China sharpens the BRI with better risk management, ESG focus

China’s Belt and Road Initiative (BRI) for investment abroad has been revamped with a greater focus on risk management and governance, and it is on the cusp of winning important new members.

Brazil is expected to announce it will join the program when China’s President Xi Jinping makes a state visit to the country following a G20 summit in Rio de Janeiro in late November. Colombian officials, meanwhile, have confirmed their government’s intent to join.

US Trade Representative Katherine Tai warned last week that Brazil should be ‘objective’ about the risks of joining and consider how best to protect its economic resilience.  But Brazilian President Luiz Inacio Lula da Silva has declared his interest in the scheme, as have several ministers.

Once Brazil and Colombia join, the only significant emerging nations outside the BRI will be Mexico, which would face a conflict with its trade agreement with the United States and Canada, and India, which has a difficult relationship with China and objects to the BRI project for a Pakistani economic corridor passing through contested territory in Kashmir.

The scheme’s membership of approximately 150 nations also includes several developed economies, including South Korea, Singapore, Saudi Arabia and 17 of the European Union’s 27 members. (G7 member Italy withdrew last December.)

China’s lending to developing countries now exceeds US$1.3 trillion (A$2 trillion). This makes it a larger official creditor to the developing world than the World Bank, the International Monetary Fund or the combined advanced nations, according to AidData, a research institute attached to the William & Mary university in the United States, which has the most comprehensive database of Chinese lending.

AidData says the scheme has significantly tightened its financial risk management and its environmental, society and governance (ESG) performance after its first five years of lending left at least 57 nations overdue on repayments or at risk of default.  There was also community and political backlash in many countries following poorly conceived and executed projects.

New lending reached a peak of US$142 billion in 2016 but had dived to US$74 billion by 2020. There was a small increase to US$79 billion in 2021.

The scheme has cut lending to the highest-risk countries and increasingly supports private rather than public projects. It is participating in syndicated loans with private lenders to spread risk and has begun lending to multilateral institutions, such as the African Export-Import Bank and the Africa Finance Corporation.  BRI loans now need to be backed with collateral, and they carry penalty interest rates for late payments. Most deals now have legally enforceable ESG safeguards.

Motivated by the number of borrowers in financial difficulty, China has been providing emergency balance-of-payments lending, most of which is denominated in yuan rather than US dollars.

‘It is learning from its mistakes and becoming an increasingly adept international crisis manager,’ AidData researchers commented, arguing that Western critics had failed to understand the extent to which the BRI had been reworked, and risked devising policies to compete with a version of the BRI that no longer existed.

The West was slow to respond to the BRI.  It was only in 2021 that US President Joe Biden announced a program, initially branded as Build Back Better World but then renamed the Partnership for Global Infrastructure and Investment (PGII), to combine G7 lending to developing countries.

The US contribution over a five-year period was to be US$200 billion, with a further US$400 billion to come from the other G7 members and the private sector. ‘We’re showing democracies can deliver,’ Biden said.

The PGII has a number of major projects, led by a transcontinental rail link from Angola’s Lobito port to the Katanga province in the Democratic Republic of Congo and the Copperbelt in Zambia on the east of the continent.  A less advanced plan would develop a Trans-Caspian transport corridor linking central Asian nations with Europe, while plans for an India–Middle East–Europe Economic Corridor were announced in late 2023.

China was lending up to three times as much as the United States until recently, but the margin has narrowed. US loans to the developing world reached US$60 billion last year, compared with just under US$80 billion from China.

However, China still appears to be winning the hearts and minds of the governments, if not necessarily the people, of the emerging world.  According to an AidData study, governments of developing countries aligned their voting in the United Nations General Assembly with China 75 percent of the time and with the United States just 23 percent between 2000 and 2023.  A government that increases its UN voting alignment with China by 10 percentage points can expect to see a near-tripling of aid and credit flows.