COVID-19 and the Future of Belt and Road Initiative

As China and the US fight for global dominance, it will be important for China to demonstrate its commitment to multilateralism and transparency to overcome the criticisms it faces in BRI borrower countries.

Since the outbreak of COVID-19 in late December 2019 in Wuhan, China, experts have speculated what its long-term effects on global health, the global economy, and social welfare will be. The human lives lost to the pandemic have been colossal. The economic impact of COVID-19 paints a very dreary picture: rising unemployment, crashing oil prices, and increasing risk of recession, with the International Monetary Fund (IMF) predicting that the global economy will shrink by three percent in 2020. Bloomberg Economics’ analysis predicts that, in the worst case, COVID-19 could cost the global economy $2.7 trillion in global output, recessions in the US, Euro-area, and Japan, and the slowest growth on record in China.

Given this scenario, this article analyzes the status of China’s Belt and Road Initiative (BRI) projects, especially in the context of the tensions between China and the US. Launched in 2013 by President Xi Jinping, the BRI comprises development and investment projects spanning Asia, Europe, and Africa. The article finds that BRI projects could widen their focus from largely infrastructure development to technology infrastructure and global health in the aftermath of COVID-19. Additionally, China may face higher accountability in terms of the sustainability, quality, and global standards of its projects in borrower countries, especially given China’s increasing competition with the US in the world stage.

Challenges abound

As expected, the outbreak of COVID-19 in China and its struggle to contain the disease also translated into challenges in its BRI projects worldwide. Work halted across various BRI projects in Pakistan, Cambodia, Indonesia, Myanmar, and Malaysia, among many other countries, as travel bans froze the movement of Chinese labor. Additionally, because BRI projects are currently predominantly reliant on Chinese materials and supplies, instead of local ones, China’s disruption of supply chains also poses additional challenges and delays. Experts at the Council on Foreign Relations (CFR), a think tank based in New York, opine that had BRI projects been based on a different model of governance, including local sourcing of workers, supplies, and manufacturers, engagement of international infrastructure-building experts, and investment in local capacity, the effects of COVID-19 would have been differently felt in BRI countries.

In response to COVID-19, the Asian Infrastructure Investment Bank (AIIB), a multilateral development bank of which China is the largest shareholder, created a $10 billion COVID-19 Crisis Recovery Facility that is meant to support countries and public and private businesses during this pandemic. Most recently, it approved millions of dollars in loans to countries like Georgia, Bangladesh, India, and China in COVID-19 emergency assistance. Much of the financial assistance is being requested in three major areas: “1) to help alleviate health care pressures in the form of health infrastructure and pandemic preparedness; (2) liquidity support through on-lending facilities and credit lines via financial institutions to address working capital and liquidity shortages and (3) immediate fiscal and budgetary support, in partnership with other multilateral development banks, so governments can focus on addressing the human and financial impacts of COVID-19.”

Notably, in China’s point of view, Foreign Minister Wang Yi, among other Chinese officials, explained that while the BRI had taken a hit due to COVID-19, its impact is temporary, limited, and short-term, and that in the long-term, BRI corporations will be strengthened and reenergized. Additionally, although BRI projects may take a year to recover from decreased trade and slower investments, China’s trade with borrower countries of the BRI might not be as badly affected as trade with other countries. In an effort to offset the constraints of COVID-19 on BRI projects, the China Development Bank has stated that it will provide additional support for (presumably just Chinese) companies involved with BRI projects by providing low-cost financing options.

However, even prior to COVID-19, China’s overseas lending to the developing world was decelerating or plateauing. This was evidenced by the flattening of the growth of construction contracts by 2017 and its significant decline by 2018, according to an April 2020 note by an independent research firm, Rhodium Group. Additionally, even before the crisis, the note explains that it was unlikely for China to return to the same levels of new BRI commitments that it had shown in 2016 and 2017. The reasons are that China continued to face a lot of criticism in recipient countries, financial instability at home, and a push by the government to improve lending practices. While no BRI contracts have been canceled, with an uncertain future, ambitious infrastructure projects under the BRI could be scaled down to safer investments.

Given the pressures facing borrower countries’ political, social, and healthcare systems, the inevitable question of debt repayment arises. The IMF and the World Bank have called on lending nations to delay collecting debt repayment from countries that request forbearance. Jonathan Hillman, a senior fellow at the Center for Strategic and International Studies, a Washington DC think tank, explains that in 2020, China could be spending more time renegotiating investment deals rather than negotiating new ones, an analysis echoed by Rhodium Group’s note as well. This renegotiation may take several forms, including refinancing. Although countries like Ghana and Pakistan have asked for debt relief in some BRI projects given the effects of the pandemic, Chinese state media has clarified that many such projects are ineligible for debt relief in the first place. Deputy Director at the Carnegie-Tsinghua Center for Global Policy, Tang Xiaoyang explains that while debt cancellation may not be realistic, as China has only forgiven debt for zero-interest loans so far, the country would put forth other methods meant to reduce the payment burden for borrower countries, including lengthening repayment periods and extending grace periods

The question of unsustainable debt for borrower countries has been criticized by some as a ploy of China to increase its economic and political influence in borrower countries. The same narrative finds ground in the current COVID-19 situation. Sam Parker, a co-author of a Harvard report on Chinese “debtbook diplomacy,” suggests that moving forward, China’s debt leverage of borrower countries is going to increase, including through an increase in soft power by China either taking control of borrower countries’ assets or forgiving debt entirely to increase its soft power. Borrowing developing countries, like Cambodia, Laos, Myanmar, and Pakistan, may face additional pressure in refraining from aggressively tackling the virus in their own countries because they fear alienating China, as a Fitch Solutions (a research firm) note explains. The US perceives China’s lending in such countries as undermining its domestic stability because of unsustainable debt, which then either contradicts the US’s interests or its strategic interests in the specific country.

Going forward, analysts at the American Enterprise Institute argue that China may focus BRI projects on fewer countries and on making its outbound investments less one-sided and more of a group effort. Rhodium Group’s note explains that should China want to keep up with BRI lending, it has the ability to do so, given that BRI loans are a small part of China’s lending portfolio. However, even with diminished financing, China is able to achieve the same proportional impact on borrower countries, as well as greater political goodwill.

Additionally, some expect that the BRI could begin focusing on technology and health initiatives following the pandemic. In discussing the COVID-19 pandemic and its implications for infrastructure priorities moving forward in a March 25 statement, the AIIB emphasized that increased focus on public health infrastructure, together with robust information and communications technology (ICT) for support, will be instrumental in a post-COVID-19 world for developing countries. The AIIB recently approved funding for satellite ICT infrastructure in Indonesia to provide greater connectivity in remote areas.

The AIIB’s statement also emphasized the immediate need to empower healthcare infrastructure, stabilize economies, and protect people’s livelihoods as well as mitigate the risks to tourism and trade due to disruptions in the supply chain and financial markets. Multilateral development banks, it explained, has a special role in protecting key infrastructure development in developing countries, despite increased fiscal pressures, in order to offset long-term economic and environmental sustainability risks.

Other challenges that China could face include growing anti-Chinese sentiments in borrower countries as well as at home, where citizens resent the government’s foreign investment given the country’s own deficient health infrastructure and the challenges facing its small and medium-sized enterprises, as Daniel Russel, the vice-president of the New York-based Asia Society Policy Institute, explains. Oftentimes, such criticisms are also fueled up by China's competitors working in such borrower countries. China will also need to reassure borrower countries and the international community that its projects will account for public health sustainability as well as the protection of its workforce and the local population when BRI projects do resume in the wake of COVID-19.

Struggle for global dominance

The COVID-19 has further highlighted the tensions between two superpowers, the US and China. Even before the pandemic, the US and China were engaged in a trade war and suffering from deteriorating international relations. This had involved everything from disputes regarding solar panel and washing machine imports to tariffs on steel and aluminum to auto tariffs and intellectual property. In fact, the tariffs on medical supplies from China supposedly hampered the US’s fight against COVID-19 by contributing to shortages and higher costs for vital equipment. Moreover, the Phase One deal negotiated by the US and China that commits China to buying additional US goods (estimated at $200 billion by the end of 2021) is going to strengthen Chinese state-owned enterprises and state control of the economy, policies that the US was supposed to oppose, experts at the Peterson Institute for International Economics in Washington DC argue.

Additionally, China was heavily criticized for its handling of the early stages of the pandemic. Allegedly, the government attempted to hide the spread of the virus in its beginning stages, and the Wuhan government failed to take actions against an outbreak even after health authorities confirmed the existence of COVID-19. Chinese government has also been accused of spreading misinformation and censoring non-state sanctioned information following the outbreak and worked to silence or punish doctors, including Dr Li Wenliang, who attempted to bring to light the dangers it posed to public health. Ultimately, described as “draconian,” China’s measures to control the spread of the disease led to a 6.8 percent drop in China’s GDP during its first quarter, but capped the officially reported (though disputed) infection count at 85,000.

China’s approach to containing the spread of COVID-19 has been described by experts at the CFR as “very traditional methods of social repression coming into play, mixed with technology.” Of course, it is worth pointing out that many Western countries went on to adopt the same methods including quarantining and government-sanctioned shut-downs of entire cities and countries, as the outbreak worsened in order to help contain the spread of COVID-19. Just in the way that President Trump has been accused of rewriting his administration’s failure to take the disease seriously and to control the outbreak in the US when it first took hold, the Chinese Community Party (CCP) has been similarly accused of attempting to rewrite how it handled the events in the beginning and avoiding questions about where exactly the outbreak began.

Additionally, the Trump administration began speculating that China had bioengineered the virus in a biosafety level-four lab located in Wuhan, China, which housed various types of coronaviruses and other pathogens. Scholars at the CFR, for example, considered how this fact, if true, could damage the reputations of both President Xi and the CCP domestically and internationally. Similarly, some Chinese leaders propagated that the virus originated elsewhere and even accused the US military of bringing COVID-19 to Wuhan. However, scientific researchers have explained that “SARS-CoV-2 did not escape from a jar: RNA sequences closely resemble those of viruses that silently circulate in bats, and epidemiologic information implicates a bat-origin virus infecting unidentified animal species sold in China’s live-animal markets.”

The US Federal Bureau of Investigation and the Cybersecurity and Infrastructure Security Agency also warned that the Chinese government has been trying to steal research related to the coronavirus from American institutions, an act that the Chinese state-run newspaper, Global Times, has denied. The Central Intelligence Agency has also stated that China threatened the WHO, from which President Trump recently withdrew the participation of the US, that it would refrain from collaboration on coronavirus investigations if the WHO declared COVID-19 to be a global pandemic. A German intelligence assessment by Germany’s Der Spiegel reported that Chinese President Xi Jinping had applied pressure directly on WHO Director-General Tedros Adhanom Ghebreyesus. However, a WHO statement on May 9, 2020 declared that these reports were unfounded and untrue and that their inaccuracy detracted from the WHO’s efforts to end the pandemic worldwide.

Additionally, China has been accused of taking advantage of the economic vulnerabilities of the outbreak by securing mergers and acquisitions worth $9.9 billion globally and investment deals worth $4.5 billion. This comes hand-in-hand with US billionaires seeing a collective wealth gain of $406 billion (or a 14 percent increase) between March 18 and April 29, according to the Washington DC-based think tank, Institute for Policy Studies. It also notes that in the same time period, 30 million Americans filed for unemployment benefits due to the impact of the pandemic.

American experts worry that at a time when cooperation is necessary to overcome the pandemic, President Trump and his administration’s antagonistic attitude towards China could be detrimental to this effort. Decoupling from China is still a difficult option, because of the US economy’s dependence on the other for many essential goods, including medical supplies, and vice versa. This strain, and President Trump’s narrative that China is to be blamed for the American lives lost to COVID-19 (over 100,000 as of this writing), has also adversely affected Asian share markets.

Additionally, as President Trump and his administration focus on blaming China for the spread of the “China virus” in an effort to detract from its mishandling of the situation and employing an “America-first” attitude, China is focused on exercising its soft power in an effort to gain geo-political influence. China has been engaged in “mask diplomacy” across Europe and Asia, where China has become a global health benefactor. It has attempted to establish a “health silk road,” included under the BRI, to Europe by deploying medical supplies to European countries. The government aims to strengthen its relations with the European Union and ensure that European companies are not withdrawing from China due to the pandemic, especially given that the European Union is its second largest trade partner. Similarly, Jack Ma, a Chinese billionaire who owns technology company Alibaba, has been sending medical supplies to countries around the world, including Nepal. Some have questioned whether he has become a friendly face of the CCP or is indeed an independent actor who has been used by the CCP for propaganda.

What next?

China appears to be on the path to recovery. Beijing’s new goal, many argue, is to catalyze 10 years' worth of reforms in just the upcoming two, with President Xi pushing for higher investment in technology, including 5G, artificial intelligence, and industrial internet. According to the Trivium National Business Activity Index, on May 12, China was operating at a typical output capacity of 87 percent. Moving forward, US-China relations will predictably decline, as US Congress discusses sanctions against China, which may include asset freezes, travel bans, and revocation of visas, for its handling of the initial outbreak and lack of openness about the events leading up to the outbreak.

Nepal’s interests lie in attracting foreign direct investment (FDI) for infrastructure development and economic growth, but this should not come as a compromise in other aspects of national development. Although the number of COVID-19 cases remain relatively lower (682 as of May 26 according to the WHO), Nepal’s health system is already struggling to cope, and there is a lack of many vital medical equipment, supplies, and human resources. The government’s decision to lock down the country, with no end in sight, appears to be unaccommodated by an exit strategy. As businesses close and the economy grinds to halt more or less, the lowest strata of Nepali society, including daily wage workers and migrant workers struggling to return home and provide for their families after losing their jobs, suffers without a safety net.

This situation has demonstrated that FDI from China and elsewhere needs to include health initiatives and anti-pandemic measures to strengthen the health care system in Nepal as well as in other developing countries with large-scale infrastructure investments. The government of Nepal needs to promote public-private modalities of investment so that the community, as well as other parties, benefit from FDIs under the BRI and otherwise. Additionally, as China and the US fight for global dominance, it will be important for China to demonstrate its commitment to multilateralism and transparency to overcome the criticisms it faces in BRI borrower countries, which are skeptical about its debt diplomacy playbook.

The sustainable, comprehensive implementation of BRI projects will be especially important as China potentially faces a competitor in Asia, and presumably other BRI countries, with the introduction of the Blue Dot Network, an infrastructure development project unveiled in November 2019 by the US, together with Japan and Australia. Many are already viewing BDN as a counterpart of China’s BRI and a way for US and its allies to ensure that they can offset China’s infrastructure financing. Moreover, the BDN “aims to promote quality infrastructure investment that is open and inclusive, transparent, economically viable, financially, environmentally and socially sustainable, and compliant with international standards, laws, and regulations.” Many of these standards are ones that BRI projects have been accused of failing to meet across borrower countries. Therefore, China must recognize that in Nepal and other developing countries, it will be held to a higher standard and scrutiny moving forward.

Bipin Adhikari is a constitutional expert. Bidushi Adhikari is associated with Nepal Consulting Lawyers, Inc as a research assistant