China is struggling to make headway with the its Belt and Road Initiative (BRI) in Africa, Europe and other parts of the world as EU countries increasingly place regulatory obstacles on Chinese investment, while emerging markets (EMs) are strapped for cash and face growing debt burdens.
At the same time, China is increasing its focus on Central Asia as the region’s importance as a trading route has grown following Russia’s invasion of Ukraine and Western sanctions on Moscow, Fitch Solutions analysts said during a webinar on February 14.
The BRI, also known as the New Silk Road, is a massive infrastructure project that was introduced by President Xi Jinping of China in 2013 as One Belt One Road (OBOR). Initially intended to connect East Asia and Europe, it has grown to include Africa and Latin America and other parts of the world, contributing to an increase in China's global economic and political clout.
After the initial welcome for the BRI projects, including in a number of West European countries, the initiative has faced growing challenges resulting from geopolitical tensions and financial constraints in the last few years.
“Despite continued policy support for the BRI and [a] growing need for China-based companies to pursue opportunities outside mainland China, we expect the BRI to face challenges, with significant headwinds to weigh on implementation,” said Tim Kerckhoff, infrastructure analyst at Fitch Solutions.
“We expect high debt loads and debt servicing costs in many EMs will limit EM policymakers willingness to borrow for large infrastructure projects.”
At the same time, Chinese contractors’ aims to reduce their risks by pursuing more projects in Europe are likely to be thwarted by greater regulatory oversight of Chinese investments in some European countries.
Growing debt burden
Kerckhoff pointed to significant borrowing by EM governments over a 10-year period, combined with weak growth and the pandemic, that resulted in the raising of government debt as a share of GDP.
In the environment of higher interest rates and currency weakness, Fitch expects this will persist throughout the coming decade to push up debt servicing costs, and make it less sustainable for governments to carry debt.
This is anticipated to discourage EM governments from borrowing for large-scale flagship projects like those in the BRI, while efforts to renegotiate existing debt will discourage China from lending more, Kerckhoff added, pointing out that Chinese lenders are already restructuring with several key BRI partners.
Among them are Pakistan, which in 2022 said it was seeking to reschedule $27bn of bilateral debt mostly owed to China.
Several of the smaller Emerging Europe and Central Asian economies also carry heavy burdens of debt to China. Montenegro struggled in 2021 to repay loans for the Bar-Boljare motorway, a huge financial commitment compared to the size of its economy.
Along with Montenegro, three other countries from the region – Kyrgyzstan, Mongolia and Tajikistan – were identified back in 2018 as most at risk from debt distress due to huge loans they took out to participate in the BRI.
Similarly, Lara Wolf, sub-Saharan Africa country risk analyst at Fitch Solutions, pointed to a decline in Chinese investment in sub-Saharan Africa, though she expects it will “remain significant”. She also identified a shift from investment into large-scale infrastructure projects towards new sectors such as agriculture. “This is in line with Chinese government’s new small is beautiful policy,” Wolf said.
Geopolitics in Europe
With greater caution on both sides when it comes to lending to EMs, Chinese companies have been eyeing more investment into developed economies in Europe. There, however, the situation in Europe has changed since the excitement in the early 2010s about the BRI in Western Europe. Later, said Anwita Basu, head of Europe country risk at Fitch Solutions, "Relations got complicated – there was the divergence between China and the US … Then due to the Russia-Ukraine war, after which China chose not to defend sanctions against Russia."
While a number of European nations – among them Germany, Hungary and Italy – continue to enjoy economic ties with China, Basu pointed out that “tensions between Europe and China remain manifold”. One clear example is the rift between China and Lithuania after Vilnius sought closer ties with Taiwan. Several EU governments have imposed restrictions on the participation of Chinese IT majors in 5G networks.
Further southeast, added Basu, “Western Balkan countries also benefited from BRI investments that were in many ways easier to access than [EU] funding that comes with lot of conditionality that is harder to fulfil.”
Central Asia going strong
Basu pointed to increased investment in Central Asia at the same time as the fall in investment in Europe, as well as a series of recent meetings between high-level Chinese and Central Asian officials.
The region played an important role in the BRI since the beginning, as the concept was originally announced by Xi during a trip to Kazakhstan in 2013.
“Central Asia remains a very important part of China’s goal to connect itself to Western economies and a very important part of China’s plan to develop the Xinjiang region in western China,” Basu said.
“The dynamic has been impacted by the Russia-Ukraine war – Central Asia has always been considered even by China as Russia’s backyard. It has benefited greatly from trade with Russia and Russia has provided it with a security guarantee.” This guarantee, Basu believes, was “rather convenient” for China, which carved out its own role as a development partner in the region.
Now, however, “Russia’s role in Central Asia has lessened as its attentions are increasingly occupied by Ukraine, and meanwhile Central Asian nations looking to other countries like Turkey, India and even China to replace it.”
At the same time, the region has become more important to China as a westward trading route. “China is looking for viable trading and development options that do not cut through Russia in order to avoid the sanctions Russia now faces,” said Basu.
The invasion of Ukraine and Western sanctions on Russia sparked new interest in the "Middle Corridor”, which is seen as having the potential to transform Central Asia into a critical region for goods transit between China and Europe, bypassing Russia.
As bne IntelliNews reported in June 2022, volumes dispatched across Kazakh railways have been booming and new routes out of China, including the China-Kyrgyzstan-Uzbekistan (CKU) railway, are planned.
Central Asia’s smaller economies, Kyrgyzstan and Tajikistan, do, however, face many of the debt issues that other emerging markets on the BRI are struggling with.
“Smaller countries in Central Asia are highly indebted especially on the BRI projects. Tajikistan and Kyrgyzstan hold debt adding up to around 20% of GDP still owed to China. Since the pandemic and Russia-Ukraine war the cumulative share of debt distress increased quite significantly,” said Basu.
“On the one hand we expect more focus on Central Asia, but on the other hand, factors such as security and debt must be at the front and centre of Chinese investors’ minds, which might lead to a slight slowing in active progress of investment in the next few years.”
However, Kerckhoff concluded that despite the geopolitical tensions and debt issues, there is still a strong need for transport links between Asia and Europe.
“Although key headwinds such as greater China-West tensions and unfavourable debt pressures in many EMs will challenge the implementation of the BRI as a China-led initiative, nonetheless we have a broadly optimistic outlook for improved transport links between Asia and Europe supported by shifting global supply chains,” he said.