Beijing’s grand global ambitions have hit a snag. The problem is money.
Apart from bold naval and air demonstrations in the South and East China seas, Beijing’s quest for influence—in Africa, the Middle East, and, to a lesser extent, Europe and Latin America—has rested on two things: how much China has at its disposal to invest abroad and how much China buys from each region.
For a while, it seemed as though the buying and investment amounts were limitless. Of late, however, available amounts are less vast than was previously thought. Matters have imposed constraints on China’s leadership, something with which they will increasingly have to deal.
The Middle East is the epicenter but hardly the extent of the problem. There, Beijing has met its biggest diplomatic success so far, reverberating around the world’s capitals and to China’s great benefit. Beijing orchestrated the resumption of diplomatic relations between Saudi Arabia and Iran. China drew on its status as an enemy of neither of these two oil-exporting nations—something that few Western capitals could claim—but its advantage mostly lay in its status as a premier buyer of oil exports from both countries.
But the buying power that made for that remarkable diplomatic accomplishment is running short. Beijing’s support for Moscow is part of the problem. Because the war in Ukraine has lost Russia’s Western markets for its energy, Moscow has looked to China to sell its energy. Chinese purchases of Russian crude oil through the third quarter of this year rose by 42 percent from year-ago levels. But China can use only so much imported oil at a time, especially since its economy is slowing.
To buy from its Russian ally, China has accordingly had to cut back on imports from the Middle East. Combined purchases from Saudi Arabia and Kuwait have grown barely during the past year. Some sources suggest a bigger 11 percent cut in Saudi oil imports. Iranian sales to China seem to have held up, no doubt so that China can retain influence in that country, but also because U.S. sanctions have forced Iran to offer discounts.
China’s need to curtail buying in the Middle East will likely intensify. Currently, a lack of available pipelines limits how much Russian crude can get to China. But both countries are working on pipeline infrastructure. Unless geopolitics changes radically when these facilities become available, Russia will surely want to sell still more in China, and Beijing’s diplomatic commitments will compel it to comply. What is more, in the uncertain geopolitics of the times, the pipelines will offer much greater security and reliability than the sea routes on which China must rely to receive Middle Eastern oil.
With less involvement in Middle Eastern oil, Beijing’s investment portfolio in that part of the world will necessarily stagnate or even shrink. And it isn’t just the oil producers that are problematic. In recent years, China has developed huge trade and investment flows with Israeli technology. That advantage for China has already begun to shrink in recent weeks because Beijing refused to label Hamas a terrorist group. At the same time, domestic Chinese financial problems have created a challenge for Beijing’s investment ambitions in the Middle East and more generally.
Whereas Chinese projects in the BRI topped $100 billion a year at their height, by 2021, only 29 percent of the $59 billion earmarked for BRI got to participants. This year, it looks as though BRI deals will amount to $80 billion at most, higher than in 2021 but still well short of the initiative’s halcyon days.
When China was growing fast and was flush with surplus funds from its export sales to the United States, Europe, and the world, it could easily have filled the financial gap left by the failures of some BRI participants and others overseas unable to pay their loans. But that is no longer the case. China’s economy will struggle this year even to meet Beijing’s 5 percent real growth target, and its exports are in decline. What is more, domestic debt problems have made the country’s financial system more fragile than ever before and certainly unable to withstand the failures of BRI participants and other Chinese overseas investment projects.
To make matters worse, the collapse of major property developers—Evergrande, Country Garden, and others—has left China’s financial system with a considerable overhang of questionable loans. So also has the refusal of mortgage holders to pay on loans they took out to prepay on apartments that these developers will likely never complete. For these reasons and the financial distress common among BRI participants, China’s banks—long the source of financing for overseas projects—are in no position to extend more.
If this were not trouble enough, local governments in China have begun to experience financial strains. As the major issuers of debt to finance domestic infrastructure projects, they have overextended themselves during the past few years of first COVID-19 and then of several failed efforts by Beijing to use infrastructure spending to stimulate economic activity. Some local governments are in such difficult straits that they are experiencing difficulties providing citizens with essential services.
None of these difficulties will find a solution any time soon. Some, such as Beijing’s obligation to Moscow, will only become more imposing. Without its once huge surplus of funds to invest aggressively abroad and to buy oil in the Middle East and other raw materials elsewhere, Beijing will continue to face significant economic and financial limits on the extent of its global influence.
