Experts React: The Belt and Road Ahead

Last week, China commemorated the tenth anniversary of its flagship global infrastructure project, the Belt and Road Initiative (BRI), by hosting the Third Belt and Road Forum for International Cooperation in Beijing. International leaders flocked to the Forum, at which Chinese leader Xi Jinping outlined China’s vision for an open, inclusive and interconnected world for common development.

While the Forum was an opportunity to reflect on the first decade of the BRI, Chinese officials also announced a flurry of policy directives aimed at increasing the scale, scope and sustainability of the BRI in its second decade.

Below, our experts react to the announcements and explain what they mean for the next decade of the BRI:

A policy directive for smart, sustainable finance

Over the last few years, GDP Center databases have tracked declines in Chinese development finance by the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM) and the pivot toward lower-risk and more sustainable lending. Our research posits that future lending may rebound with more robust due diligence mechanisms on financial soundness and environmental and social risk management (ESRM). Xi Jinping’s October 18 address provides important insights that the Chinese government intends to do just that.

The speech directly addresses whether and how future Chinese overseas development finance may shift. First, both CDB and CHEXIM will open new financing windows of RM 350 billion (approximately $48 billion) and the Silk Road Fund (China’s largest overseas development investment fund, which provides equity finance) will receive an additional RMB 80 billion (approximately $11 billion). Furthermore, China has committed to “promote both signature projects and ‘small yet smart’ livelihoods programs.” This goal clearly demonstrates an intention to return to overseas lending in a way that serves development and diplomatic goals while limiting risks.

Another commitment emphasizes China’s intention to support “green development” through renewable energy and sustainable infrastructure and transportation. This commitment includes implementing the Green Investment Principles for the Belt and Road: understanding projects’ environmental, social and governance risks, disclosing environmental information, enhancing stakeholder engagement and other crucial ESRM elements. With these statements, China has pointed to clear policy directives for smart and sustainable development lending in the future.

Diversifying Financing of BRI Offerings

The decline in Chinese lending in Africa and Latin America and the Caribbean within the past five years has caused concerns amongst policymakers in the emerging markets and developing economies (EMDEs). Now more than ever, there is a heightened need for finance for development, as many EMDEs are experiencing the multiple shocks of the COVID-19 pandemic, Russia’s war in Ukraine, increasing natural disasters, inflation and rising interest rates.

China’s commitment to development and comprehensive connectivity through the Third Belt and Road Initiative Forum reveals that China has not diminished its role as a source of finance for development. Instead, in addition to establishing new financing windows through its development finance institutions, China is increasing new types of capital provisions and enhancing co-financing between Chinese financiers and multilateral entities.

During the Forum, China committed to increasing the capital of one of its overseas development investment funds (ODIFs), the Silk Road Fund, by $11 billion. During the week of the Forum, China International Development Cooperation Agency (CIDCA) released a statement that discussed a mobilization of $12 billion fund for China’s aid (grants, zero-interest loans and preferential loans) for the implementation of the Global Development Initiative. The South-South Cooperation Fund has also received a $2 billion increase. China has also emphasized several interbank agreements and cooperation mechanisms with regional and multilateral banks. Aid, equity investment and future co-financing are important avenues for diversifying the financing tools EMDEs can receive from China, as they help EMDEs mitigate debt burdens and pursue public-private partnership models. Given these offerings, EMDEs can demand more blended finance to make Chinese financing packages even more affordable in the long-run.

China pledges to make the BRI not only bigger, but better

It was both a privilege and an eye-opener to be at the Belt Road Forum firsthand. While the optics said one thing — with Russian President Vladimir Putin getting top billing, how could the West interpret otherwise that this was a geopolitical affair — but the actions at the Forum spoke louder than the words. Indeed, rather than step back, China has breathed new life into the BRI.

As my colleagues noted, China’s flagship development finance institutions for the BRI, CDB, CHEXIM and the Silk Road Fund, all received new BRI-related financing windows or new infusions of capital.

However, China not only pledged to make the BRI bigger, but also better. Our recent report showed that while the BRI spurred a major increase in development finance that significantly unlocked infrastructure bottlenecks and economic growth, it also increased global carbon emissions. Across 2021-2022, China announced and implemented a number of directives to shift overseas financing away from coal and toward low-carbon energy.

At the BRF, China also unveiled the Green Investment and Finance Partnership (GIFP). Still to be fully designed, the GIFP promises to be a new platform to help BRI partner countries develop green projects and match those projects with Chinese financiers. The platform will provide financing for feasibility studies, technical support, risk analysis, debt sustainable analysis and proposal design to generate a green project pipeline aligned with China’s new directives. China’s Ministry of Ecology and Environment and the BRI Green Coalition have lined up the BRI flagship financiers of the CDB, CHEXIM, the People’s Bank of China, China International Capital Corporation and China Power International to participate in the program. This partnership will help Chinese actors and partner country actors find the right blend of debt, equity, investment and grants, tailoring it to the circumstances of each project or country, so both sides benefit.

If the GIFP lives up to its promise, Chinese institutions get to invest in strong projects that have undergone stringent due diligence, advancing both their bottom line and the goals of the BRI, while partner countries get much needed financing for green development. Paramount will be ensuring China and host countries alike can maximize the benefits and minimize the risks, but if these plans are any indication, the next decade of the BRI may be even more successful than the first.

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