Infrastructure investment: the core instrument of BRI

September 7, 2021 will be the eight years anniversary of the establishment of the Belt and Road Initiative (BRI), which has accomplished remarkable achievements. From 2013 to 2019, China invested US$117.31 billion in BRI countries. Although the COVID-19 in 2020 affected the stagnation of the international economy, However in the first half of 2021, the investment of Chinese companies in the countries along BRI increased by 8.6%.

Furthermore, BRI has received both widespread “attention” and “hostility” from the world’s major powers. In order to counter China’s BRI, US President Joe Biden launched the “Build Back Better World (B3W)” plan at the G7 summit. Its purpose is to provide an alternative plan to invest in developing countries. Immediately afterwards, on July 12, 2021, the EU foreign ministers agreed to launch a global infrastructure plan, the so-called “A globally connected Europe”. The strategic plan is an attempt to connect Europe and the world as from 2022 to contrast China’s influence.

Biden wants to reshape the United States into a World leading country, and hopes this will increase the attractiveness of B3W. But whether the B3W plan can be realized remains a question mark. The world is more willing to sign BRI projects based on national interests than to choose the B3W project with the United States. So far, approximately 140 countries have signed a memorandum of cooperation on the BRI with China.

The BRI has become the “flagship” project of China’s overseas investment in the past eight years. According to Refinitiv, a data provider under Thomson Reuters, new infrastructure has been built under the framework of BRI, including railways, ports, highways, etc. As of July 2020, there are more than 2,600 projects related to BRI, with a total project valuation of approximately US$3.7 trillion.

In the last eight years, China has mainly increased investment in Central Asia, Southeast Asia and South Asia, and gradually looked towards Central and Eastern Europe.

According to China’s investment in Central Asia is concentrated in Kazakhstan and Uzbekistan. In the ten years from 2009 to 2018, China invested US$12.7 billion and US$3.246 billion in Kazakhstan and Uzbekistan, respectively. The investment in both countries is mainly concentrated in energy and minerals. But with China’s commitment to COP 21, energy investment in Central Asia is expected to slow down. Southeast Asia and Central Europe will become the next stage of China’s investment focus in implementing the “high-quality” BRI program.

Since signing the RCEP, China’s investment in Southeast Asia has gradually increased, but it has a long way to go to catch up with Japan’s investment. China’s investment in Malaysia reached an average of 3.9 billion MYR per year between 2012 and 2016. Since 2016, China has been the largest source of foreign investment in Malaysia’s manufacturing sector. In 2019 and the first half of 2020, Malaysia successively approved 32 projects from China for a total value of US$45243 million. It has been observed that Malaysia’s economic growth rate rose by 1.31% in 2014 after the implementation of the first Malaysia-China project under the BRI framework. However, the growth rate in 2018 and 2019 was less than 5%. Chinese investment has little impact on Malaysia as a whole: the start-up time of China-Malaysia cooperation projects is too short, and its economic effects are not easy to see. In addition, Malaysia’s economic growth is also affected by many external factors, such as tensions caused by geopolitics including the trade war. This is also a mirror of Southeast Asia.

Relatively speaking, China’s investment in Central and Eastern European countries has become a bright spot in recent years. From 2010 to 2019, China’s total investment in Central and Eastern Europe increased from US$310 million to US$14.69 billion, with an average annual growth rate of 53.4%. In 2017, the China-Central and Eastern European Banking Consortium was formally established. The China Development Bank(CDB) provided 2 billion Euros in financial cooperation loans to this region. The second phase of the China-Central and Eastern Europe Investment Cooperation Fund raised US$1 billion to be invested in Central and Eastern Europe. Strong policy support continuously which indicates that China’s investment in the region will grow rapidly in the future.

Generally speaking, China’s investment in Central and Eastern Europe presents the following typical characteristics. Firstly, as far as investment entities are concerned, China’s early investment in Central and Eastern Europe has been dominated by state-owned enterprises. Secondly, in terms of industry distribution, China’s cooperation projects in Central and Eastern Europe are largely concentrated in the energy and chemical industries. Third, China’s investment in Central and Eastern Europe is extremely unbalanced in terms of geographical distribution. Hungary and Serbia are the countries that receive the greatest contribution from China, and the two countries account for 1/2 of China’s total investment in Central and Eastern Europe.

However, the political risks within the Central and Eastern European countries have become the primary issue facing China’s investment projects in the region. The Czech Republic, Slovakia, Slovenia, Croatia, Romania, and Bulgaria have many parties are marked by frequent regime changes, with the ruling coalition often clashes due to differences in policy tendencies. In addition, the long-term sustainability of economic growth in Central and Eastern Europe still presents great uncertainties. Although countries in Central and Eastern Europe have experienced strong economic growth in recent years, in the long run, there is a risk of an economic decline. The “middle income trap” has become a real threat to all these countries.

China’s investment in countries along BRI mainly relies on state-owned and private enterprises. And the problem is that the proportion of state-owned enterprises’ overseas market revenue has increased significantly, but the level of internationalization has not followed suit. On the other hand, private enterprises show a two-tiered trend, with low overall profitability and weak investment sustainability.

When it comes to the choice of investment destinations for enterprises, state-owned enterprises will continue to invest in key areas of the BRI such as Southeast Asia, West Asia, Africa, and South Asia; while private enterprises and foreign-funded enterprises are currently investing more in developed countries such as the United States and Europe, but in the future , forecasts indicate they might increase investment in Southeast Asia, South Asia and other regions. Companies will also be paying more attention to safety, profitability and liquidity.

Regarding the question of whether the BRI is a strategy or an initiative, Chinese scholars express different opinions. Personally, I think it can be defined as a strategic initiative. In view of the long repayment period of the infrastructure investment and the limited debt repayment ability of various countries, it may be considered as an assisting instrumental Road Map. What is certain is that China needs to have an economic foundation if it wants to gain recognition from other countries. Extending it then to the political and diplomatic fields on this basis will be a long-term process. After all, if China cannot balance economic cooperation and obtaining strategic benefits (political influence), then China’s plan to promote the BRI will also be faced with greater risks.