China’s Economy May Be ‘Slowing Down’, But Don’t Write Off BRI Yet

BRI is key to China’s trade diversification interest. In 2019, China’s trade with BRI countries was $1.34 trillion.

Ever since it was launched, there’s been a raging debate about the sustainability of China’s Belt and Road Initiative (BRI). Conventionally, these conversations take shape depending on where you stand. In other words, depending on one’s ideological and geopolitical prism, BRI is either a grand strategic plan that is reshaping the global political and economic order or an example of Xi Jinping’s hubris, which is leading to overreach, and will eventually collapse under the weight of its own contradictions. A new Financial Times report this week, highlighting a sharp decline in Chinese overseas lending, sparked another such debate.

Chinese Bank Lending Is Increasingly Focussed On Intra-Country Loans & Loans To State-Owned Enterprises

The report draws on data from China’s Overseas Development Finance Database at Boston University. The database tracks lending commitments by China Development Bank (CDB) and the Export-Import (EXIM) Bank of China. These are the two key policy banks that Beijing relies on to finance BRI projects. The researchers estimated China’s overseas development finance between 2008 and 2019 at USD 462 billion, merely USD 5 billion less than the World Bank’s lending during the same period. More importantly, the researchers found that China’s overseas lending tumbled in the aftermath of the 2009 financial crisis only to start picking up steam in 2012.

After a dramatic spike in 2015 and 2016, which is when it hit a peak of USD 75 billion, there has been rapid decline to just USD 4 billion in 2019. The numbers are not without controversy.

For instance, writing in The Diplomat, Tristan Kenderdine and Niva Yau argue that the Boston University database takes a “geospatial approach in examining China’s overseas development financing,” which results in the omission of multimillion dollar loans issued for non-greenfield investments. They further argue that the database does not take into account the fact that Chinese banks have opened branches or subsidiaries in partner states, lending outside of the government-to-government loan scheme. In addition, they point out that Chinese policy bank lending is increasingly focussed on more intra-country loans and more loans to State-owned enterprises. Responding to the debate, the Boston University researchers explained that their database covers all overseas loan commitments to governments and State-owned entities from CDB and EXIM Bank.

It also includes a total of 858 projects, out of which 243 are unmapped but still tabulated. What they don’t include, however, are data from China’s State-owned commercial bank activities.

Lack Of Clear Official Data On China’s Overseas Lending

There are two key takeaways from this discussion.

First, the lack of clear official data on China’s overseas lending makes any assessment challenging. This also underscores the amorphous nature of BRI. But, let’s get back to this later. Second, increasingly, evidence points to a slowdown in China’s financial engagement with the wider world, starting around 2016-2017. This is also seen in other assessments of Chinese lending. In their recent paper, Sebastian Horn, Carmen Reinhart and Christoph Trebesch draw on data from the People’s Bank of China and the IMF to show that Chinese overseas lending largely plateaued after 2016.

An assessment by researchers at the International Institute of Strategic Studies in March 2020 pointed to linkages between domestic financial problems in China and policies to address them motivating the Chinese leadership to be more selective with regard to overseas lending and investment.

China’s outward FDI since 2016 has also evidently tumbled, coinciding with efforts to tighten restrictions on them. The World Investment Report estimated China’s outward FDI in 2016 at USD 183 billion, making China the second-largest source for outward FDI. In 2019, however, the number had fallen to USD 118 billion.

Yet, none of this really means that it’s time to write BRI’s obituary.

Doing so, in fact, would be a fundamental misunderstanding of what the initiative entails.

BRI Is All-Encompassing – Why This Is Important To Know

To begin with, it is important to recall that after the 19th Party Congress in October 2017, BRI found mention in the Communist Party’s Constitution. That lends the initiative certain political sanctity as long as Xi Jinping remains at the helm of China’s affairs.

Moreover, from Chinese foreign policy perspective, BRI is all encompassing. Officially, the initiative has five major priorities:

1. policy coordination
2. infrastructure connectivity
3. trade and investment
4. financial integration
5. people-to-people connectivity

Among these, infrastructure is the most visible and perhaps controversial, given the debate over debt traps. Yet, it is the lesser-discussed dimensions of BRI that tend to structurally bind partner states to the Chinese economy. For instance, BRI entails increasing penetration of Chinese financial products in partner states, signing of preferential trade and tax agreements, media partnerships, educational partnerships, training of officials from partner states, creating alignments on governance norms, etc.

None of this is going to fade away anytime soon.

Chinese Economy Is No Longer Likely To Grow At Past Rates

Another important aspect is that BRI is critical to China’s desire for trade diversification. In 2019, China’s trade with BRI countries totalled 9.27 trillion yuan (USD 1.34 trillion). This accounted for around 29 percent of China’s total foreign trade, and its growth outpaced its aggregate trade growth by 7.4 percentage points. Trade with BRI partners is likely to be all the more important for Beijing in the event of new barriers being erected by developed economies going forward.

What, however, is certain is that the days of Beijing’s profligacy are now a matter of history. The Chinese economy is no longer likely to grow at the rates that it once did.

In addition, domestic financial risks and the desire to tighten fiscal discipline at home, geopolitical tensions, and increasing concerns over sustainability of investments, particularly after the pandemic, will result in greater caution.

Greater Emphasis By China On Directing Private Capital Towards BRI Partners

Nevertheless, the Chinese leadership will likely continue to press ahead with what are seen as strategic investments.

This was evident in the form of deals worth USD 11 billion that were inked with Pakistan in the end of June and early July to build two hydro-power generation projects and revamp the country’s railways infrastructure.

At the same time, there will likely be greater emphasis on directing private capital towards BRI partners, and a focus on technology-related investments.

The latter is a critical strategic imperative for Beijing, given that it views technological innovation as the key to its future development and global power.

(Manoj Kewalramani is an Associate Fellow-China Studies at The Takshashila Institution. Prior to joining Takshashila, he spent 11 years working as a journalist in India and China. He tweets @theChinaDude. This is an opinion piece, and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)