The Third Phase of China’s Belt and Road

HKUST IEMS Policy Briefs No. 1

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James Crabtree (National University of Singapore)
  • On 27 August 2020, the Institute for Emerging Market Studies organised a series of policy dialogues as part of its Conference on Trade and Investment under the Belt and Road Initiative. Here, we reproduce some of the key points made by James Crabtree, one of the three policy dialogue speakers.
  • James Crabtree argues that the COVID-19 pandemic represents a third distinct phase of the BRI, even as its underlying aims remain the same. While infrastructure projects will face a more challenging environment, he challenges the notion that Beijing will now downplay the BRI. Instead, he suggests that the Initiative is likely to change its focus, especially to the Health Silk Road and Digital Silk Road. These projects are less lavish and eye-catching, but the BRI may be more critical to China than ever.

 

China’s landmark Belt and Road Initiative (BRI) infrastructure scheme is entering a new, uncertain third phase. The first began with BRI’s formal launch in 2013, leading up to the initial BRI Forum, hosted in Beijing in 2017. The second kicked off five years later in 2019 at the second BRI forum, where President Xi Jinping sketched the beginnings of a new agenda for the programme’s future. Now, the COVID-19 pandemic looks set to re-shape BRI once again, leading to a distinct third phase of development. Even so, BRI’s basic strategic aim remains the same, namely to ensure that new networks of natural resources and trade, and the global value chains that connect them, flow between China and its partner countries, rather than between Asia and the long-economically dominant nations of North America and Europe.

 

BRI’s early trajectory is by now familiar, with Xi’s signature plan acting as an umbrella term to describe Chinese spending on myriad international port, rail and power megaprojects. With investments in more than 100 countries, and spending totalling many hundreds of billions of dollars, BRI has come to embody China’s growing economic and political heft. Rather than a grand strategic masterplan, however, BRI’s early phases remain best viewed as a series of often-chaotic bottom-up initiatives driven by many different strategic motivations. Some involved exporting surplus capital and Chinese domestic industrial capacity. Others provided cheap financing to forge bilateral ties with strategically important nations. Others were almost purely commercial. Even today, BRI is a confusing archipelago of projects united more by a brand than an institution, given the absence of a central BRI agency. Descriptions of BRI by the Chinese state often seem to be invented after-the-fact to justify deals struck by various different state or state-backed entities.

 

That said, after the 2019 second BRI summit, a distinct new reform agenda did appear to be reshaping BRI’s future. China’s projects had by then been assailed in the West for what was dubbed “debt trap” diplomacy. Critics suggested BRI projects came with expensive loans that emerging economies could never hope to re-pay, leaving them in China’s debt as a matter of policy. China denied this, but Xi nonetheless used the second forum to sketch out a new "open, clean, and green" agenda to push BRI forward during the second five years of its operation. China hinted BRI might involve multilateral ties, for instance via partnerships with bodies like the Asian Infrastructure Investment Bank. While China’s critics questioned how sincere these proposed reforms were, Xi was at least talking about moving BRI in a new direction.

 

It is this second phase that is now likely to be undone by COVID-19, and the economic crisis it has brought in its wake. Most obviously, BRI’s existing planned infrastructure projects have faced a newly challenging post-pandemic environment. Many have been delayed or put on hold. Building infrastructure is challenging in near-lockdown conditions, and especially so for projects that rely on immigrant Chinese labour, as many BRI schemes do. More generally, China now has less money to splash around on foreign investment projects. Domestic Chinese public opinion has also turned against sending money abroad at a time when China’s own economy has been badly damaged, while Chinese policy-makers worry about the health of their state-owned enterprises and banks, reducing their appetite for expensive new international projects. Thus, Xi signalled a return to domestic infrastructure spending with his post-COVID stimulus package, which focussed in particular on new investments in areas such as 5G telecoms technology.

 

COVID has changed the calculus for potential BRI recipient nations too. Global emerging markets, typically BRI’s major partners, have strained public finances. This leaves them less able to co-finance infrastructure deals, and with less money to pay back existing debts. This then leaves Beijing with a dilemma about debt forgiveness. China is the largest lender to global emerging markets. It is facing considerable pressure to restructure or forgive outstanding loans to BRI partners — and will face criticism if it does not. In sum, all this means major new BRI infrastructure projects are unlikely to move ahead at the scale and pace of the last five years. Plans to introduce new multilateral elements into BRI are also likely to be delayed, given potential partner bodies like the AIIB or Asian Development Bank are likely to be distracted by their own attempts to manage COVID-19.

 

The post-COVID geopolitical environment will then act as one further brake on BRI’s future growth. As tensions between China and its rivals grow, BRI’s expansion into western countries like Australia or Italy looks less sustainable. Some partner nations in emerging markets where public opinion is sceptical of China, such as Myanmar, may also become less keen on Chinese projects. At a time of rising security tensions, there is also likely to be increased concerns over BRI projects which have potential “dual-use” military or geostrategic value to China. “Beijing’s win-win rhetoric about the peaceful and benign nature of BRI notwithstanding, a deliberate military and strategic functionality seems clearly entrenched in the initiative,” as noted in a recent report by the Asia Society entitled Weaponizing the Belt and Road Initiative.

 

All this said, it would be a mistake to suggest that this nascent third phase will lead Beijing significantly to downplay BRI, as Chinese-American political scientist Minxin Pei argued recently, predicting that Xi might even allow the programme to “die quietly”. The opposite is more likely to be true. BRI will adapt to its new post-COVID environment, much as it has in previous iterations, aided by its bottom-up, inchoate structure. Its importance to China’s foreign policy will remain substantial, even as its activities change in three important respects.

 

For starters, BRI’s existing projects will mostly continue, rather than stalling or being cancelled. China keeps no central database of its project’s status, so a comprehensive picture is hard to gauge. But there are numerous examples of projects that are now back up and running, for instance the $7bn Karachi to Lahore rail link plan in Pakistan, which was approved in June as part of the China Pakistan Economic Corridor, a major BRI artery. Equally, as BRI recipient countries cast around for funds to help them recover from Covid, China is still a likely port of call, as exemplified with a new $500m concessional loan provided to Sri Lanka in March.

 

Second, BRI is likely to adapt by changing its focus, giving prominence to new areas, such as the until-now low-profile Health Silk Road (HSR), first formalised at the first BRI summit in 2017. In common with BRI itself, the HSR is hard to pin down institutionally. Some more alarmist US media have suggested the programme’s focus on sharing and tracking disease information suggests Beijing may in time turn it into an alternative to the World Health Organisation. Even if this is unlikely, HSR still provides Beijing with a helpful umbrella brand under which to undertake substantial healthcare diplomacy, from exporting medical equipment to selling pandemic management technology and telemedicine systems.

 

A further and potentially significant new avenue comes via the Digital Silk Road (DSR), until now a small subset of the BRI’s focus on hard infrastructure. DSR’s focus on new partnerships to build 5G telecoms infrastructure or develop digital trade free zones is likely to find favour with emerging economies keen to invest in new technologies. Further investment into digital initiatives could help Beijing improve technological connections with partner nations, and increase digital trade flows, while also helping to bolster Chinese claims to be a global technology standards setter, at a time of rising geopolitical competition over technological governance.

 

But it is the third point that remains the most important, namely that BRI's overall goal remains unchanged, despite the new environment in which its third phase will operate. Xi’s aim for BRI aim was never merely to build infrastructure. Rather, infrastructure was a means: the creation of a new Chinese sphere of political and economic influence, involving the reorientation of networks of trade and commerce that once flowed from Asian markets to the rich industrialised west. Beijing still aims to refashion these links, so in future they flow back and forth between China and its partners. Indeed, the post-COVID geopolitical environment, with its heightened divisions between China and the west, makes it more important for Beijing to forge new relationships with emerging markets in regions such as Southeast and Central Asia. BRI’s third phase might be less lavish in terms of its spending, and less eye-catching in terms of its megaprojects. But in many ways BRI is now more critical to Xi’s vision than ever.

 

James Crabtree is an associate professor in practice at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is author of "The Billionaire Raj."

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