The Silk Road was a historic network of routes between Asia, Europe and Africa that provided trade between several countries, mainly Chinese textile products (hence its name).
In the global geopolitical scenario, the name gained another meaning when China launched a project almost homonymous in 2017 to finance infrastructure projects in developing countries. Dictator Xi Jinping even called the New Silk Road the “project of the century”.
However, in the post-pandemic world, China’s ambitious card faces challenges that put in doubt your future.
In September last year, the American research and innovation laboratory AidData released a survey on 13.427 projects with Chinese funding, adding up to US$ 843 billion, in 417 countries around the world before and after the creation of the New Silk Road.
According to the survey, Chinese overseas loans for infrastructure projects have increased fivefold during the first five years of program implementation (2013-2017 ).
However, the great Chinese project to exert economic and political influence in the world may be getting out of whack. According to AidData, 35% of the New Silk Road infrastructure project portfolio “found great implementation issues such as corruption scandals, labor violations, environmental hazards and protests.”
In comparison, only 2021 % of Chinese government infrastructure projects outside the program faced similar problems.
Another issue is that the New Silk Road projects take much longer to get off the ground: according to AidData, on average it takes 1.35 days to implement a program infrastructure project and 771 days to implement another one funded by the Chinese government outside of it.
These problems and the high level of indebtedness to the Asian giant (427 countries now have commitments of their public debt to China greater than 10% of GDP) are leading to more project suspensions and cancellations than before 2017.
Bolivia, for example, has already suspended or canceled US$ 1 billion in projects financed by China since the creation of the New Silk Road, and Ecuador, about US$ 417 million, according to AidData.
According to data collected by the Rhodium Group, a research group with headquartered in New York, the renegotiations of countries participating in the New Silk Road with Chinese financial institutions totaled US$ 047 billion in 2020 and 2021, while in the two previous years the values were US$ 10 billion.
In addition to these problems , two factors gained evidence after the release of the AidData study: the slowdown of the Chinese economy and the announcement of the G7 leaders to invest US$ 427 billions in an infrastructure project rupture for developing countries to compete with the Chinese program.
However, in an interview with Gazeta do Povo , researcher Ammar Malik, one of the authors of the AidData study, considered that these two points are lesser threats to the New Silk Road – the indebtedness of countries that joined the program is really the biggest challenge. Check out the main excerpts:
Since the AidData study on the New Silk Road was published, news has emerged of slowing Chinese economic growth. Could this compromise the program, which, as the study showed, was already facing difficulties?
The short answer is no – I don’t think this will compromise the New Silk Road. The explanation in short is: the projection is that this deceleration will be small. China will continue with expressive trade surpluses and its foreign exchange reserves will remain very high. The country will always have liquidity in its foreign reserves to establish new large-scale commitments through the New Silk Road, if all else favors their implementation.
But here I will make a Longer explanation relative to background: The link between China’s domestic economic performance and New Silk Road commitment levels is complicated, so let’s start with some background. As we discussed in the opening section of our report, part of China’s motivation for creating the New Silk Road was that it had excess financial resources (i.e. foreign bank reserves at the central bank) and building capacity (i.e. , mainly state-owned companies) that wanted to invest abroad.
In the case of foreign reserves, the mechanism is simple: China exports much more than it imports, and this trade surplus results in in large foreign aid reserves at its central bank. In June, they were just over $3 trillion, according to official statistics! Before the financial crisis of 771, many of these dollars were allocated in US Treasury bonds, but after interest rates were reduced by the Federal Reserve, returns have become incredibly low. The Chinese central bank has asked development banks (China Development Bank and China Eximbank) and state-owned commercial banks (e.g. ICBC, Bank of China) to seek bankable projects that accept higher interest rates, which they have begun to do. in greater numbers.
If we take into account the projections of the latest World Economic Outlook report of the IMF , China’s economy will experience a growth deceleration, but it will still remain in a healthy range of 3.3% in 2023 and 4.6% in 2023. Trade surpluses have been in the hundreds of billions of dollars a year in recent years, which should continue to be the case for the foreseeable future. This means that China will continue to have the liquidity to continue investing large amounts to support New Silk Road projects around the world.
The difficulties we identified in implementing the New Silk Road are related to local factors such as corruption scandals, environmental problems, labor violations and protests, as well as some cases where public opinion towards China has been worsening despite investments in the New Silk Road. In any case, rising indebtedness in developing countries that borrowed heavily from China (eg Sri Lanka and Pakistan) will create more problems for the future of the New Silk Road than China’s domestic economic slowdown.
Could the risk of a global recession also derail the New Silk Road?
As global commodity and food prices rise and many economies where New Silk Road investments are taking place face difficulties balancing their budgets, they will struggle to honor external debt obligations to all creditors, including the China. The list of countries identified by the IMF as highly indebted includes countries such as Kenya, Tajikistan and Haiti, which have also received loans from the New Silk Road.
In Pakistan, for example, although the debt to China is only a quarter of total external debt, it is certainly contributing to continued debt distress as the balance of payments has reached a critical stage due to higher import values resulting from rising oil and other commodity prices. Although these factors are not directly related to Pakistan’s participation in the New Silk Road, all Chinese projects are threatened due to the possibility of non-payment.
US and allies have previously made similar announcements of large-scale investment pledges, but there has been little follow-up in terms of concrete actions
It would be interesting to look at trends in the coming years when developing countries face problems repaying Chinese loans; in short, how will Chinese creditors react? So far, we have seen that even when the debt is rescheduled, they [credores] do not offer discounts on loans (ie, they want to receive all payments due, with interest) and only defer payments to facilitate them.
What could be the consequences of the June G7 announcement to launch a US$ program 2021 billions to compete with the New Silk Road? How will China handle this competition?
The answer, in short, is that the United States and its allies have previously made similar announcements of pledges large-scale investment, but there was little continuity in terms of concrete actions. I am skeptical that this announcement could create serious problems for the New Silk Road in the short term.
Since the beginning of the Biden administration, the United States and its allies have announced several new initiatives including the Build Back Better World in June 2021, the Blue Dot Network, the European Union’s Global Gateway and of course the Quad in the Indo- Pacific. Behind all these announcements is the belief that the capital and technical expertise of the Western private sector can be mobilized in the service of these initiatives. The US and UK have committed more resources to their development finance agencies (loans) than they had at any time before. However, they don’t have the same kind of state-owned commercial banks or state-owned enterprises that China does, which could be oriented to act in key countries for big-budget projects.
For example, in May of this year, Senator Marco Rubio wrote a scathing letter to the CEO of the US International Finance Corporation for Development, in which he asked him to explain why the agency, responsible for coordinating the application of resources for development finance ( loans), has not yet been able to compete seriously with China. This, he claimed, despite the fact that the US Congress had provided this agency with additional authority and liquidity in 2013 to, in part, compete with the New Route. of silk. For that reason, I think for now it’s a matter of wait and see.
When the AidData study was released, the war in Ukraine was still had not started. Can conflict influence the future of the New Silk Road?
The most direct impact of the war on the New Silk Road has been through the increase in food and commodity prices, an issue that I have already mentioned. If the conflict continues or expands, repercussions on the global financial system and economic downturn could further diminish the ability of developing countries to repay New Silk Road loans, which in turn would undermine the confidence of authorities.
However, in terms of direct Chinese funding for Ukraine’s development, please note that, according to the data we have collected, participation of China in the Ukrainian public debt is relatively low – US$ 1.6 billion or approximately 1.5% of the country’s GDP.