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Political risk on the Belt and Road

1. Introduction to the Belt and Road Initiative

By the second decade of the twenty-first century, China had become a key driver of the global economy. Rapid pragmatic reform and internationalization of its economy brought China to the point that between 2010 and 2015, it had overtaken Japan to become the second largest economy, passed Germany to become the world’s largest trading economy and surpassed the United States (US) to become the world’s largest economy on purchasing power parity terms (Woetzel et al., 2019). Its export industries became integrated with global supply chains, partly driven by the presence of a large number of foreign investors taking advantage of China’s competitive advantages. At the same time, its market for imports was expanding as a result of a rapidly growing middle class consuming on a greater scale than ever before. From imbalances in its trade, especially with the credit-fueled US, China amassed huge foreign reserves, providing it with a new capacity for outward capital investment. Meanwhile, at the same time that China had become a formidable player in the global economy, brimming with confidence in its own model of development, the major developed economies had fallen into financial crisis and suffered a decline in political confidence. The times therefore suited an initiative to leverage China’s advantages by building broader and deeper economic linkages with the fastest growing regions of the world and, simultaneously, to address its disadvantages by strengthening China’s power in the international system.

The Chinese vision of building new silk roads of trade connectivity for the twenty-first century was outlined by China’s new leader, Xi Jinping, in a series of major speeches in 2013 and 2014 in Kazakhstan and Indonesia, and later expanded in policy detail by China’s leading coordinating agency the National Development and Reform Commission (NDRC). The Belt and Road Initiative (known in Chinese as “One Belt One Road”) envisages a network of new inter-regional trade routes and production chains, linking the growing Chinese economy with the developing world and providing alternative routes to developed markets. China would fund infrastructure and new capabilities to enhance global economic integration, providing finance for development in places that had previously struggled to attract infrastructure investment. It would foster trade and investment cooperation, financial integration, policy coordination and strengthen people-to-people links (State Council of the People’s Republic of China, 2015; National Development and Reform Commission, 2015). If successful, the plan would shift the center of the world economy closer to China and address China’s geopolitical imperative to ensure access to a greater diversity of land and maritime trade routes.

The response across most of the world was initially positive, with more than one hundred and twenty-five nations, mostly in the developing world, signing up to participate in the initiative and to qualify for new, Chinese-funded infrastructure projects (Raiser – Ruta, 2019). For decades, developing countries have suffered dependence on aid and migration of talent and were keen to access more finance for the infrastructure required to build new industries and internationalize their economies. In Asia, in particular, the fastest growing region of the global economy, a severe infrastructure deficit meant China’s additional pool of funds to support infrastructure would find a ready pipeline of projects to drive further economic growth and regional linkages. Japan had already become a major infrastructure funder across Asia, and now China was set to compete. For most in the developing world, the opportunities appeared to outweigh any risks.

For China itself, the BRI serves a number of purposes. In fostering outward foreign investment and shifting low value manufacturing to lower cost developing country locations, it supports China’s restructuring away from a domestic investment/production focus to a higher-value consumption economy. The BRI projects provide opportunities to deploy China’s massive foreign reserves for higher return, in support of its giant firms in construction and logistics and utilising their spare capacity. New links to Central Asia promise to strengthen the economic development of China’s troubled Western regions. The new trade routes offer valuable diversification away from exposure to maritime choke points and towards a wider range of suppliers as well as new logistical links to new markets for Chinese exports. The BRI builds a new multi-bilateral network of inter-regional relationships and economic interdependence for China, strengthening the new multipolar nature of the international system.

Perhaps more than anything, the BRI is a brand, with China collecting under its banner a wide range of activities that build bridges to the developing world, including bilateral financing for development, bilateral aid and private sector investment. The image of new silk roads consciously evokes the trading networks of old, that stretched from ancient China through Central Asia to the Persian and Roman Empires. The twenty-first century version sees China as cashed up, confident and going global. While the giant Chinese policy banks are predominantly providing the finance, the Export Import (Exim) Bank of China and the China Development Bank (CDB), China has also established a Silk Road Fund and initiated new multilateral banks, envisaged to also fund BRI projects, the Asian Infrastructure Investment Bank and the New Development Bank (formed with BRICS partners, Brazil, Russia, India and South Africa). By developing new infrastructure connectivity, the BRI promises to contribute to trade and investment across the developing world, with the World Bank estimating that trade in BRI corridors is currently 30 per cent below potential and foreign direct investment is 70 per cent below potential, with BRI investments likely to raise global income with significant net benefits for BRI countries, particularly in East Asia (Maliszewska – van der Mensbrugghe, 2019).

To date, firms engaged in BRI projects have been overwhelmingly Chinese financial institutions, state-owned enterprises and Chinese private sector partners, with local contractors and local government partners. However, it is likely there will be further internationalization of BRI projects, involving international financial institutions and firms from a range of developed and developing countries and across a wide array of sectors. For all of these actors, a comprehensive understanding of political risks will be important, in particular if the BRI is generating new kinds of risks.

2. Political Risks

A new risk narrative in the Western discourse on the BRI can be traced to around the same time as the US abandoned its decades-long policy of constructive engagement with China and embraced a new doctrine of strategic competition (The White House, 2017; Department of Defense, 2018). The narrative goes that China is trapping nations in debt that will be impossible to repay and is laying the groundwork for Chinese economic and political domination, potential seizure of strategic assets and other risks (Chellaney, 2017; Hart – Johnson, 2019; Lee, 2018). This paper proposes three categories with which to identify, analyze and assess risks. First, there will be risks at the geopolitical level because of the shifting world order and these may therefore include factors that are specific to the BRI. Second, there will be risks at the country level that may relate more to the normal political risks of operating in that location than any particular BRI risk. Third, there will be risks at the project level which will have characteristics that are related to Chinese business practices and therefore might include political risks as well as normal economic risks. The risks manifest differently at each level.

These three levels of risk build upon traditional political risk theory, usually understood to refer to discontinuities in the business environment from political factors that impact on profit or other goals of an organization (Robock, 1971). A risk refers to a likelihood or probability of an event or set of problems that can be identified, understood and managed (Fägersten, 2015). Usually, these risks are understood to arise at a national level as a result of the governance environment and described in this paper as “country risks”. There are many well-developed risk frameworks to assess these (Alon – Martin, 1998; Jarvis, 2008) and several surveys of risks on the Belt and Road have been developed (Arduino – Gong, 2018; Russel – Berger, 2019; World Bank, 2019), which all list location-specific problems facing firms, from conflict in high-risk settings to uncertainty about local regulations as well as more micro-level, project-specific risks such as poor corporate social responsibility and local social resentment. These latter kinds of risk will be discussed below as “project risks”. Missing, however, from the literature so far has been a new category of “geopolitical risks” for firms or other actors, despite a prominent geopolitical discourse emerging in international relations.

2.1. Geopolitical Risks

Geopolitical risk has traditionally been a term applied in political risk theory to measurable conflicts or other events or processes disrupting international peace and security, such as Russia’s hybrid warfare tactics in Ukraine or the rampage of international terrorist networks (Wernick, 2006). Geopolitical risk has sometimes been utilized to observe the effects of major power competition but within a positivist, zero-sum geopolitical survey of “objective” factors such as competition for resources, communication lines and industrial regions (Sykulski, 2014). There is nothing objective about some of the geopolitical claims concerning the BRI, so “geopolitical risk” will be utilized here to refer not only to objective, measurable events or processes of major power competition but also, in a disruptive period of “fake news”, trade wars and geopolitical transition, to include constructed risks and threats.

The audacity of China, as a rising power proposing a scheme on the giant scale of the BRI has prompted a return to geopolitical analysis and fears that the BRI is less a geo-economic plan for infrastructure connectivity than a grand strategy for maritime and land route domination by China. The US has actively promoted the new geopolitical risk discourse that the BRI is “debt diplomacy”, seeking to trap nations in debt and develop dual-purpose strategic infrastructure around the world (Pence, 2018). Any firms engaged in BRI projects, whether Chinese firms or the partners of Chinese firms, face risks of blocked investment, trade restrictions or reputations damaged in an atmosphere in which every Chinese port, finance or communications project becomes a suspected vector for Chinese expansionism, every increase in Chinese economic footprint a zero-sum threat to others.

A leading Chinese private sector firm, Huawei, is confronting bans in some countries, trade restrictions and reputational damage, with fears by the US and some of its allies that the firm poses risks of espionage or other cyber risks such as sabotage of critical infrastructure (Bryan-Low et al., 2019; Gilding, 2020). Huawei is a key player in China’s vision of a “digital silk road”, in which China and BRI partners are investing in communications networks, smart city and other digital infrastructure. The firm is widely considered to be one of the leading innovators in new communications technology and has a global network of suppliers, customers and business partners who are all impacted by these risks. The campaign against a particular firm has been a remarkable new feature of the rising geopolitical tension between the US and China and constitutes a new kind of geopolitical risk.

New port infrastructure along the Belt and Road commonly features in the risk narrative, with fears that developing nations are being trapped in debt and that China will seize ports to turn into geopolitical assets. Hambantota Port in Sri Lanka is commonly cited as a live example, despite studies finding China was a minor provider of debt to that country and the port was not “seized”, but that the then government entered willingly into a public-private partnership with China Merchants Group to develop the port (Weerakoon – Jayasuriya, 2019; Zhang, 2019). Fears about China wanting to build a military base in the South Pacific (Wroe, 2018a, 2018b) have never been substantiated, but continue to run through the discourse about China in the Pacific, where developing nations have sought Chinese finance for port infrastructure.

Some of the countries included in the BRI now have high levels of indebtedness, while others do not. China itself is facing high levels of debt after a decade of expansionary policies. This is a new risk environment in which some countries may be ill-prepared if a new global financial shock occurs in the short or medium term, which could force adjustment to asset bubbles that have followed the flow of funds from China to emerging economies (Zhang, 2018). Debtor countries seeking to renegotiate the terms of debt may find themselves negotiating from a position of weakness. This is the risk of disproportionality in BRI projects, which tend to be bilateral deals, often lacking transparency around conditions. To date, at least, it is evident debtor countries have been able to achieve rescheduling of debt or even conversion of debt to grant aid. Ethiopia’s repayments for a problematic railway project were deferred from ten to thirty years (Pilling – Feng, 2018) and even tiny Tonga, which became heavily indebted to China has been able to convince China to defer repayments (Dornan – Brant, 2014). A Rhodium study of forty cases of Chinese lending to 24 countries over a decade found no evidence that China was deliberately trapping nations in debt (Kratz – Feng – Wright, 2019).

To date, at least, fears about the BRI as generating geopolitical risks appear to be exaggerated. Most countries and firms continue to work with Huawei and most developing nations continue to seek Chinese finance for key infrastructure. It is unlikely that the risk discourse will disappear, however, and indeed it appears likely to escalate as China’s relative power continues to challenge the status quo in the international system. For now, China remains a “partial power” (Shambaugh, 2013). It does not enjoy dominance of the digital economy or the maritime environment and it has not yet surpassed the US on any security-related measure of global power. Nevertheless, its challenge to the US dominance of the international system is generating risks for firms, governments and communities along the BRI that projects may be caught up in the escalating geopolitical contest.

2.2. Country Risks

As discussed above, classic political risks occur at the level of the nation state, where specific governance conditions may have likely and consequential impacts. The BRI encompasses a diversity of operating environments including some high-risk locations, some exhibiting poor governance, corruption, clientelism, law and order problems, inadequate environmental regulations and other risks. Some “country risks” such as crime, conflict and corruption can be plotted quantitatively (Zhang – Xiao – Liu, 2019). BRI projects have faced significant security challenges, including terrorism and sabotage in South Asia, Central Asia and Africa (Feigenbaum, 2017; Saltskog – Clarke, 2019). Some high-profile projects have failed, such as the US$4 billion Addis Ababa-Djibouti freight railway, because of poor planning, underuse and power shortages, which cost the China Export and Credit Insurance Corporation (Sinosure) losses of around US$1 billion (Ng, 2018).

Country risks from poor governance are regularly faced by foreign investors regardless of whether projects fall under the BRI or not. Typically, only large resources and energy investors are prepared to take on the highest-risk environments (in expectation of high returns). Nevertheless, Chinese infrastructure and other firms are now to be found pursuing projects badged as “Belt and Road” in countries across the spectrum of risks. In each case, the Chinese Government is demonstrating confidence in its model of infrastructure bringing development benefits as well as mutual benefits of closer bilateral and people-to-people connections over time. Close information sharing between the local Chinese Embassy and Chinese firms (many of which are state-owned) tends to assist risk management. In theory, projects are aligned with the host government’s national development plan.

In practice, country risks are difficult to manage at the government-to-government level, China’s preferred modality. Adaptation of the project to local risk conditions, or “capture”, is common, but varies from country to country. Similar projects had vastly different outcomes, for example, in two Pacific island countries, Samoa and Tonga, because of different processes of government accountability and expert coordination (Dornan – Brant, 2014). Corruption risks vary from country to country and, while the Chinese Government has embarked in recent times on a high-profile anti-corruption drive, its opaque legal system makes it difficult to assess whether this has been successful or whether the same level of anti-corruption vigilance has been extended to Belt and Road projects, despite much lofty rhetoric. The high costs of many projects and anecdotal chatter that corruption is often recycled after ministers of governments in BRI partner countries change, suggests problems are widespread, but evidence is scarce.

Further, the BRI brings environmental risks, which affect not only country stakeholders but the global environment, as China demonstrates a continued willingness to fund and construct new coal-fired power stations for its BRI partners, even while it is domestically investing in moving to more renewable energy sources. In some cases, Chinese firms are facing protests by local stakeholders because they are softer targets than unresponsive host governments with inadequate environmental regulations, such as widespread protests against the Bank of China for funding the Batang Toru Dam in Indonesia, damaging the habitat for the endangered orangutan (Chan, 2019).

2.3. Project Risks

Infrastructure investment always entails significant project risks that must be managed by all stakeholders. Big, complex projects often fail, are poorly designed or executed or captured by local corruption or clientelism, as discussed above. But are there particular project risks on the Belt and Road? Chinese state-owned enterprises and private sector firms have demonstrated expertise in infrastructure project finance, planning and construction in diverse locations, and might be expected to manage the risks as well as firms from other countries, but many Chinese firms are still in the early stages of internationalization and can often be observed to export elements of Chinese business culture, which sometimes generates new risks on the ground. These include opaque tender processes and closed shops, a common failure to conduct adequate due diligence, to adapt to local conditions and to engage with local stakeholders. This is consistent with Chinese investor behavior even in highly developed, non-BRI markets (Powell Tate – Weber Shandwick, 2017). Further, across the vast geography of the BRI, Chinese firms and bureaucrats have sometimes for their own political purposes brought projects under the BRI banner that have not been well designed or executed and that pre-dated the BRI, generating duplication, confusion and poor communications, all problems that are familiar dynamics often observed in domestic provincial settings distant from Beijing (Ang, 2018).

The nature of BRI projects, characterized by Chinese funding, project management and construction, often by state-owned enterprises employing a significant proportion of Chinese labour and contracting Chinese suppliers, is collectively understood by Chinese stakeholders including the Chinese Government, to provide risk mitigation. The Exim Bank and CDB require the utilization of Chinese firms for a significant proportion of each project they fund. However, local communities can therefore all too easily stereotype BRI projects as pursuing only Chinese interests, snubbing local workers or worse. Perceptions that Chinese state-owned enterprises are subsidized and therefore are at an unfair advantage (Heide et al., 2018) may also constitute a political risk to Chinese firms. In Croatia, when a Chinese firm successfully tendered to construct a bridge for the first time in the European Union, it was challenged and characterized in international media as likely unfair bidding, despite its tender being upheld on appeal (Santora – Surk, 2018). It seems there are short memories in most countries that have featured large, subsidized state-owned firms themselves in the past. Nevertheless, the world will look to China to follow the rules of fair competition given its preponderant size and Chinese firms would be well advised to pay attention to reassuring local stakeholders of the local benefits from their investments.

In recognition of the problems in implementation of some BRI projects to date, there is now an important debate underway in China about “fine tuning” projects, learning from the mistakes of the first few years and ensuring projects are more market-oriented, sustainable and “win-win” for all participants (Ghiselli, 2018). This is consistent with a broader push to focus outward flows of investment to projects with sound business cases, at the same time with the Chinese Government’s efforts to stem outflows of cash to developed countries for trophy real estate and other purchases. The Chinese Government has reviewed the massively subsidized new freight train routes to Europe, signaling subsidies will be reduced over time to require a new focus on efficiency and lower operating costs (Wang, 2018). The powerful NDRC, which oversees the BRI, will need to take a closer look at the political risks attached to BRI projects, as will China’s BRI partners, and it appears there is a growing understanding of this. After recent elections, both Malaysia and Pakistan carefully reviewed, and in some cases dramatically downscaled, BRI projects.

The most effective way to both transmit learnings and improve perceptions and implementation of BRI projects would be for China and its firms to more actively seek to engage with local and third-party partner firms, including seeking more co-financing with multilateral development banks. This would likely improve project design, transparency in tendering, governance accountability and local stakeholder engagement and ownership. Whether through such partnerships or deepened experience in international markets, it might be expected that Chinese projects will over time be as well received as those from Japan or other international financiers. Alternatively, China may double down on its confidence in its own exceptionalism, especially if the BRI becomes a geopolitical contest, and operating norms may diverge rather than converge over time, which would result in declining trust.

3. Conclusion

The Belt and Road Initiative represents a new chapter in China’s internationalization, this time with China proactively taking its economic development plans to the world, after decades of engaging in the world more passively. No longer is China “biding its time” but, under Xi Jinping, it is now acting as a major power planning to make its mark. The BRI is only one component of a China that is more ambitiously staking its regional and global interests, just as it is building new security arrangements such as the Shanghai Cooperation Organisation, new institutions such as the Asian Infrastructure Investment Bank and taking a leading role in global coalitions such as the Paris Climate Change agreement. If the BRI, as a new platform of economic cooperation, can help developing countries to build important new infrastructure and industries, creating jobs and opportunities to overcome previous barriers to development, it will be judged a success. In that scenario, China will amass much influence and standing as a leading player in the international system.

If the fears of China’s geopolitical competitors come true, however, and China takes advantage of its disproportionate power to bully other countries to meet its will, the international judgment is likely to be harsher. It is early days for the Belt and Road Initiative and perhaps simplistic threat scenarios are inevitable in the early stages of a geopolitical shift in the world order, while there is ample opportunity for further investigation to either produce or refute evidence for such claims in the future. In the meantime, there are indeed new geopolitical risks to be identified, analyzed and assessed, whether constructed because of the geopolitical contest underway or whether they represent real and grave security risks. To be sure, there are also ample risks at the country and project levels to be managed, some pre-existing because of the difficult business environments to which the BRI is bringing major projects, and others because of the nature of the BRI and Chinese traditional business practices. These risks all need careful strategies for risk management, to ensure adequate returns, repayment of debts and economic development benefits. Such risk management is the responsibility of all stakeholders including not only the Chinese Government and its state-owned firms, but their private sector partners, BRI partner governments and their businesses and communities that stand to benefit (or not) from these important infrastructure projects and the new trade routes and production chains they promise to build.

To date, the application of conventional political risk analysis has neglected to factor in the geopolitical risks, or in an emphasis on the geopolitical risks, has neglected other factors at the country or project level. A more empirical, evidence-based process of risk identification, analysis and assessment in future case study research, using the three categories proposed — geopolitical risk, country risk and project risk — promises to be particularly valuable to key actors involved in BRI projects, to support development and implementation of risk management strategies.


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This chapter was originally published in A Geopolitical Assessment of the Belt and Road Initiative, edited by Csaba Moldicz: Budapest Business School

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