China's Belt and Road Initiative Still Going Strong Despite Setbacks

The Belt and Road Initiative, China's ambitious plan to build infrastructure overseas, has been facing some challenges in recent years. The initiative, which began in the mid-2010s, has been hit by cost overruns and delays in some projects. However, the Chinese government remains committed to the initiative and is working to address the challenges.

It is still too early to write the Belt and Road Initiative (BRI) off entirely. The BRI’s retrenchment during the pandemic has been remarkable in Asia—where much of the funding was initially committed. However, the BRI is still expanding its footprint rapidly in Latin America, at least in terms of foreign-direct investment. And even in some trouble spots such as Pakistan, Beijing is unlikely to abandon its megaprojects, given how much it has already invested.

The latest round of political problems in Pakistan occurred at Gwadar, where the BRI's Gwadar Port project is located. According to Nikkei Asia, protesters who were angry about deep-sea trawling, security checkpoints around the port, and other issues began blockading the port in late December, prompting a police raid. Chinese nationals in Pakistan have been targeted in violent attacks in recent months.

Pakistan was supposed to be an easy political win for China, given the countries' shared history of conflict with India. But instead, Pakistan has become a symbol of the BRI's broader problems: many lower-income governments are no longer sure that such expensive projects are worthwhile, and are wary of the indebtedness and local opposition they often create. High global interest rates, falling emerging market currencies, and the economic damage from the pandemic have all strengthened the hand of BRI skeptics.

It is no surprise that both China's lending to and direct investment in BRI countries have plummeted in recent years, according to French bank Natixis. This is partly due to a pullback in Chinese financing globally, as most economies including China's have struggled during the pandemic. China's average annual outward foreign-direct investment fell by 72% between 2020 and 2021, compared to the 2015-2019 average. Investment in BRI countries fell slightly less sharply, by 62%.

Despite the overall drop in investment, there has been some growth in certain areas. For example, data from Natixis shows that China's average annual direct investment in Latin American countries quadrupled between the 2020-2021 period and the five years before. Much of this growth has been due to mergers and acquisitions of Latin American state assets, such as utilities. Some Latin American governments, which Natixis says were among the hardest hit by the pandemic, may have decided that selling assets was a way to raise some additional funds after the Covid-19 crisis.

China has been burned by some of its most high-profile greenfield overseas infrastructure projects, such as Gwadar in Pakistan and Hambantota port in Sri Lanka. Direct investments in infrastructure assets that are already producing income streams might be one way to build credit with local governments, without the financial and political risks that come from lending to new megaprojects in unstable regions. And Latin America’s abundant agricultural and mineral resources are obviously of interest to Beijing, which appears to be ever more obsessed with food and supply-chain security as its relations with developed democracies deteriorate.

It is unlikely that Beijing will give up on projects like Gwadar, according to Michael Kugelman, director of the South Asia Institute at the Wilson Center in Washington, D.C. Kugelman believes that these infrastructure and connectivity projects are still critical for China’s economic interests, and if Beijing has any plans to turn them into military assets in the future, they are also important for its strategic interests.

It seems more likely that the BRI will become more focused on financial returns and on building good relationships with local communities. This would be a more practical and sustainable approach that would benefit all parties involved.