The Communist Party of China has announced its thirteenth National People’s Congress will be held on May 22nd in Beijing. This annual event is important as it brings together the top brass of the CCP to discuss plans and goals for the year ahead. Its 2020 incarnation has extra significance – it’s the latest sign that Beijing believes the worst of the Coronavirus pandemic in China is over.
With the virus contained domestically, getting the economy up and running is the party’s top priority. Unfortunately, the lingering effects of the pandemic at home and abroad will make this a slow and arduous process. Domestic consumption remains low as some Chinese continue to avoid shopping malls and prioritize replenishing their savings. Mass lockdowns and soaring unemployment in the U.S. and E.U. have depressed demand for Chinese goods – bad news for an export-driven economy.
Across the globe trade disruptions and goods shortages have motivated governments to diversify supply chains and ramp up domestic production. This will accelerate China’s decline as the world’s factory, a process that is already underway ats a time when Beijing’s response to the crisis has soured relations with much of the West. Reinhard Buetikofer, chair of the European parliament’s delegation for relations with China, stated that “Over these months, China has lost Europe”, citing concerns over its honesty, aggressiveness, and propaganda.
Several E.U. members have intensified investment screening protocols to prevent Chinese companies, who often act on behalf of the CCP, from acquiring controlling interests in industries vital to national security. Investing in Europe has helped the Chinese garner political support on a variety of issues and facilitated the transfer of technologies crucial to the Made in China 2025 initiative. As the E.U. increasingly views China as a threat, Beijing’s economic prospects in the region will suffer accordingly. In the U.S., Donald Trump’s name-calling, accusations, and threats do not bode well for future American Chinese relations.
Faced with these uncertainties, China needs alternative drivers for growth. The obvious choice is the Belt & Road Initiative, the flagship project of Chinese leader Xi Jinping. At first glance, BRI seems like the perfect tool for the job. Its sprawling network of roads, airports, railways, ports and more will connect China to emerging markets in Asia, Africa, the Middle East, and eastern Europe. These projects will provide countless jobs for Chinese workers, soak up surpluses of domestic steel and aluminum, and ensure the flow of raw materials into China. It also allows the Chinese to partially negate one of its greatest geopolitical vulnerabilities: the first island chain. In a conflict, the U.S. navy could use its bases in the western Pacific to block the sea lanes through which most of China’s trade flows. This would grind the Chinese economy to a halt, a threat Beijing takes seriously.
Building trade routes over land across Eurasia provides it with an alternative should the worse occur. Beijing promotes the BRI as a win-win scenario for everyone. Participants get shiny new infrastructure, improved connectivity, jobs, and access to more goods and services. In short, BRI seems like the ultimate solution to Beijing’s economic conundrum.
But…. many of the BRI projects are in countries with less than stable finances. They have taken out enormous loans from Chinese lenders to build infrastructure they otherwise couldn’t afford. Even before Coronavirus ground economies to a halt, many were struggling to service their debts.
Sri Lanka serves as a cautionary tale. After accepting huge loans to build a port at Hambantota, the government was unable to pay back the money. Following lengthy negotiations, Colombo seeded control of the port and surrounding lands to Beijing for 99 years. China gained control of precious territory in the Indian Ocean, but it led to accusations of ‘debt-trap diplomacy’. Critics suggest that China was weaponizing debt to control strategically important real estate. Montenegro, Mongolia, Pakistan, Kyrgyzstan, and Djibouti may be among those at risk of a similar fate.
COVID-19 threatens to expand that list. The pandemic induced economic crunch makes it impossible for some BRI members to service their debts. Calls for the postponement or cancellation of repayments are growing louder, especially among African nations. This puts the CCP in a tight spot.
Chinese banks are under pressure domestically and are unlikely to cancel loans outright. China has signaled its willingness to suspend interest payments, and has agreed to a G-20 initiative to freeze loan repayments for developing countries. However, these steps will only provide a temporary reprieve.
However, China is wary of its reputation for debt-trap diplomacy. Adopting a hardline approach with partners could collapse support for projects underway or proposed. Countries that remain on the fence about joining BRI will be watching closely to see how China responds to the situation, as will strategic competitors like the United States and Japan. Any signs that China seeks to exploit its partners for strategic gain will be noted.
All this leaves China in a precarious situation. The BRI was meant to symbolize Chinese strength, ambition, and desire to spread growth and prosperity throughout the developing world. The Coronavirus threatens to shatter this veneer by making China choose between its internal finances, the stability of its partners, and its credibility as the leader of a new Eurasian economic order. Whatever decision Beijing makes, someone is going to unhappy. The BRI is not such a win-win after all.