CHINA´S SHRINKING BRI AMBITIONS / GEOPOLITICAL FUTURES

China’s Shrinking BRI Ambitions

Corruption, delays and boondoggles are transforming the Belt and Road Initiative.

By: Victoria Herczegh

Last week, the head of China's Central Commission for Discipline Inspection laid out the watchdog’s main goals for this year. 

His report focused on eliminating corruption and unhealthy practices associated with Beijing’s gargantuan, globe-spanning infrastructure development plan, the Belt and Road Initiative (BRI). 

This follows President Xi Jinping’s declaration of a shift away from large-scale projects toward the “small but beautiful.” 

Once celebrated as a symbol of China’s rise as a global power, lately the BRI has been met with doubts about the integrity and viability of its projects. 

If implemented, Beijing’s new approach could reduce risk while improving the efficiency of its investments, but first China will need to address lingering problems associated with its previous approach.

Conceived more than a decade ago, at a time when China’s economic ascent seemed unstoppable, the BRI was initially meant to create an expanded, interdependent market for China and thus grow the country’s geoeconomic and geopolitical power. 

However, it has in some cases turned into a reputational hazard and financial risk for Beijing. 

Major recipients of Chinese investment such as Zambia and Sri Lanka have defaulted, giving substance to critics’ claims that Beijing is a predatory lender and that BRI loans are debt traps. 

Facing its own debt concerns at home, China has hesitated to forgive or restructure its foreign loans, while its secrecy regarding the size and terms of its loans has deterred other major lenders from offering assistance. 

It didn’t help Beijing’s reputation when the Associated Press reported last year that China requires borrowers to deposit funds in hidden escrow accounts to ensure that it gets paid first in a crisis.

Then there are the broken promises, which are most evident in Southeast Asia. 

According to a recent study by the Lowy Institute, out of 24 major regional projects worth a combined $77 billion, only about $25 billion has been delivered. 

Just a third of these projects are finished, while another third – mostly infrastructure megaprojects – either have been or are expected to be canceled. 

Similar shortcomings are evident in other regions, from structurally unsound hydroelectric dams in Ecuador to stalled railway projects in Hungary and Serbia to unfulfilled promises to build infrastructure in the Democratic Republic of Congo.

Before 2015, when the Chinese economy was experiencing high capital inflows and had reserves nearing $4 trillion, China's ability to finance the Belt and Road seemed more plausible. 

However, the current scenario is drastically different. 

Economic growth has decelerated rapidly, and banks' balance sheets are burdened with doubtful loans. 

The state of China’s banks is critical because they are the BRI’s main financiers; the China Development Bank is on the hook for an estimated $100 billion, for example, while the Bank of China has lent $20 billion. 

Multilateral organizations established to support BRI financing lack the firepower to come to the rescue in a crisis.

Against this backdrop, Chinese leaders began to call for a shift toward more modest infrastructure projects, which they hope will mitigate financial and corruption risks while restoring Beijing’s reliability as a creditor and partner. 

Urging lenders to judge projects by their financial viability, President Xi Jinping late last year committed 350 billion yuan ($48 billion) to the China Development Bank and a similar amount to the Export-Import Bank of China. 

These banks, along with the four major state-owned commercial banks – particularly the Bank of China and the Industrial and Commercial Bank of China – are crucial to financing the BRI. 

Additionally, Beijing will provide 80 billion yuan to the Silk Road Fund to finance smaller BRI projects based on their market fundamentals. 

Example projects include solar power plants to serve areas not covered by the existing power grid and roads to open remote areas to trade. 

This new approach might signal China's gradual move toward a market-oriented strategy, driven by its need for Western investment.

However, Beijing’s new BRI strategy does not erase the large-scale projects that are behind schedule or stalled, such as the East Coast Rail Link in Malaysia, the Thailand-China high-speed railway, the Philippine National Railways Bicol line, the Mindanao Railway in the Philippines and a deep-sea port in Myanmar's Kyaukphyu Special Economic Zone. 

Some of these projects have not even started construction and are waiting for promised financial support from China. 

The Philippines has already rejected Chinese loans for three railway projects due to transparency issues and is now negotiating with Japan, which recently started offering investment to BRI recipient countries that are disillusioned with China. 

Other countries in Southeast Asia are also exploring alternatives, despite China's emphasis on the benefits of smaller initiatives.

Japan is just one of China’s several rivals that is stepping in to offer an alternative to the BRI. 

Most significant is the G7’s Partnership for Global Infrastructure and Investment (PGII), a $600 million initiative launched in 2022. 

Targeting low- and middle-income countries, the PGII focuses on financing "high-quality infrastructure" with an emphasis on clean energy, digital connectivity and health, positioning itself as the Western counter to the BRI. 

Unlike the BRI, which involves direct government participation, the PGII seeks to attract private capital. 

This lowers risks for taxpayers but also limits the fund’s potential to compete directly with the BRI, since China can leverage state-owned enterprises for BRI investments. 

In addition, Western companies do not face the same economic and geopolitical pressures, such as sanctions and manufacturing overcapacity, that drive Chinese firms to explore new markets and investments.

But even if Western alternatives cannot go toe to toe with the BRI, they offer developing countries more funding options, which will help push China to live up to its "win-win cooperation" mantra. 

It will also encourage transparency and effective communication between Beijing and BRI participants. 

The BRI will not evolve into the vast economic empire that its most ardent supporters imagined (and critics feared), but it can continue to benefit China as a collection of small, practical projects tailored to meet participants' needs.