the globe for tracking of the cases, the pandemic has pushed economic activities and consumption patterns online and this is likely to stay even post-pandemic giving more opportunities for DSR to flourish.
China already is the major exporter of PPE, is engaging in 'mask diplomacy' where it has been sending protection kits, ventilators, testing kits, and other medical supplies to different countries. Though there have been complaints of defective equipment from a few countries. China pledged $50million to WHO, and also announced to do ‘whatever it can’ to assist different countries. HSR has been there since 2016, but this the right time for them to realize its full potential and push it even further. This is the best time for China to resort to its soft power diplomacy until the situation is under control.
As the ability of debtor countries is affected and they aren't in a position to repay their loans taken for projects under BRI. There is a rising pressure on China from the BRI stakeholder countries to provide debt relief in the form of interest waiver, an extension of payment or to suspend payment altogether. China should readily address the issue and renegotiate the loan terms and should focus on not letting down the current and future participant countries.
What next?
In the long-term perspective, the current situation won't last forever, the pandemic will be over and economies would want to develop and invest in physical domestic infrastructure and BRI will be relevant again. But If China is serious about BRI this will need them to go beyond rhetorics and take concrete and bold steps to come back with a newer and better version of BRI post-COVID-19. China needs to consider the long-time pending suggestions and work on them.
The first thing that needs to be done is to define BRI there is no official definition to it or of what it constitutes. It can’t be everything, a proper definition would allow it to narrow down its objectives and focus in a better way. The major policy reforms suggested in the World Bank’s Belt and Road Economics report need to be addressed.
One of the very essential policy reforms suggested is to 'multilateralize’ BRI and to move from being China-centered to being more inclusive. Transparency, necessary at all levels is from project planning to finance, procurement, and public reporting of debt level. Currently the funds for projects are released mainly by policy banks and commercial banks of China, they should diversify and try to rope in international institutions like IMF, world bank, Asian development bank, BRICS new development bank, etc. To date, the project has been all about Chinese funding, Chinese material, and Chinese labor it needs to get over that and diversify giving the participating countries more chance of involvement.
Stronger labor mobility could ensure more shared economic gains. In order to increase its efficiency and quality of projects under BRI china should consider developing 'pilot projects' with the host countries. This would allow them to test policies on a small scale and then they can scale it up with necessary changes and lessons learned.
China should help host countries to promote and encourage local communities, and create local employment opportunities in the domestic markets, making it more acceptable for the people in the host countries. This will ensure a long-lasting socio-economic impact of the projects in those countries and will increase legitimacy for BRI. Equally ambitious reforms are needed from the participating countries, they need to pay more heed towards strengthening environmental standards and to increase transparency around open government procurements. These are important steps in order to encourage community participation and build public trust.
These are crucial first steps that need to be taken in order to garner the trust of countries so crucial for the BRI’s future. If China uses its soft power efficiently now which won't be an easy task keeping in mind their fumbled initial response to control the virus outbreak in Wuhan. But if done correctly it could pave a path for the country's voluntary participation for BRI and help the Chinese dream to come to reality. Looking at the current economic condition, a project like BRI could help in providing an economic stimulus to the world, of which it would be in a dire need post COVID19.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
Ragini Kashyap is currently pursuing a Masters in International Relations at Jawahar Lal Nehru University in New Delhi. Image credit: Edward Stojakovic/Flickr.