New investment in Russia through China’s Belt and Road Initiative (BRI) fell to zero in the first half of 2022, while Chinese outlays in Pakistan dropped by 56 percent during the same period.
These are the findings of a new report from the Green Finance and Development Center at Fudan University in Shanghai, which point to growing headwinds facing Chinese President Xi Jinping’s signature foreign policy venture that he once dubbed “the project of the century.”
Both Russia and Pakistan have been among the top beneficiaries of Chinese development spending through the BRI. Moscow signed deals worth about $2 billion in 2021 alone and Islamabad hosts a $62 billion collection of infrastructure and energy projects known as the China-Pakistan Economic Corridor (CPEC).
The Fudan University report highlights the changing nature of the BRI as it adapts to a combination of a strained global economy, China’s shifting position in the world, and many countries who inked deals and took out loans through the initiative now grappling with a growing debt crisis.
BRI spending has been declining for several years as Beijing becomes more risk averse. The report shows a total of $28.4 billion in Chinese investment across 147 BRI countries over the first half of 2022, down from $29.6 billion over the same period last year.
The BRI’s rapid expansion since 2013 has helped China become the world’s largest source of development credit, and how Beijing navigates the program’s future will have global consequences.
To find out more, RFE/RL spoke with Christoph Nedopil Wang, the director of the Green Finance and Development Center at Fudan University who helped write the report.
RFE/RL: One of the leading takeaways from your report is that China is increasingly investing in oil and gas, making up about 80 percent of Chinese overseas energy investments for the first half of 2022 and 66 percent of Chinese construction contracts. Saudi Arabia has become a major recipient of Chinese investment along with other nations in the Middle East. What does this tell us about the current state of the BRI and also where it is heading?
Christoph Nedopil Wang: We saw last year in the 2021 report that one of the major recipients of Chinese engagement was Iraq and it was similarly through fossil fuel-backed projects. I think one of the interpretations that we are exploring is that resource-backed investments are increasing because they are a way to reduce risks.
China has been trying to manage financial risks for a number of different reasons, including that the overall [Chinese] economy after [the] COVID-19 [pandemic] -- as well as in a lot of the BRI countries -- has not been performing as well as expected. Therefore, [Chinese] government sponsored projects or sovereign guarantees from these [BRI] countries are much harder to get for a variety of other projects.
Whereas, if you have resource backed projects like oil and gas it is relatively clear how you're going to get your money back. Therefore, these projects tend to be a lot lower risk and quite lucrative, particularly in today's markets of high fossil fuel prices.
RFE/RL: Another finding of the report is that some countries that were leading partners of the BRI received no Chinese engagement so far this year, including Russia. Is this drop-off in investment in Russia largely due to Beijing wanting to avoid secondary U.S. sanctions over Moscow’s war in Ukraine or are there other factors that help explain this?
Nedopil Wang: It's the first time that in any of the recorded periods that we looked at [where] we couldn't identify any large deal between China and Russia. It's an event that hasn't happened before, [but] of course, all of the questions and potential reasons about why this happened are speculation for the moment.
China has never confirmed that it's trying to avoid the sanctions with Russia, and it is [still] trading very regularly, particularly in fossil fuels, with Russia. So, it's not that there is no engagement between China and Russia. It's that there's no construction and investment recorded in the first half of 2022. It might be that Beijing is playing it safe and reducing the risk of any secondary sanctions, but it might also have other factors behind it.
That applies for other countries that have seen a drop in Chinese engagement such as Egypt. I think it’s not possible to say there is a trend yet and that [this drop] is because Egypt has fallen out of favor with Beijing. China is actually constructing quite a bit of the new capital in Egypt and it’s therefore a bit tricky to make big conclusions from a half-year window. Some larger deals might be announced later in the year and so it’s still somewhat difficult to decipher the long-term trend.
RFE/RL: But are these drop-offs surprising to you? It seems like a noteworthy shift, especially for Russia, given where things stood in previous years.
Nedopil Wang: It was definitely a surprising finding. It's the first time that we did not see any engagement in Russia for any period of time.
But again, we can only speculate on the exact reasons right now and there will not be an official announcement by China about why this has happened.
RFE/RL: China’s engagement in Pakistan through the CPEC has been one of the flagship projects of the BRI. But your findings show that investment dropped by about 56 percent. What would you say is the main reason for this and what does it say about the future of the project overall?
Christoph Nedopil Wang
Nedopil Wang: Pakistan has, since the establishment of the BRI through CPEC, been one of the most prominent corridors and China and Pakistan have exchanged a number of really impressive contracts to build infrastructure for energy, road, and rail transportation over the years.
Pakistan went through some big political changes last year and this year and there has been some reevaluation of the political risks from the Chinese side, as well as some reevaluation about the current economic situation in the country, which is not as strong as it was when a lot of this investment started.
With that in mind, perhaps it’s not too surprising. It might also be healthy for CPEC to have a breather and reevaluate what kind of projects are actually driving it forward and what is working, what is not, and what might be needed.
Pakistani Prime Minister Imran Khan (left) and Chinese President Xi Jinping meet in Beijing on February 6.
RFE/RL: We’re entering an interesting period as the BRI approaches its 10-year anniversary. The venture has shifted and adapted in many ways already. Currently, there is discussion of a potential overseas debt crisis mounting with BRI. Do you think that these problems are prompting a rethink in Beijing about the economic risks from the type of big infrastructure lending we’ve traditionally seen?
Nedopil Wang: I would be very surprised if not all of the involved players in China, from the ministries to the financial institutions and also the developers, are having to rethink their engagement in a number of different ways.
The number one reason is that the overall economic situation in a lot of the BRI countries is different now. A lot of the deals were done back when everybody was still in kumbaya mode believing that they could develop and finance anything. That has changed. There have been some sovereign debt crises and defaults in some BRI countries, and they have been trying to renegotiate their debt with China.
There’s a clear recognition now of the risks involved and also a reduced appetite for further financial engagement. You also have other impediments right now, such as China having very strict travel controls due to COVID restrictions.
It's very hard right now for Chinese managers or Chinese developers to travel from China to any of the BRI countries to make deals or to actually do due diligence and plan a large-scale project. That’s a major detriment to making new deals. It doesn’t mean that there aren’t any new deals, because Chinese companies and financial institutions have staff on the ground, but things are just more cumbersome now.
Chinese President Xi Jinping speaks at the second Belt And Road Forum in 2019.
China is also domestically in a different situation than it was in 2015-2017 when a lot of these BRI deals were being signed. Chinese financial institutions are focusing a lot of their effort to support the domestic economy and are potentially less interested in adding on more loans to foreign projects. So, there's also a reevaluation happening from the financial institutions.
Overall, there's a host of reasons why we're seeing a shift from these larger-scale projects to potentially smaller ones.
Going back to your first question, there is a growing focus on resource deals. In a way, those are perfect projects for any developer because the risk is very low. Essentially, you get your financing and there is a more straightforward way for you to get your money back, which is not the case with other big infrastructure projects that have much longer payback periods with much higher uncertainty.