Pandemic slows growth of China's Belt & Road Initiative

Some countries where investments were made in the past are facing increased credit stresses as a result of Covid-19

A ship-to-shore crane loads containers onto a ship at Mombasa port, operated by Kenya Ports Authority, in Mombasa, Kenya, on Saturday, Sept. 1, 2018. China's modern-day adaptation of the Silk Road, known as the Belt and Road Initiative, aims to revive and extend trading routes connecting China with Central Asia, the Middle East, Africa and Europe via networks of upgraded or new railways, ports, pipelines, power grids and highways. Photographer: Luis Tato/Bloomberg

The level of investment across China's Belt and Road Initiative is set to decline this year from that of the past five years and is unlikely to recover in the next two years, according to ratings agency Moody's Investors Service.

Although China's policy objectives will remain the same – continuing support for projects related to the Belt & Road Initiative – many of the countries into which investments have been made are facing increased credit stresses as a result of Covid-19, which will limit the financing of new projects.

"Most BRI investment activity is financed with external debt, and many of the principal sovereign beneficiaries are either sub-investment grade or unrated," the ratings agency said. "Unsurprisingly, therefore, coronavirus-induced economic and financial instability has disproportionately affected many BRI countries with large external deficits and weak debt dynamics."

The Belt & Road Initiative was first launched by China's president Xi Jinping during a visit to Kazakhstan in 2013. It is a key plank of China's foreign policy, extending trade and investment along traditional silk route paths through Central Asia and the Middle East into Africa and Europe. It now encompasses 139 countries, stretching to South America.

According to Moody's Chinese-led contracts and direct investments into BRI countries fell to $23.5 billion in the first half of 2020, "suggesting that full-year volumes will be well short of last year's total of $104.7bn".

Many of the governments that have borrowed from China to finance BRI infrastructure projects will instead need to prioritise spending to contain the virus and to support local economies, the ratings agency said.

Some may also need to agree deals with multilateral lenders to obtain debt relief, which is likely to contain conditions preventing them from taking on more debt. China itself is also focusing on local infrastructure spending as part of its domestic stimulus.

A June survey by China's Ministry of Foreign Affairs suggested the pandemic has affected about 20 per cent of BRI projects, with many facing lengthy delays or even indefinite suspension.

"However, despite rising credit strains, we do not expect China's BRI strategy to reverse course given the considerable financial outlay and political capital that the country has invested in the initiative," Moody's said.

According to Refinitiv's BRI database, which charts projects with a signed agreement between China and the host country, the number of BRI projects in the first half of 2020 was 19 per cent higher year-on-year at 392 but the value of deals almost halved to $248 billion.

Florence Eid-Oakden, chief executive of London-based economic research company Arabia Monitor, said she expects a 'V-shaped' recovery for BRI investments, "which will become evident around the time of the dissemination in scale of a reliable vaccine".

"Project delays and temporary stops are typical whenever there are travel restrictions, and China and many BRI countries have had amongst the strictest measures," Ms Eid-Oakden said.

Some Chinese workers on projects in the Middle East and North Africa who returned home for Chinese New Year in February had been unable to return to sites for months, she said.

"However, we are not aware of any major project that fell through due to the impact of the pandemic. Chinese financiers and state-owned entities tend to be particularly resilient to such market shocks, especially given the rapid emergence of economic recovery in China," she added.