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Why the New Silk Road, China’s ‘Project of the Century’, is under threat


The Silk Road was a historic network of routes between Asia, Europe and Africa that provided trade between several countries, mainly Chinese textile products (hence its name).

On the global geopolitical scene, the name took on another meaning when China launched an almost eponymous project in 2013 to finance infrastructure projects in developing countries. The dictator Xi Jinping even called the New Silk Road the “project of the century”.

However, in the post-pandemic world, China’s ambitious card faces challenges that cast doubt on its future.

In September last year, the American research and innovation laboratory AidData released a survey of 13,427 projects with Chinese funding, totaling US$ 843 billion, in 165 countries around the world before and after the creation of the New Silk Road.

According to the survey, Chinese overseas loans for infrastructure projects quintupled during the first five years of program implementation (2013-2017).

However, the great Chinese project to exert economic and political influence in the world may be getting out of whack. According to AidData, 35% of the New Silk Road infrastructure project portfolio “encountered major implementation issues such as corruption scandals, labor violations, environmental hazards and protests.”

By comparison, only 21% of Chinese government infrastructure projects outside the program faced similar problems.

Another issue is that New Silk Road projects take much longer to get off the ground: according to AidData, on average it takes 1,047 days to implement a program infrastructure project and 771 days to implement another funded by the Chinese government. out of it.

These problems and the high level of indebtedness to the Asian giant (42 countries now have public debt commitments to China in excess of 10% of GDP) are leading to more project suspensions and cancellations than before 2013.

Bolivia, for example, has already suspended or canceled US$1 billion in projects financed by China since the creation of the New Silk Road, and Ecuador, about US$417 million, according to AidData.

According to data collected by the Rhodium Group, a research group based in New York, renegotiations of countries participating in the New Silk Road with Chinese financial institutions totaled US$ 52 billion in 2020 and 2021, while in the two previous years the amounts were US$ 16 billion.

In addition to these problems, two factors gained evidence after the release of the AidData study: the slowdown of the Chinese economy and the announcement by G7 leaders to invest US$ 600 billion in an infrastructure project for developing countries to compete with the Chinese program.

However, in an interview with People’s Gazette, researcher Ammar Malik, one of the authors of the AidData study, considered that these two points are lesser threats to the New Silk Road – the indebtedness of countries that joined the program is really the biggest challenge. Check out the main parts:

Since the AidData study on the New Silk Road was published, news has emerged of slowing Chinese economic growth. Could this compromise the program, which, as the study showed, was already facing difficulties?

The short answer is no – I don’t think this will compromise the New Silk Road. The explanation in short is: the projection is that this deceleration will be small. China will continue with expressive trade surpluses and its foreign exchange reserves will remain very high. The country will always have liquidity in its foreign reserves to make new large-scale commitments through the New Silk Road, if all else favors their implementation.

But here I’ll do a longer explanation relative to the background: the link between China’s domestic economic performance and New Silk Road commitment levels is complicated, so let’s start with some background. As we discussed in the opening section of our report, part of China’s motivation for creating the New Silk Road was that it had excess financial resources (i.e. foreign bank reserves at the central bank) and building capacity (i.e. , mainly state-owned companies) domestically that wanted to apply abroad.

In the case of foreign reserves, the mechanism is simple: China exports far more than it imports, and this trade surplus results in large reserves of foreign aid in its central bank. In June, they were just over $3 trillion, according to official statistics! Before the 2008 financial crisis, many of those dollars were held in US Treasuries, but after interest rates were lowered by the Federal Reserve, returns became incredibly low. The Chinese central bank has asked development banks (China Development Bank and China Eximbank) and state-owned commercial banks (e.g. ICBC, Bank of China) to seek bankable projects that accept higher interest rates, which they have begun to do. in greater numbers.

If we take into account the projections of the latest IMF World Economic Outlook report [Fundo Monetário Internacional], China’s economy will experience a growth slowdown, but it will still remain in a healthy range of 3.3% in 2022 and 4.6% in 2023. Trade surpluses have been in the hundreds of billions of dollars a year for the past few years. years, which should continue to be the case for the foreseeable future. This means that China will continue to have the liquidity to continue investing large amounts to support New Silk Road projects around the world.

The difficulties that we identified in the implementation of the New Silk Road are related to local factors, such as corruption scandals, environmental problems, labor violations and protests, in addition to some cases in which public opinion towards China has been worsening despite investments by the New Silk Road. Silk Road. In any case, rising indebtedness in developing countries that borrowed heavily from China (eg Sri Lanka and Pakistan) will create more problems for the future of the New Silk Road than China’s domestic economic slowdown.

Could the risk of a global recession also derail the New Silk Road?

As global commodity and food prices rise and many economies where New Silk Road investments are taking place struggle to balance their budgets, they will struggle to meet external debt obligations to all creditors, including China. The list of countries identified by the IMF as highly indebted includes countries such as Kenya, Tajikistan and Haiti, which also received loans from the New Silk Road.

In Pakistan, for example, although the debt to China is only a quarter of the total external debt, it is certainly contributing to continued debt distress because the balance of payments has reached a critical stage due to higher import values ​​resulting from rising prices. oil and other commodities. Although these factors are not directly related to Pakistan’s participation in the New Silk Road, all Chinese projects are threatened due to the possibility of non-payment.

The US and allies have previously made similar announcements of large-scale investment pledges, but there has been little follow-up in terms of concrete actions.

It would be interesting to look at trends over the next few years as developing countries face problems repaying Chinese loans; in short, how will Chinese creditors react? So far, we have seen that even when debt is rescheduled, they [credores] they do not offer discounts on loans (that is, they want to receive all payments due, with interest) and only defer payments to facilitate them.

What might be the consequences of the G7’s June announcement to launch a $600 billion program to compete with the New Silk Road? How will China deal with this competition?

The answer, in short, is that the United States and its allies have previously made similar announcements of large-scale investment pledges, but there has been little continuity in terms of concrete actions. I am skeptical that this announcement could create serious problems for the New Silk Road in the short term.

Since the beginning of the Biden administration, the United States and its allies have announced several new global initiatives, including the Build Back Better World in June 2021, the Blue Dot Network, the European Union’s Global Gateway and, of course, the Quad in the US region. Indo-Pacific. Behind all these announcements is the belief that the capital and technical expertise of the Western private sector can be mobilized in the service of these initiatives. The US and UK have committed more resources to their development finance agencies (loans) than they had at any time before. However, they don’t have the same kind of state-owned commercial banks or state-owned companies that China does, which could be oriented to act in key countries for big-budget projects.

For example, in May of this year, Senator Marco Rubio wrote a scathing letter to the CEO of the US International Finance Corporation for Development, in which he asked him to explain why the agency, responsible for coordinating the application of resources for development financing ( loans), has not yet been able to compete seriously with China. This, he said, despite the fact that the US Congress provided this agency with additional authority and liquidity in 2018 to, in part, compete with the New Silk Road. For that reason, I think for now it’s a matter of wait and see.

When the AidData study was released, the war in Ukraine had not yet started. Can conflict influence the future of the New Silk Road?

The war’s most direct impact on the New Silk Road has been through rising food and commodity prices, an issue I’ve already addressed. If the conflict continues or expands, repercussions on the global financial system and economic downturn could further diminish the ability of developing countries to repay New Silk Road loans, which in turn would undermine the confidence of authorities. Chinese companies in their ability to keep this global initiative going.

However, in terms of direct Chinese financing in Ukraine’s development, note that according to the data we have collected, China’s share of Ukrainian public debt is relatively low – $1.6 billion or approximately 1.5% of GDP. from the country.

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