Managing political risks on the Belt and Road

This past year has demonstrated the critical importance of managing risk. Pandemic, geo-political contest and dramatic economic shifts are the new normal. It is timely to take a closer look at the risks of the Belt and Road Initiative (BRI) and China’s new institutions and platforms for geo-economic influence.

The BRI is – at least in theory - built on the free trade and investment principles of globalisation, a system previously supported and partly constructed the US itself. The plan includes projects for finance, technology and infrastructure such as transport, power, communications and water in developing nations and beyond. More than 125 countries have signed up for joint projects. The World Bank estimates trade in Belt and Road economic corridors is currently one third below potential and foreign investment seventy per cent below potential.

To be sure, there are risks. In the first few years following its announcement in 2013, BRI risks were diagnosed as those confronting any infrastructure investments in the developing world – these were projects in high-risk environments, often badly governed, with corruption, poor business practices, clientelism and security problems.

Further, Chinese State-Owned Enterprises and their partners were in many cases exporting business practices that generated risks for governments and project partners. There were examples of poor planning, lack of transparency and misunderstanding local conditions. But none of these problems was specific to the BRI or, indeed, to Chinese firms.

What has changed is the growing power and influence of China itself, and that is generating anxiety and fear in the US and other countries. It is claimed the BRI will create debt traps, cyber-attacks, asset seizures, militarisation of assets and undermine the norms of the liberal international order.

China is financing BRI projects with a combination of commercial loans, concessional finance and aid. It created a new multilateral institution, the Asian Infrastructure Investment Bank. In Asia, steady development has generated an infrastructure deficit and the new institution is an interesting test of how China might play a greater leadership role in the multilateral system in future. US fears that it would undermine the World Bank and International Monetary Fund seem, to date at least, to be unfounded. The new bank has worked closely with other financial institutions to demonstrate best practices in lending. The biggest risk of China creating a new institution seems to have been that China would do so effectively. In this respect, it challenges the norms of the previously US-led financial order.

China’s private sector firms are also making waves. Huawei has become a world leader in 5G communications. Together with other Chinese tech firms, it is building a “digital silk road” to developing countries, constructing not only communications networks but facial recognition and other “smart city” applications that are feared to be building blocks of a surveillance state. In the new geopolitical contest, Huawei is claimed to be a vector for cyber espionage and potential sabotage. It has become a case study of the US push to decouple from Chinese supply chains. This is a much more difficult set of risks to evaluate. It would appear prudent to ensure a diversity of suppliers, so that no one country dominates the technology of the future.

Infrastructure projects in Myanmar, Malaysia and Pakistan have been downscaled or cancelled. This has fed a narrative that China is deliberately trapping nations in debt. The most quoted case is the Hambantota port in Sri Lanka, which US Vice President Pence claimed was “debt trap diplomacy” and would “soon become a forward military base” for China. On closer investigation, the story is more complicated. Most of Sri Lanka’s debt was not to China at all, and the Sri Lankan Government actively sought the deal with China Merchants Group to manage the port (in exchange for debt forgiveness). Indeed, the deal specifically excluded military uses.

A Rhodium study of forty cases of Chinese lending to 24 countries over a decade found no evidence that China was deliberately trapping countries in debt. Rather, China has agreed to significant amounts of debt rescheduling, often on favourable terms to borrowers. It remains to be seen how China will respond to debt defaults as a result of the economic fallout from the Covid-19 pandemic.

There are risks in this new geopolitically-contested world. The question in relation to risk is always proportionate assessment, so that an appropriate management strategy can be developed. Whether China constitutes such a grave risk that the world must decouple and contain it, as some in the US claim, or whether we can learn to live with a rising China is the question of our age. For now, the BRI is meeting a demonstrated need in the developing world. It may be that the best risk strategy is to assess each project on its merits, for international firms to find ways to collaborate and ensure best practices. For governments, finding ways to work with China within the rules and standards of international trade and investment may be a more pragmatic strategy for risk management, rather than embarking on a new cold war, which is sure to generate even more risks.



Originally published as a Guest Expert Blog in CWI Strategies Silk Road Business Brief, August 2020