Lingling Wei, chief China correspondent for the Wall Street Journal, has written a remarkable piece on the troubles now facing China’s vaunted Belt and Road Initiative.
The BRI was hailed by many as a new form of economic statecraft that the U.S. needed to contend with. China was supposed to have taken the lead in influencing the developing world, and it was winning more countries into its sphere of influence through BRI lending and infrastructure projects.
Now, China has $1 trillion sunk into BRI projects, and rising interest rates around the world mean a bunch of them could go bust.
How did China get here? Wei explains:
The program’s roots date back a little over a decade, when China saw an opportunity for its state-owned financial institutions to extend their reach and earn better returns on their cash holdings through investments overseas.
Authorities encouraged lenders to finance projects like mines and railways to enable developing countries with natural resources to better supply China’s market, and to create jobs for Chinese contractors.
After taking power in 2012, Mr. Xi expanded those efforts and promoted the initiative as part of his plan to expand China’s influence and build markets for Chinese goods.
In 2015, when a stock-market collapse in China damped domestic demand, Beijing used the initiative to export products in oversupply at home, like steel and textiles. The Export-Import Bank of China and China Development Bank often required countries that benefited from their financing to source from Chinese suppliers.
Unsurprisingly to anyone even slightly familiar with public-choice economics, politically motivated investment decisions did not turn out to be financially sound. And these weren’t just a few missteps. There were a cumulative $1 trillion of loans made to about 150 countries over a decade as part of the BRI, and 60 percent of those loans are now held by countries in financial distress, Wei writes.
The real tell that Beijing knows it’s in trouble is that it has changed the propaganda messaging around the BRI. Wei writes:
Beijing has also dialed down its rhetoric in state media. While it used to tout the economic benefits of Chinese lending for recipient countries, it now emphasizes managing risks and improving international cooperation, said Weifeng Zhong, a senior research fellow who tracks Chinese government propaganda at the free-market think tank Mercatus Center at George Mason University. “China is attempting a course correction,” Mr. Zhong said.
On the financial side, Chinese bankers have resorted to “extending and pretending,” which means extending the maturity of loans rather than restructuring them or accepting some losses. But that’s not going to work as current global economic conditions wreck emerging markets. China’s outsize exposure to developing-world debt is one of many economic troubles the country’s government-directed economy is facing.
What’s the CCP’s plan to overcome the foreign-debt problems of the Belt and Road Initiative? Belt and Road 2.0. “After nearly a decade of pressing Chinese banks to be generous with loans, Chinese policy makers are discussing a more conservative program, dubbed Belt and Road 2.0 in internal discussions, that would more rigorously evaluate new projects for financing, the people involved said,” Wei writes.
They can’t totally jettison the project because it would upset the paramount leader:
A full retreat on Belt and Road is unlikely. Mr. Xi, who is seeking to extend his rule for a third term at a Communist Party conclave next month, continues to believe it has an important role to play in promoting China’s role on the world stage, according to the people involved in policy-making and readouts of recent speeches he has made.
The inability of regimes to adapt is one of the biggest opportunities for government failure in authoritarian systems. As the market reforms of previous Chinese leaders continue to be undone, and the cult of personality around Xi Jinping intensifies, expect more errors and mismanagement. And remember that even in a country with a government immune from private-interest-group pressure, government-directed investment undertaken in the “national interest” is not a path to success.