CIGI Papers No. 225 — September 2019 The Belt and Road Initiative: Motivations, Financing, Expansion and Challenges of Xi’s Ever-expanding Strategy Alex He CIGI Papers No. 225 — September 2019 The Belt and Road Initiative: Motivations, Financing, Expansion and Challenges of Xi’s Ever-expanding Strategy Alex He About CIGI Credits We are the Centre for International Governance Innovation: an Director, Global Economy Robert Fay independent, non-partisan think tank with an objective and uniquely global Program Manager Heather McNorgan Publisher Carol Bonnett perspective. Our research, opinions and public voice make a difference Senior Publications Editor Jennifer Goyder in today’s world by bringing clarity and innovative thinking to global Graphic Designer Brooklynn Schwartz policy making. By working across disciplines and in partnership with the best peers and experts, we are the benchmark for influential research and trusted analysis. Our research initiatives focus on governance of the global economy, global security and politics, and international law in collaboration with a range of strategic partners and have received support from the Government of Canada, the Government of Ontario, as well as founder Jim Balsillie. À propos du CIGI Au Centre pour l'innovation dans la gouvernance internationale (CIGI), nous formons un groupe de réflexion indépendant et non partisan doté d’un point de vue objectif et unique de portée mondiale. Nos recherches, nos avis et nos interventions publiques ont des effets réels sur le monde d'aujourd’hui car ils apportent de la clarté et une réflexion novatrice pour l’élaboration des politiques à l’échelle internationale. En raison des travaux accomplis en collaboration et en partenariat avec des pairs et des spécialistes interdisciplinaires des plus compétents, nous sommes devenus une référence grâce à l’influence de nos recherches et à la fiabilité de nos analyses. Nos projets de recherche ont trait à la gouvernance dans les domaines suivants : l’économie mondiale, la sécurité et les politiques internationales, et le droit international. Nous comptons sur la collaboration de nombreux partenaires stratégiques et avons reçu le soutien des gouvernements du Canada et de l’Ontario ainsi que du fondateur du CIGI, Jim Balsillie. Copyright © 2019 by the Centre for International Governance Innovation The opinions expressed in this publication are those of the author and do not necessarily reflect the views of the Centre for International Governance Innovation or its Board of Directors. For publications enquiries, please contact [email protected]. This work is licensed under a Creative Commons Attribution — Non-commercial — No Derivatives License. To view this license, visit (www.creativecommons.org/licenses/by-nc-nd/3.0/). For re-use or distribution, please include this copyright notice. Printed in Canada on Forest Stewardship Council® certified paper containing 100% post-consumer fiber. Centre for International Governance Innovation and CIGI are registered trademarks. 67 Erb Street West Waterloo, ON, Canada N2L 6C2 www.cigionline.org Table of Contents vi About the Author vi About Global Economy vii Acronyms and Abbreviations 1 Executive Summary 1 Introduction 2 The Policy-making Process of the BRI 5 China’s Investment in the BRI: Priorities and Achievements 13 BRI Financing 17 Ever-expanding Themes of the BRI 19 Problems and Risks Facing the BRI 22 Conclusion: The Future of the BRI 24 Works Cited About the Author About Global Economy Xingqiang (Alex) He is a CIGI research Addressing the need for sustainable and balanced fellow. His work focuses on China and global economic growth, the global economy is a central economic governance, the Group of Twenty, area of CIGI expertise. The Global Economy domestic politics in China and their role initiative examines macroeconomic regulation in China’s foreign economic policy making (such as fiscal, monetary, financial and exchange and Canada-China economic relations. rate policies), trade policy and productivity and innovation policies, including governance Prior to joining CIGI in 2014, Alex was a senior around the digital economy (such as big data and fellow and associate professor at the Institute artificial intelligence). We live in an increasingly of American Studies at the Chinese Academy of interdependent world, where rapid change in Social Sciences (CASS) and a visiting scholar at the one nation’s economic system and governance Paul. H. Nitze School of Advanced International policies may affect many nations. CIGI believes Studies, Johns Hopkins University in Washington improved governance of the global economy DC (2009-2010). Alex was also a guest research can increase prosperity for all humankind. fellow at the Research Center for Development Strategies of Macau (2008-2009) and a visiting Ph.D. student at the Centre of American Studies at the University of Hong Kong (2004). Alex is the author of The Dragon’s Footprints: China in the Global Economic Governance System under the G20 Framework (2016) (in both English and Chinese) and co-author of A History of China-U.S. Relations (2009). He has published dozens of academic papers, book chapters and newspaper and magazine articles. Alex’s upcoming book will examine China’s economic policy-making process under President Xi Jinping. He has a Ph.D. in international politics from the Graduate School of CASS and previously taught at Yuxi Normal University in Yunnan Province, China. Alex is fluent in Chinese and English. vi CIGI Papers No. 225 — September 2019 • Alex He NDB New Development Bank Acronyms and NDRC National Development Abbreviations and Reform Commission ODI outward direct investment AEI American Enterprise Institute PBoC People’s Bank of China AIIB Asian Infrastructure Investment Bank PBSC Politburo Standing Committee BRF BRI Forum RCIF Russia-China Investment Fund BRI Belt and Road Initiative Sino-CEEF China-Central and Eastern Europe Fund CADF China-Africa Development Fund SOEs state-owned enterprises CAF China-ASEAN Investment Cooperation Fund UAE United Arab Emirates CAFIC China-Africa Fund for Industrial Cooperation CCB China Construction Bank CDB China Development Bank CEF China-Eurasian Economic Cooperation Fund China-CEE Fund China Central and Eastern Europe Investment Cooperation Fund CIC China Investment Corporation CLCF China-LAC Cooperation Fund CLFIC China-LAC Fund for Industrial Cooperation CQJIF China-Qatar Joint Investment Fund CUJIF China-United Arab Emirates Joint Investment Fund G7 Group of Seven ICBC Industrial and Commercial Bank of China IMF International Monetary Fund MoF Ministry of Finance MOFCOM Ministry of Commerce MoU memorandum of understanding The Belt and Road Initiative: Motivations, Financing, Expansion and Challenges of Xi’s Ever-expanding Strategy vii The widespread accusation of debt-trap diplomacy misses the crux of the problem facing the BRI, Executive Summary since it is based on a misreading of the initiative and lacks solid evidence. Most of the problems This paper argues that with more objectives and risks originate from China’s state-driven added since its inception in 2013, China’s Belt investment model, which intensifies the risk and Road Initiative (BRI) has evolved into a much of debt distress in some of the BRI countries. more expansive grand strategy that includes While the BRI has boosted economic growth and a package of themes and goals. Chinese state- created job opportunities in receiving countries, owned enterprises (SOEs) and state-owned the Chinese state-driven investment model has banks have dominated investment and financing nevertheless generated many concerns and risks, for BRI projects, which explains the root of the including debt sustainability, non-transparency, problems and risks facing the initiative, such as corruption, lower economic efficiency, a lower unsustainable debt, non-transparency, corruption degree of localization, and a lack of participation and low economic efficiency. Measures taken of the private sector and international investors. by China to tackle these problems, for example, China has recognized the negative impacts of mitigating the debt distress and improving debt distress and tried to respond with measures debt sustainability, are unlikely to make a big to improve the debt sustainability in countries difference anytime soon due to the tenacity of that have received a large amount of Chinese China’s long-held state-driven investment model. investment over a short period of time. The BRI is China’s global investment plan to build It remains to be seen whether China’s efforts a complex infrastructure network connecting the to reduce debt distress and improve debt world through land-based and maritime facilities sustainability in BRI countries will make any such as rail, highways, bridges and ports. Initially, difference. The crucial issue to watch is how these it was designed to address China’s overcapacity announced measures could be implemented and promote economic growth in both China and in practice. It is not going to be a smooth in countries along the “belt” and “road” through process as political considerations and the soft infrastructure investment and industrial capacity budget constraints and guaranteed government cooperation. It took into account China’s strategic bail-outs for Chinese SOEs and state-owned transition in its opening-up policy and foreign banks would continue to foster the existing policy to pay more attention to neighbouring problems and risks and thus stand in the way of countries