BRI: Have we passed the Chinese peak?

The People’s Republic of China rarely passes up the opportunity to re-establish itself as a supporter and funder of the developing world, a role deeply embedded in its collective psyche.

In March, Foreign Minister Wang Yi said China would “always support” developing countries. During a trip to Kenya in the first week of 2022, he urged the international community to “pay more attention to Africa” ​​- and to learn from China, which had “done more” for the continent than the West developed.

The most obvious physical manifestation of this is the Belt and Road Initiative (BRI), championed by President Xi Jinping, which now encompasses 42 countries in sub-Saharan Africa, 20 in Latin America and most of Central Asia and of central and eastern Europe.

Thanks to the BRI, China has come to see itself not only as an ideological defender of the developing world, but also as its financial champion. So have the leaders of poor and rich nations.

However, two years into the Covid era, Chinese overseas lending to the developing world has collapsed.

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The Asian Development Bank estimates that Chinese-led foreign direct investment (FDI) in Asia, including Japan, halved between 2019 (when it totaled $56.6 billion) and 2020 (29.7 billion). billions of dollars).

Outbound mergers and acquisitions are also down across the board. In terms of volume in 2017, companies on the continent accounted for $32.7 billion in M&A deal flow in Asia excluding Japan, according to Dealogic. In 2021, that figure was $10.8 billion.

The same trend is visible in Africa, where deal flow increased from $5.24 billion in 2016 to $1.38 billion in 2021, and in Latin America, from $15 billion in 2017 to 1, 25 billion dollars in 2021.

Just 12 outbound M&A deals, worth a total of $915 million, were completed globally outside of Europe and North America in the first six weeks of 2022. Yes, the year is still young, But national banks like to turn on lending taps early, and January is a reliable barometer of how the state plans to make its money work in the first half of the year and beyond.

Is China really withdrawing from the world? Or is it just a break

Then there is the Middle East, a mix of developed and developing markets. According to Natixis, capital flows from the continent to the region have virtually ceased, from $5.2 billion in 2016 to $100 million in 2020. Covid accelerated this process, but did not cause it: investments led by China in the Middle East were just $300 million in 2019, according to data from Mergermarket and the American Enterprise Institute.

Add to that Beijing’s zero Covid strategy and border closures, and it doesn’t seem a stretch to conclude that outbound FDI and M&A volumes will remain suppressed and may well continue to decline over the next 12 months.

Then there is the curious case of Latin America. Beijing has spent a lot of time and effort wooing banks, businesses and heads of state in the region.

Above all, it worked. When Argentinian President Alberto Fernández visited Beijing in early February ahead of the Winter Olympics, he came laden with compliments.

He praised the “magnificent architecture” of the Party’s own museum. As his delegation left a televised meeting with Xi, an aide said that “without the Communist Party, there would be no new China”, much to Xi’s delight.

For his part, Fernández probably saw this as a cheap win. His visit came days after the IMF agreed to restructure a $57 billion loan for the Argentine Republic, averting an imminent default.

Removing the cap in Beijing ensured admission to the BRI. Argentina is the first major Latin American economy to join the project and the ninth overall. Later, Fernández said, “Our country will get more than $23 billion in Chinese investment for works and projects.”

China, ostensibly, has made no formal financial commitment to its new sibling BRI. Xi pledged to complete existing hydropower and railway projects and “deepen cooperation” with Argentina in trade and anti-epidemic efforts.

However, reality and recent data suggest that Buenos Aires will be lucky to get more than a pinch of cash from Beijing.

The Inter-American Dialogue, a Washington-based nonprofit organization, tracks loans from the China Development Bank (CDB) and the Export-Import Bank of China to sovereign states and state-owned enterprises in Latin America and of the Caribbean.

Total lending peaked in 2010 at $35.7 billion, then in 2015 at $21.5 billion. It then slowed down sharply – before coming to a complete stop. In 2020 and 2021, the two big political banks did not channel any new dollars to any project in Latin America.

So what’s going on here?

It’s not one thing that goes wrong, but many: the proverbial perfect storm.

For one thing, the China of the early 2020s is not the China of a decade earlier. There is still a lot of money lying around in his coffers, but less than before. Its foreign exchange reserves topped $4 trillion in 2015, but have since plateaued at around $3.2 trillion.

Moreover, Asia’s largest economy is stuttering. In 2010, production increased by 10.6% on an annualized basis. In 2020, the first year of the pandemic era, it grew by 2.3%.

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The IMF expects GDP to hit 4.8% this year, with pressures from the housing sector acting as a prelude to a broader decline. The zero Covid policy, which includes city lockdowns and bans on foreign workers, is likely to further temper growth.

Beijing reacted by redirecting capital from foreign projects to domestic ones. Although logical, this means that it has less money to put to work beyond its borders.

“Dealing with the pandemic and economic downturn at home means the abundance of capital that fueled the BRI is no longer there,” says Yunnan Chen, China-Africa expert and senior research manager at ODI, a think tank on global affairs based in London. .

Additionally, China’s political banks have been hit by a series of scams and scandals.

In September, the country’s top anti-corruption agency indicted CDB Vice Chairman He Xingxiang for alleged “serious violations of discipline and the law”. It came eight months after former bank chairman Hu Huaibang was sentenced to life in prison for accepting $13 million in bribes.

“Cases of corruption in the country have heightened scrutiny of credit institutions, which halted disbursements in 2019,” Chen said. Xi’s anti-corruption campaign “is further delaying new loan approvals,” said Alicia Garcia-Herrero, chief economist, Asia-Pacific at Natixis.

Add to that damning accusations, mostly from Western officials and non-governmental organizations, that China is turning poorer nations into client states by burdening them with unpayable levels of debt.

“Narratives around debt traps have not helped with the optics of overseas Chinese lending,” notes ODI’s Chen. “There is also more risk aversion on the part of lenders in financing certain sectors and projects overseas.”

What shall we do now? Is China really withdrawing from the world? Or is it just a pause, Beijing biding its time until the pandemic ends and its borders open?

Chen leans more towards the latter view. When asked if the BRI project is dead, she answers: “No, because everything can be called belt and road. It can be based on investments in digital technology, in payments, in renewable energies. Really, anything related to interpersonal or cultural exchange is grouped under BRI, so everything can be repackaged.

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There is ample evidence that, stung by debt-trap accusations, the Party has used the past two years to reconfigure how it lends abroad and to whom.

“There is definitely evidence of a shift in the direction finance is taking,” Chen adds. “China seems to have a more specific and targeted approach. Its financial institutions are learning, acknowledging past mistakes and mistakes, and taking a more cautious approach to the projects they fund and how they go about funding and due diligence.

This means less direct state-to-state and state-to-project financing, and more indirect lending, via smaller development entities such as the Cairo-based African Export-Import Bank and the Bank of Commerce and of development based in Burundi.

Natixis’ Garcia-Herrero believes the reverse to be true. According to her, Beijing’s foreign capital commitments are in long-term decline, having peaked across the world around 2016.

“If you talk to a senior [mainland] officials, they will say: “It is China that is entrenching itself”. And it is: China is very entrenched, not on the power side, but certainly on the financing side.

She adds: “They are increasingly using words rather than actions; using political power, but the money is not behind it. I don’t think China’s influence will grow overseas. We have passed the peak of China.

Carol N. Valencia