On May 14-15, China convened the first summit of the Belt and Road Initiative (BRI) – formerly known as One Belt, One Road. With this major diplomatic event, President Xi Jinping aimed to both showcase and buttress international support for his central foreign policy initiative, the success of which will hinge on the participation of other countries, regional organizations, and international financial institutions. Their contribution – or lack thereof – will affect the nature of BRI and determine the impact of the Chinese initiative on Asia’s infrastructure connectivity, economic system, and geopolitical order.
BRI will remain a Chinese object, tied to China’s evolving economic and geopolitical ambitions. China will continue to provide the undisputed leadership and the bulk of the financing. But Xi Jinping will seek more followers, if not partners, to implement the initiative on which much of his domestic power depends. China will leverage their resources in projects, sectors, and regions where their positive-sum involvement will help China achieve its long-term goals under the BRI. In turn, China may make concessions on some contested issues, such as project standards and public debt sustainability.
The cooperation between China and multilateral development banks may increase the number of BRI infrastructure projects with competitive procurement;
- Plans for BRI’s corridors may be altered to accommodate competing visions for Asia’s connectivity, such as Russia’s;
- BRI’s geographic boundaries may be expanded to include Latin America and the rest of Africa;
- At its Annual Meetings in June, the Asian Infrastructure Investment Bank may more formally align its mandate with BRI’s.
The first Belt and Road Forum for International Cooperation was attended by 110 delegations, 29 national leaders, and the heads of the United Nations, the International Monetary Fund, and the World Bank. Their presence demonstrated the international support for President Xi Jinping’s main foreign policy initiative.
China capitalized on this support to anchor the BRI in an embryonic set of dedicated structures. At the summit, Xi Jinping announced the establishment of an advisory council and of a liaison office for the summit’s follow-up activities, along with new cooperative mechanisms such as the Facilitating Center for Building the Belt and Road.
Since the launch of the initiative in 2013, China has used BRI as a narrative to guide and justify various domestic and foreign activities. Similarly, Chinese provinces and countries along the Belt and Road have used the BRI brand to obtain the backing of the Chinese government for various infrastructure projects.
The new institutions presumably represent a first step from the idea to the reality of BRI as a transformative initiative. They have the potential to empower it with the capacity to be additional – ie. to enable activities that would not have otherwise taken place.
The nascent framework will remain under the authority of China, which is also due to host the next BRI summit in 2019.
Made in China
Overall, the summit reiterated the China-centric model of BRI, which remains a physical and relationship network with China as its sole node. For instance, bilateral agreements represented most of the 76 items in the list of deliverables prepared by the Chinese delegation. Similarly, only China committed new financial resources for BRI, the bulk of which is to be delivered via bilateral channels.
- RMB 100 billion ($14.5 billion) for the Silk Road Fund, the $40bn China-owned investment fund established in 2014;
- RMB 250 billion ($36.2 billion) for China Development Bank, for the creation of multi-currency lending schemes for infrastructures and industries and multi-currency credit lines for foreign financial institutions;
- RMB 130 billion ($18.8 billion) for China Export-Import Bank.
In a bilateral setting China can leverage its full weight to achieve its economic and strategic goals under the BRI. In particular, tied bilateral financing allows China to maintain control over project preparation and implementation, thereby favouring Chinese companies or undertaking projects, such as dual-use ones, that do not provide sufficient commercial returns.
However, a China-centric model is not sustainable if BRI is to be successful, as China does not have the capacity to implement it alone. First, Chinese resources are significant but limited. For instance, foreign exchange reserves have dropped to $3 trillion, from a peak of about $4 trillion in 2013. Second, the risks involved in the construction and operation of infrastructure projects in unstable regions are considerable. Facing possible sovereign defaults in other high-risk countries, China will want to limit its exposure. These challenges explain, in part, why according to a recent study by the American Enterprise Institute, China’s combined investments in all BRI countries since 2014 is smaller and growing more slowly than Chinese investments in the United States alone over the same period.
China is therefore facing a dilemma: maintain the current model, at the risk of the failure of the initiative; or, in a process similar to the establishment of the Asian Infrastructure Investment Bank, multilateralize BRI to leverage the resources of partners at the expense of China’s control.
China’s declarations at the BRI summit reflect this balancing act.
The recent name change to BRI epitomized China’s recent efforts to shift BRI’s narrative from that of a Chinese policy to a more inclusive Chinese-led international initiative.
China used the summit to push for an internationalization of BRI. Xi Jinping reiterated his proposition that the cooperation and coordination take place within the framework of existing regional organizations such as the Shanghai Cooperation Organization.
The summit also marked an effort to enrol new partners, from non-BRI countries to the private sector, to implement the initiative. The joint communique mentioned the importance of non-discriminatory procurement procedures and that of private participation in infrastructures.
Furthermore, China signed a memorandum of understanding with six traditional and non-traditional multilateral development banks. They pledged to collaborate on matters of common interest under the BRI, including via a new forum for financial cooperation. In parallel, the World Bank is establishing the Global Infrastructure Connectivity Alliance, a platform mandated by the G20 under Chinese presidency, whose mission will include mapping the BRI and sharing information on associated bankable projects.
China and the IMF will also set up a joint capacity development centre focused on the BRI countries. The involvement of international financial institutions will help improve the policy and regulatory environment and provide additional financing, thereby facilitating the implementation of BRI.
China’s effort to internationalize BRI is not open-ended, nor is it necessarily a step toward multilateralism.
China has also used the summit to expand the geographic and thematic realms of BRI. In the process, the BRI might grow to supersede, instead of merely complementing, existing mechanisms.
The summit further blurred the geographic boundaries of BRI. It opened the possibility of expanding BRI to the rest of Africa and to Latin America.
The summit also demonstrated the continued effort by China and bilateral partners to expand the use of the renminbi for trade settlements and for other cross-border financial transactions, at the expense of the dollar. The internationalization of the renminbi has the support of several BRI countries, including that of Russia following the imposition of international sanctions in 2014.
China reiterated the need for the development of hard infrastructure which had formed the core of the BRI. But at the summit it placed a greater emphasis on the soft infrastructure – customs clearance systems, quarantine processes, market access, trade barriers, and foreign investment procedures. This shift may signal a renewed effort by China to set the regional economic norms and standards, in part filling the vacuum created by the withdrawal of the United States from the Trans-Pacific Partnership.
This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief