China’s belt and road plans face new EU, US competition, but ‘space for cooperation’ remains

China is unlikely to be displaced as the main funder of infrastructure projects among belt and road countries even as alternatives like the European Union’s Global Gateway plan come online, analysts say.
But after a series of setbacks, Beijing is taking a more discerning view on how it engages with many developing countries.
A number of flagship projects along China’s modern-day Silk Road, which seeks to link Asia, Europe and Africa with a network of ports, motorways and railways, have run into challenges in recent years.
Montenegro, a tiny Balkan state of just 620,000 people, reached a deal with European and US banks last year to restructure a Chinese loan of nearly US$1 billion for a highway, despite its lender, the Export-Import Bank of China (EXIM), offering an 18-month grace period for repayment.
Indebtedness to China became a hot-button issue in Montenegro, with deputy prime minister Dritan Abazovic asking for the EU’s help in managing credit repayments to “combat unhealthy foreign influence”.
Governments in Africa and Central Asia have also cancelled or reviewed projects due to difficulties with Chinese lenders and fears over foreign influence.
Nigeria announced in July last year it was turning to Standard Chartered Bank for funding of a railway project after lending delays from EXIM bank. Ecuador has also sealed an agreement with the US International Development Finance Corporation (DFC), a belt and road rival, to refinance up to US$3.5 billion in Chinese debt.
In exchange, the Ecuadorean government reportedly agreed to exclude Chinese companies from its telecommunications network.
China’s financing and investment across the 144 countries under the Belt and Road Initiative was US$59.5 billion last year, in line with the US$60.5 billion in 2020, according to a report by the Green Finance & Development Centre at Shanghai’s Fudan University released on Wednesday. Iraq was the largest beneficiary in 2021, with about US$10.5 billion in construction contracts.
In 2022, belt and road investment is likely to shift towards smaller projects that are fast to implement, such as solar and wind developments, and away from large and often loss-making projects, the report said.
The average deal size last year was US$476million, 21 per cent smaller than 2015.
Dr Christoph Nedopil Wang, director at Green Finance & Development Centre, said China’s belt and road engagement was changing amid recent challenges.
“China’s undergoing a reassessment phase for its projects after it had a series of lessons learned over the past few years,” he told the South China Morning Post late last year.
Kanyi Lui, a partner at British law firm Pinsent Masons in Beijing, said the recent slowdown in Chinese cross-border lending activities since the pandemic struck was generally believed to be the result of a number of factors.
“They include market uncertainty, difficulty in project development due to travel restrictions and countries trying to reassess growth projections and infrastructure needs for post-Covid,” he said.
The launch of the EU’s Global Gateway and the US-supported Build Back Better World (B3W) initiative have inevitably prompted questions about whether China’s Belt and Road Initiative will lose influence.
But observers say China’s experience in planning, building, managing and financing infrastructure under difficult circumstances since 2013 means it is likely to remain the main partner of many developing countries.
David Dollar, a senior fellow in the John L. Thornton China Centre at the Brookings Institution, said large developing countries like Nigeria and Indonesia rely on diverse sources of finance to fund infrastructure.
“Additional funds from the EU will be welcome, but they will not necessarily displace the Chinese funding,” he said.
“There is likely to be some pullback in the next few years because the pandemic has resulted in slower growth all around, but I expect that to be temporary.”
In Africa, a number of big ticket belt and road projects have either stalled, been cancelled, or are being reviewed.
Kenya terminated its contract last year with the Chinese-owned Africa Star Railway Operation Company for the operation of the Standard Gauge Railway, a move expected to save the country more than US$120 million in annual fees.
Progress has also stalled on the US$10 billion Bagamoyo mega port and special economic zone in Tanzania, which was to be funded by China Merchants Holdings International.
“We assume the stalled projects negatively affect economic productivity and GDP growth that could come from regional connectivity … since African countries need to trade more among themselves,” said Paul Nantulya, research associate at Africa Centre for Strategic Studies in Washington.
“However, it is also important to note that no new deals are much better than badly negotiated deals.”
Nantulya said there was “an indication of readjustment” after the Forum on China-Africa Cooperation in Dakar last November, which unveiled in a comprehensive 42-page document nine strategic sectors for development.
China’s funding pledge at the forum of US$40 billion for private-sector initiatives, as opposed to state-owned firms, showed it is reconsidering how it engages African countries to reduce risk, Nantulya said.
China may be adopting a more cautious approach to funding, but recent studies from the G20, United Nations and management consultants McKinsey & Company have confirmed the annual infrastructure financing gap in developing countries is worth trillions of dollars.
Developing countries require investment of about 4.5 per cent of gross domestic product (GDP) per year to achieve infrastructure-related sustainable goals and tackle climate change, the World Bank estimates.
“This gap cannot be met by any initiative or country alone,” said Lui. “Regardless of the disagreements between the EU and China, combating climate change and transitioning to renewable energy appear to be areas where everyone can agree on.”
However, competition in renewable energy development could heat up in the next few years, he added.
Francesca Gheretti, an analyst at German think tank the Mercator Institute for China Studies, said there seemed to be “space for cooperation” between the Global Gateway and Belt and Road Initiative.
“However, to collaborate, the EU will require high environmental standards as well as higher standards in other areas, such as the respect for and the involvement of local communities and stakeholders,” she added.

South China Morning Post

Tags: Asia, ports, infrastructure projects, Silk Road, motorways, China, Europe, Africa, Railways