Meanwhile, the Biden White House and India have announced a plan for a trade corridor that will build rail and sea routes to connect Asia with the Middle East and Europe—in other words, an alternative to China’s BRI.
Beijing’s aim to use the BRI as a means to extend its global economic and diplomatic reach seems to be falling far short of the ambitions that prompted Mr. Xi to describe it not too long ago as the “project of the century.”
When Italian Prime Minister Giorgia Meloni was asked at the recent G20 meetings in India about Rome’s future in the BRI, she told media outlets that her government hadn’t yet arrived at a final decision. Italy has until December to formally withdraw from BRI—which it joined in 2019—or the deal will automatically renew in March 2024 for another five years.
If, as is likely, Italy does withdraw, it will take from the BRI the only member that’s also part of the G7.
Diplomatic circles speculate that Washington had pressured the Italians to withdraw. Some pressure may have been exerted. After all, Italy will assume the rotating presidency of the G7 next year. But if Washington applied pressure, neither Washington nor Rome acknowledged it. All the Italian government has said is that membership has failed to benefit its economy sufficiently and that otherwise, Italy is determined to maintain friendly trade and diplomatic relations with China.
At the G20 meetings, Ms. Meloni and Chinese Premier Li Qiang jointly expressed their intention to “consolidate and deepen dialogue between Rome and Beijing.” Still, maintaining good relations after a withdrawal from the BRI could, according to Washington’s thinking, encourage others to sever their links to the arrangement.
Italy’s likely departure isn’t the only trouble facing the BRI. Many other members have found the arrangements burdensome. From its beginning, the BRI always had a Mafia-like feel to it. Beijing would approach needy countries in Asia, Africa, Latin America, the Middle East, and the periphery of Europe and offer loans for important infrastructure projects—ports, rail links, dams, roads, and the like.
State-owned Chinese banks would arrange the financing, and Chinese contractors would execute the projects and manage them when they were complete. If the host country failed to pay, the projects would come under Chinese ownership. Either way, Beijing gained influence and considerable leverage over the nations that allowed themselves to become involved. Since Mr. Xi took power in 2012, China has made more than $1 trillion in such loans in some 150 countries, making China the world’s largest official creditor.
Over time, many BRI clients have realized the one-sided nature of these arrangements. A big part of the problem is that the projects pursued under the BRI were chosen for political and diplomatic rather than economic reasons. Many of these efforts were always economically dubious, and now it is clear that these projects cannot earn enough to support the loans. In Sri Lanka, for example, even before the COVID-19 pandemic shut down trade, the BRI-built port never saw the traffic needed to meet the terms of the loan. These loans have gone bad. Others have, too, even when the Chinese state-owned banks involved fail to make such a declaration.
Similar things are occurring across the entire scheme. Pakistan, one of the largest BRI participants, has fallen so far short of its obligations that it has had to turn to the International Monetary Fund for relief. Loans in Africa look especially shaky. Economists at the World Bank estimate that some 60 percent of all BRI loans now involve countries in financial distress.
For a long time, Beijing refused to acknowledge the financial trouble. Chinese bankers long ago had warned Beijing about the financial and economic viability of BRI arrangements. Some of these bankers were so concerned that they insisted Beijing extend to several loans the moniker “policy designated” to make clear that the decision to lend came from Beijing and not the banks’ managements. Officials pressured bankers to avoid any reference to bad or failed loans. Instead, the banks were encouraged to keep the borrowers afloat by extending the maturity of the loans, which in banking jargon is cynically referred to as “extend and pretend.”
Beijing refused to cooperate with Western efforts through the G20’s Paris Club to renegotiate troubled loans. No doubt China’s leadership wanted to avoid the embarrassing admission that BRI loans had problems, but refusing cooperation would also have put repayment to China ahead of others should failure become unavoidable.
Now that China’s state-owned banks are also facing massive defaults from domestic property developers, such as Evergrande, Beijing has realized that the BRI is perhaps as unsupportable a burden on China as it is on the client states. In the past, when China’s economy was growing by leaps and bounds, Beijing might have been able to cover for the defaults with its own resources, but that is no longer the case.
Accordingly, Beijing has become much more open to talks on debt restructuring. Negotiations have already started between Beijing and Chad, Ethiopia, and Zambia. Indeed, the Chinese authorities have joined with international groups, such as the Paris Club, to work out what is called a “common framework” to deal with these sovereign loans, whether part of the BRI or not. Mr. Xi has certainly changed his rhetoric. He now describes the BRI as “increasingly complex” and in need of stronger risk controls and cooperation—quite a comedown.
Italy’s prospective withdrawal not only makes bad optics because of the prominence of that economy, but it also highlights all the difficulties surrounding the BRI for China and its client states. It certainly is no longer considered the “project of the century,” either in Beijing or elsewhere. Political and diplomatic imperatives will keep the scheme alive for some time. But the BRI does look set to shrink, no doubt to the delight of Chinese bankers and the Ministry of Finance, but not Mr. Xi.
