China tweaks its Belt and Road Initiative to avoid further backlash

China tweaks its Belt and Road Initiative to avoid further backlash
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In his speech at the recent Belt and Road Forum, Chinese President Xi Jinping underlined that the next phase of the Belt and Road Initiative (BRI) will “adopt widely accepted rules and standards,” “follow general international rules and standards in project development, operation, procurement and tendering and bidding” and “ensure the commercial and fiscal sustainability of all projects.”

The speech echoes his message on the fifth anniversary of the BRI in 2018; he described the first five years of BRI as the phase of deployment as a freehand brushwork in traditional Chinese painting and the next phase of BRI as a Gongbi painting — a classical Chinese art form characterized by meticulous attention to detail and realistic rendering of landscapes and people. 

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This transition represents China’s response to challenges for the BRI that have become increasingly pronounced since the last forum, only two years ago.

Four central challenges facing the initiative are an over-expansion of the scope of the types of BRI projects, unsustainable debt issues in a significant number of receiving countries, an ever-expanding array of environmental concerns stemming from China’s infrastructure buildout and a growing concern about technological development as an important component of the BRI.

First, the over-expansion of the BRI, driven by local governments and enterprises, has concerned policymakers in Beijing for at least the last two years.

Plagued by insufficient economic benefits (for China and host countries alike), uncontrolled resource extraction and a lack of attention to environmental and social impacts, the chaotic swarm of investment in the name of the BRI has done real damage to its reputation.

Beijing has concluded that the BRI needs to be clearly defined and well-managed. More careful assessment of BRI projects is required to select qualified enterprises and projects. 

Second, China faces a great challenge in its approach to project development and project financing. Chief among these concerns is the issue of debt sustainability. BRI financing is highly dependent on loans from China Development Bank (CDB) and Exim Bank of China, as well as other state-owned commercial banks. 

China’s foreign reserves are important sources of capital in the CDB and Exim Bank, and the decline of the foreign reserves in recent years indicates the unsustainability of current BRI financing. Foreign capital and substantial support from multilateral financial institutions will be needed to sustain BRI projects in the coming years. 

In this regard, China’s Ministry of Finance led the establishment the Multilateral Cooperation Center for Development Financing, together with eight multilateral development banks and financial institutions.

As a coordination mechanism, the Center is expected to improve project financing through information sharing, project preparation and capacity building. The Ministry of Finance has also developed the Debt Sustainability Framework for Participating Countries of the BRI, cooperating with its counterparts from 28 partner countries.

Debt sustainability will only grow in importance in Beijing, and China will take steps to improve transparency in how and when it reports the financing and deal structures of BRI investments.

Third, environmental concerns have plagued BRI projects and domestic electric grid construction, notably China’s continuing expansion of coal power capacity, alongside its efforts to reduce greenhouse gas emissions.

In response, China has sought to integrate the BRI with its nascent green growth agenda, notably to address criticism of its continued reliance on coal power and the lack of environmental oversight over Chinese infrastructure projects both at home and abroad

Greening the BRI goes far beyond responding to international criticism. Xi has, since 2012, advanced the concept of "ecological civilization," suggesting that China should take the lead in promoting environmentally sustainable economic development, starting from its own domestic battle with carbon emissions.

Finally, China’s technological development has become a priority for Beijing and that permeates the BRI in the form of the "Digital Silk Road." Under this scheme, China has bundled railway and road construction with underground telecommunications cables, invested in smart-city construction and expanded e-commerce.

However, it came with worries that this part of the plan suggests an emphasis on the promotion of China-origination technological standards in industries like information technology, telecommunications and transportation.

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Ultimately, the changes in the BRI have the potential to deliver clearer benefits to host countries but are unlikely to assuage critics, such as the U.S., India and Australia, any time soon.

It is uncertain how much China can change its model of investment in the BRI and pay more attention to debt sustainability in receiving countries, a more transparent process for biding and government procedure.

But the changes signaled by the recent BRF in Beijing suggest that the re-tooled BRI is driven by long-standing policy issues facing Beijing both internationally and domestically. 

Alex He is a research fellow at the Centre for International Governance Innovation (CIGI), author of "The Dragon’s Footprints: China in the Global Economic Governance System under the G20 Framework" and co-author of “A History of China-U.S. Relations.”

Anton Malkin is a research fellow in the Global Economy Program at CIGI. His work focuses on China's industrial policy, focusing on China's intangible economy, foreign investment and outbound mergers and acquisitions.