Money Management

Covid-19 Creates Bumps On China’s ‘New Silk Road’

An increasing number of developing countries that have joined Beijing’s “New Silk Road” initiative are facing economic problems caused by the coronavirus crisis. China now faces a dilemma between trying to save its own economy or forgiving and renegotiating loans from its partners.

One of the chinese president Xi jinpingflagship projects has turned into a painful thorn in Beijing’s flank due to the Covid-19 pandemic.

Xi’s flagship infrastructure project aims to connect businesses between Asia, Europe and Africa. But the Belt and Road Initiative (BRI) – nicknamed “The New Silk Road” – puts China in a very uncomfortable position. With a growing number of countries reporting difficulty reconciling their economic support plans with loan repayments to China, Beijing must now avoid fulfilling the prophecies of skeptics who have warned the project is just a government trap. debt under the guise of assistance.

The initiative, launched in 2013 by Xi, has already led China to invest more than $ 450 billion in nearly 140 countries in Asia, Europe, South America and Africa. There have been some project name adjustments along the way: The original name of One Belt One Road (OBOR) has been changed because the word “one” was found to be misleading for a project subject to mission drift. But the promise of the project has been consistent: Beijing lends money to its partners to build vital infrastructure – railways, roads, ports, factories – in exchange for Chinese companies discovering new markets abroad. .

But since the pandemic, clouds have started to accumulate over the program.

The problems first emerged when Pakistan sent an official letter to China in mid-April calling for a review of the terms and conditions for the repayment of more than $ 100 million, set for May. Beijing assured Islamabad on May 17 that it would make an effort for its “Pakistani friend”. But there was no follow-up or precision on the promised goodwill gesture.

“A delicate balance”

“We understand that many countries are seeking to renegotiate the terms of these loans; it’s a process that will take time, ”said a researcher from the China Development Bank – a“ political bank ”that runs several BIS project loans – Financial Time. “But it takes time to make a new deal and we can’t even travel overseas right now. BIS loans do not constitute foreign aid. We need to at least recover the principal and moderate interest, ”said the researcher, who declined to be named.

Most of these demands come from African countries, which are at the heart of China’s investment program but which are also economically weak and among the least prepared to face the current crisis, the New York Times noted in an article from May 18.

For China – faced with questions about its handling of the viral outbreak in Wuhan and under pressure from US President Donald Trump’s trade threats – this comes at an inopportune time.

None of the choices available in Beijing are good. On the one hand, China can hardly refuse to renegotiate loans to its partners without further tarnishing its image on the international scene. On the other hand, granting extended repayments or even debt relief, as the International Monetary Fund (IMF) has done to its 25 poorest member countries, is costing China dearly.

It is “a delicate balance”, declared Mary-Françoise Renard, director of the Chinese Economic Research Institute (IDREC), in an interview with FRANCE 24. China “has already put in place a number of measures to support its economy last year, and the pandemic has forced it to spend even more, reducing its margin budgetary maneuver, ”she noted.

A problem for Xi

Beijing is caught between two imperatives: supporting its economy, hard hit by the health crisis and “which remains its No. 1 priority”, according to Renard, and helping its “friends of the Silk Road”, to whom the Asian superpower has promised a lot in return for their BIS membership.

Renard notes that, fortunately for China, the country still has the means to make this big financial leap. But to do so, Xi will have to deal with two issues: repayments that won’t come when Beijing needs them most, and infrastructure projects that will be delayed due to slowing economies.

“The railroad between China and Malaysia and the high-speed train project in Thailand, funded by Beijing, have already had to be suspended,” noted an April Fitch Solutions report, a macroeconomic and country risk research institute.

These are setbacks that can have a political impact for Xi as well. The Chinese leader has made the initiative the economic pillar of the reign. Beijing has already been criticized in recent years for the lack of transparency on loan terms and questions about the real benefits for countries participating in the project.

Following these complaints, Xi “was forced to restart” the program in 2019, promising in particular greater transparency by ensuring that his projects “follow international procurement guidelines,” wrote Felix Chang, a specialist. from China for the US-based Foreign Policy Research Institute. Xi needs results to justify the money invested, and with the Covid-19 crisis, it will take longer than expected, Chang added.

“Silk Road of Health”

Importantly, these difficulties – coupled with Washington’s anti-China campaign – could lead some countries to reconsider their participation in the BIS or deter others from signing up, the New York Times suggested. This would be particularly damaging for China in Africa, where Beijing is locked in fierce competition with the United States and Europe.

Renard, however, says Beijing could overcome these challenges in Africa. The majority of African countries “think there is more to be expected from China, which has so far helped them to develop, than from the United States or Europe,” she said. These African countries, she noted, would only slam the door on the BRI “if they had problems directly with Beijing or thought that the benefits, especially in terms of jobs, of these infrastructure projects would not would not materialize ”. perception campaign to appease and cajole countries in its New Silk Roads initiative.

The Covid-19 pandemic could also present opportunities for China. On Monday, during a virtual meeting of member states of the World Health Organization (WHO), Xi reaffirmed that his country will not let down its “friends”.

In addition, the crisis could also push China to “implement a Silk Road initiative for health” to create “opportunities in the construction of health facilities and increase trade in health-related products. between China and the BIS countries, ”noted the Fitch Solutions report.

Instead of building only roads, railways or ports, the Silk Road for health could be “an extension of the BRI”, noted analysts at the rating agency, “which focuses on l ‘improvement of health infrastructure, improvement of the flow of goods and services related to health care and the exchange of ideas and medical practices among BRI countries ”. China proposed a similar extension of the project at a WHO summit in 2017.

This article was translated from original in french