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China’s new “Silk Road” initiative is losing momentum

Since 2013, projects for the development and expansion of intercontinental trade and infrastructure networks between the People’s Republic of China and over 60 other countries in Africa, Asia, Latin America and Europe have been combined under the name New Silk Road (One Belt, One Road).

The name was chosen based on the historic Silk Road.

As Forbes reported at the end of November 2022, the initiative seems to be missing its original goals. According to the report, the Belt and Road Initiative (BRI) “has always been something of a mafia-type corporation.”

Beijing would offer loans to poor countries to develop large infrastructure projects.

People's Republic, China’s new “Silk Road” initiative is losing momentum
The projects in the BRI countries were selected from the outset for political rather than economic reasons (Photo internet reproduction)

Chinese state-owned banks would arrange the financing and Chinese contractors would develop the projects and manage them after completion, the article said.

In the event that the host country fails to meet its commitments, the projects would pass into Chinese hands, Forbes reported.

China has lent millions of dollars to the public and private sectors in around 150 countries, making it the world’s largest lender. More than half of the countries that received BRI loans are in economic difficulties.

However, after two years of the pandemic, high inflation, interest rate hikes in the United States, the aftermath of the Russian invasion of Ukraine and rising energy and food costs, many of these countries are unable to pay back their loans, according to the British energy news site Oil Price report at the end of November.

This has made the BRI China’s first overseas debt crisis, Britain’s Financial Times newspaper reported in July.

According to the newspaper, China must recognize that flaws in the initiative’s design, such as a lack of transparency and the selection of risky debtor countries, further complicate matters.

Debtor countries include Argentina, Angola, Ecuador, Iran, Pakistan, Russia, Sri Lanka, Venezuela and Zambia.

Beijing has granted multi-billion dollar bailout loans to BRI countries to stave off defaults.

Chinese state banks are facing massive defaults not only on domestic property developers like Evergrande Group but also on their BRI loans.

The pressure is too great for China to stand alone, Forbes reports, so Chinese authorities are joining forces with international groups to handle the loans.

In addition, “a certain type of Chinese investment in the [Latin American] region and those linked to the interests of the Asian country itself have a very close relationship with the Chinese Communist Party,” according to Ariel Slipak, economist and academic from the University of Buenos Aires.

DISADVANTAGED SITUATION

In Latin America, many countries have entered into financing agreements with China Development Bank, China Exim Bank or BRI Fund to develop their infrastructure.

Venezuela and Ecuador have received loans backed by Chinese resources, particularly with oil as collateral.

Ecuador has five confidential loans tied to oil supplies to Chinese state-owned companies.

The only way to make these loans transparent is for China to agree to an amendment to the conditional clause.

China, as Ecuador’s largest creditor, faces the possibility that the country may not be able to meet debt servicing costs in the coming years, according to a report from Ecuador’s Simón Bolívar Andean University.

“When some Latin American countries negotiate with Beijing, they are in a disadvantageous situation because of the asymmetric economic relationship,” Slipak said.

“When China defends its interests, it focuses on securing resource deposits. Given the risk of non-compliance, there will be greater pressure to step up resource projects.”

PROJECTS

Currently, 22 countries in Latin America and the Caribbean are part of the BRI, including Argentina. In Argentina, about 20 projects are being carried out under the BRI.

“The problem with Latin America is that it is not able to sovereignly dictate to […] China what kind of investment projects it wants to undertake,” Slipak said.

The projects in the BRI countries were selected from the outset for political rather than economic reasons. Many of these plans have always been commercially dubious, reports Forbes.

Public protests, chronic delays and allegations of corruption dog many BRI projects, according to the Financial Times.

An example of this is the hydroelectric power plant project in Santa Cruz, Argentina.

“The dams on the Santa Cruz River have very serious environmental impact effects. They are rejected by communities and endanger biodiversity and glaciers,” Slipak said. “China needs to finance this project so that its suppliers can make advance payments.”

BIG SETBACK

In this context, the BRI has “lost much of its power”. China also suffered a setback in terms of prestige and finances.

The Chinese government is beginning to describe the BRI as “increasingly complex” and needs risk controls and collaboration.

China should also review the way it lends for development under the BRI and adopt a more multilateral approach, working with development banks and conducting sufficient risk management studies before funding, according to the Financial Times.

What Latin America should be concerned about is the green economies of these major capitals, which are impacting these infrastructure projects in popular sectors with major environmental impacts around the world,” Slipak concludes.

“We need stricter standards for evaluating [Chinese] projects and more civil society participation.”

With information from latinapress

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