EXPANDING AND EXTENDING GLOBAL REACH
1. BRI received a timely credibility boost in March 2019 when Italy became the 130th nation to sign on. Although the BRI already counts several less prosperous EU nations among its ranks, Italy is the biggest European economy and first member of the Group of Seven (G7) bloc of advanced countries to join, conferring renewed legitimacy on the Initiative.
2. Italy no doubt hopes the agreement will lead to more Chinese investment inflows to shore up its ageing infrastructure, especially after the collapse of a 50-year-old highway bridge in Genoa in August 2018. With Italy’s national debt now at 130 percent of GDP, the BRI is likely seen by members of the country’s newly installed populist ruling coalition as a means of attracting a much-needed infusion of funds
3. Japan is also eyeing BRI opportunities, with speculation it could become the second G7 nation to join. Japanese officials recently announced plans to send a high-level delegation to the second Belt and Road Forum in China in April 2019 to extend their cooperation on BRI-related issues.
LEADING DESTINATION IN EUROPE
1. Well before the advent of BRI, Chinese investment sought strategic assets overseas, particularly in the advanced economies of Europe.Chinese firms have invested heavily in key sectors across Europe over the past decade, with several high-profile acquisitions, including stakes in most of the UK’s leading banks, Sweden’s largest carmaker, robotics in Germany, power utilities in Portugal,solar farms in Hungary, as well as Greece’s Piraeus port, which has flourished following the investment.
2. Italy, meanwhile, is already one of the biggest European destinations for Chinese investment. According to data compiled by the Rhodium Group, Chinese enterprises have since 2000 invested EUR15.3 billion (about RMB115 billion/USD17 billion) in Italian companies in sectors, ranging from luxury brands to high-tech manufacturing and the country’s power grid. Since the signing of Italy’s BRI agreement, there have been suggestions it could soon open up its ports to Chinese investment, with Trieste tipped as having the potential to develop into a key gateway to Europe with China’s support
3. Yet Chinese investment going to Europe and North America plunged from 2017 to 2018, declining from USD111 billion to just USD30 billion, according to a report by Baker McKenzie. Although Beijing’s capital controls and China’s mounting debt load crimped Chinese foreign investment last year, heightened scrutiny by regulators of Chinese acquisitions was a major factor behind the drop in investment, with a large number of deals cancelled or blocked.
SUCCESSES AND CHALLENGES
1. The BRI has transformed a substantial portion of the developing world over the past five years. Given the long investment horizon associated with the infrastructure projects of BRI, a commensurate timeframe—10-15 years rather than 3-5 years—should be used when measuring returns. Still, there have been clear short-term benefits associated with construction activity to date, which has boosted the economies of host countries and benefited Chinese and international firms involved in the projects. Larger benefits will accrue over the longer term, with new infrastructure set to facilitate trade—and transform the economies of many host countries— by improving connectivity. Trade agreements inked under the BRI banner also stand to benefit China and its partners.
2. the new Maldives administration has claimed large-scale graft under the previous government led to the signing of perceived overambitious construction contracts with Chinese companies, and is now seeking a reduction in the debts accrued on those contracts from Beijing.
CHINA'S RECALIBRATION
1. The backlash to high-profile debtprompted crises in Sri Lanka, Pakistan and the Maldives has sent a clear signal to China to modify its approach to lending. There is clearly awareness of what went wrong with those projects, such as with the USD4 billion railway linking Addis Ababa with neighboring Djibouti, where the loan repayment terms had to be extended by 20 years.
2. At a meeting of Chinese policymakers in January, Han Zheng, the vice-premier holding the BRI portfolio, reiterated a call for the “high-quality” development of the Initiative. This was preceded last year by the release of guiding opinions by several central government agencies aimed at standardizing funding sources, enhancing general risk-management and better guiding the financing channels for Chinese overseas projects.
3. Working with international agencies and multinational corporations (MNCs) is another way for China’s lenders to better assess and hedge financial, sovereign and geopolitical risks. The Chinese policy banks funding the BRI, including the China Development Bank (CDB) and the Export-Import Bank of China (Exim Bank) are already pursuing partnerships with international lenders to improve financial governance and manage debt and investment risk.
ADRESSING INFRASTRUCTURE GAPS VIA THE RIGHT APPROACH
1. The world needs as much as USD3.7 trillion in annual infrastructure spending for years to come, with the potential consequences of failing to close the infrastructure gap more dire in developing countries. China’s readiness to extend loans to upgrade roads, railways, ports, and electricity and telecommunications infrastructure is therefore welcome in those countries and the allure of the BRI remains strong, despite mounting concerns about debt sustainability and the commercial rationale of projects.
2. The Global Infrastructure Forum held in Bali in October 2018 stressed that, contrary to widespread perception, there is enough financing available to fix the world’s infrastructure shortfalls. What is needed is to make the projects “bankable.” This needs to happen anyway, because even before China’s policy banks were instructed to step up their due diligence in extending infrastructure loans, the most aggressive estimates of BRI spending fell well short of addressing the anticipated infrastructure shortfall over the coming years.
3. Paving the way for private investment can be achieved by better assessment of the risks of individual projects and improved project preparation and planning. Concurrently, countries need to step up their procurement processes and regulatory frameworks. The forum also highlighted the vital role multilateral development banks can play in bringing credibility to projects by identifying and removing barriers to private investment, such as weak project preparation, supportive policy and regulatory environments and insufficient financial preparation.
IMPROVING THE FINANCING OF PROJECTS
1. Even before concerns about debt sustainability and project feasibility came to a head, China had sought to foster greater international involvement in financing BRI projects by spearheading the creation of two key multilateral financial institutions: the New Development Bank (NDB) established in July 2015 and funded by the BRICS countries; and the Asian Infrastructure Investment Bank (AIIB) set up in January 2016 and co-funded by 57 other countries.
2. Among other high-profile international partnerships focused on improving the financing of BRI projects, the People’s Bank of China supported the City of London Corporation in compiling a comprehensive report detailing case studies of BRI projects financed through London by banks such as HSBC and Standard Chartered.
3. Published in October, this report offers suggestions on how to understand the opportunities and risks of such projects better.30 Standard Chartered provided several insights, having funded more than 50 BRI projects and committed to funding deals worth an additional USD20 billion by 2020. Among the projects already financed by Standard Chartered are a USD515 million power plant in Zambia and a USD200 million electricity plant in Bangladesh, as well as a USD42 million export credit facility for a Sri Lanka gas terminal.
(Source: Deloitte)
