In this webinar, Dr Yu Hong sheds light on the issues and problems associated with BRI implementation, and its prospects going forward.
REGIONAL STRATEGIC AND POLITICAL STUDIES PROGRAMME
Tuesday, 8 June 2021 — Inaugurated in 2013, the Belt and Road Initiative (BRI) is the centrepiece of President Xi Jinping’s drive to make China into a global power. In a webinar at the ISEAS – Yusof Ishak Institute entitled “Revisiting the Belt and Road Initiative: Progress, Challenges and Prospects”, Dr Yu Hong discussed China’s recent adjustments to the BRI, the status of some BRI flagship projects in Southeast Asia, and the future prospects of Xi’s signature strategy. A Senior Research Fellow at the East Asian Institute, National University of Singapore, Dr Yu has researched and published on the Belt and Road Initiative, the Asian Infrastructure Investment Bank, China’s state-owned enterprises and railway sector reforms.
Dr Yu described the BRI as “the world’s most ambitious infrastructure development initiative” that is unmatched in its scale and geographical coverage. Having been incorporated into the Chinese constitution, the BRI will serve as “a long-term strategy” in China’s bid to attain global leadership, particularly since President Xi has the necessary resources and political will to see it through. He also contextualised the BRI’s importance to Xi’s “dual-circulation strategy” which is meant to tap on Chinese domestic market to power economic growth and solidify economic resilience while simultaneously expanding China’s trading and investment links to the world. Dr Yu described the BRI as “the heart of [China’s] international circulation” paradigm, especially in ensuring market access for Chinese exports.
Dr Yu also discussed the diverging perceptions about the BRI. While China portrays the BRI as an “economic cooperation initiative” to foster economic growth and trade, some countries are worried that the BRI is motivated by China’s geopolitical ambitions. The common fear for many is that the BRI enables China to translate its economic and financial power into geostrategic leverage – a concern reflected in a number of surveys, including the ISEAS–Yusof Ishak Institute’s State of Southeast Asia Survey Report.
A key focus of the BRI is infrastructure connectivity, which is instrumental in helping China gain control over key markets and industrial supply chains. To pursue such expansive projects, China has heavily relied on its state-owned enterprises (SOEs). According to Dr Yu, a total of 81 centrally-administered SOEs have been involved in 3,400 BRI projects as of January 2020. Chinese financial institutions, such as the Export-Import Bank of China and the State Development Bank, serve as crucial sources of financing for these projects.
In terms of implementation, Dr Yu observed that China has been making several policy adjustments to the BRI since 2019. In particular, President Xi has promised that the BRI will be more “green” and more “multilateral” in nature. China has signed agreements with countries such as France, Italy, Japan and Singapore to provide third-party market cooperation on infrastructure financing. In addition, China has demonstrated a willingness to restructure costs, for example the 30 per cent reduction for the East Coast Rail Line (ECRL) project in Malaysia. The Chinese Ministry of Finance has issued a “Debt Sustainability Framework for Participating Countries of the Belt and Road Initiative” in April 2019 to guide China’s lending decisions on BRI projects. However, since the Framework remains non-mandatory, the extent to which China would abide by its promised readjustments remains to be seen.
Characterising Southeast Asia as a “friendly investment destination and market for China”, Dr Yu reported that the region accounted for one-third of total BRI investments from 2005 to 2020. However, while the region has urgent infrastructure needs and thus welcomes investments, there are still suspicions about China’s geostrategic intentions with the BRI. Many Southeast Asian countries are acutely conscious of their “asymmetrical relationship” with China and the strategic risks of increased Chinese influence in the region. Dr Yu examined the China-Laos Railway – describing it as “a flagship project” for the BRI in Southeast Asia – to suggest that the BRI remains on track despite the COVID-19 pandemic and the challenging geostrategic environment. He however raised concerns about the financial sustainability and commercial viability of the project. To finance the US$5.9 billion railway, Laos had obtained a loan covering 80 percent of the costs from China’s Export-Import Bank. This has ballooned Laos’ external debt and made China the country’s largest sovereign creditor. Moreover, it remains doubtful whether the railway will be viable on its own and deliver the promised economic benefits to Laos and its citizens.
Dr Yu drew attention to five key challenges that may impede the progress of the BRI. The first is its weak compliance with international standards, including on procurement rules and environmental and labour protections. The second is the presentation of the BRI as a total policy package on recipient countries, who lack the discretion to reject specific elements of the package. The third is the failure to truly multilateralise the BRI beyond a China-centric endeavour. As Dr Yu noted, private capital remains reluctant to participate, while local stakeholders in recipient countries are generally only lukewarm to the BRI projects. The fourth is the excessive borrowing to finance the projects, which have aggravated the debt burdens of many developing countries involved in the BRI. The fifth relates to the harsh contractual terms imposed on recipient countries. For instance, Dr Yu recounted that post-2014 Chinese lending contracts included “unusual confidentiality clauses” (such as prohibiting borrowers from disclosing the terms or even the existence of the debt). Furthermore, he stated that Chinese financial institutions are committed only to restructuring debts or delaying repayments, while firmly rejecting the possibility of debt reduction or relief.
In his concluding remarks, Dr Yu noted that the BRI will likely be re-adjusted to cope with current circumstances. For one, Chinese financial institutions are tightening their outbound loans as funds are redirected to domestic businesses and individuals. However, the BRI remains an important strategic tool for China, especially in reinforcing China’s role as a hub to the regional supply chain and facilitating the creation of a China-centric regional economic order. In order to do so, the key challenge for China is to develop a genuinely multilateral BRI, which would help the initiative gain greater credibility and legitimacy.
During the Q&A session with the audience of 119 participants, Dr Yu addressed various topics, such as how different Chinese stakeholders involved in the BRI may have diverging interests. For instance, he highlighted that state-owned enterprises may be more concerned about a project’s profitability and commercial viability while the central government may prioritise its strategic value. He also shared his thoughts on the various rail projects in Southeast Asia under the BRI. According to him, the Jakarta-Bandung rail connection will not be completed on time, while the Sino-Lao railway is unlikely to live up to its potential unless a further link to Thailand is constructed. He also reiterated the importance of multilateralising the BRI and being more understanding of the concerns and needs of local communities in order to improve the BRI’s prospects in South Asia. In particular, he recommended for China to be sensitive to India’s sovereignty and territorial concerns if it wants to encourage the latter’s participation in the BRI.
