Belt & Road: Circular dynamics

The conventional wisdom around declining Belt & Road Initiative (BRI) investment in recent years is that the political tensions of an increasingly bipolar world have soured appetite for China’s infrastructure ambitions, stoked fears of debt-trap diplomacy, and created a malaise now being exacerbated by COVID-19. It’s hard to argue against these observations except to say that many of them highlight the very same forces that are accelerating BRI in the long run. 

The paradox can be somewhat explained in the raw numbers. Chinese outbound infrastructure investment during the first half of 2020 was down 60% year-on-year at $12.8 billion, according to Deloitte. The implied erosion of confidence among sovereigns and state-owned enterprises (SOE) had a noticeable knock-on effect in broader outbound M&A activity, which declined 68% to $7.5 billion. Approximately 90 deals were announced, a fall of 40%. 

Broken down by geography, the narrative of BRI’s demise loses some coherence, however. Chinese outbound M&A to the US amounted to 10 transactions worth $1.5 billion, down 63% and 59%, respectively, while Western Europe saw China M&A collapse 73% to $1.3 billion. By comparison, the BRI stomping ground of Southeast Asia was considerably less impacted, with the deal count climbing 14% to 22. In dollar terms, it fell only 49% to $1.3 billion.

“If China is not feeling comfortable putting more investment into the Western world, the only logical place for it to go would be the Belt & Road countries,” says Patrick Yip, Deloitte’s national M&A leader for China. “These are also the countries that have been most adversely effected by COVID-19, so we’re talking about cheaper currencies and cheaper projects that could be available. Based on what we have seen from our SOE clients, they continue to be interested in Belt & Road countries.”

Reluctant reds 

Still, the suggested pattern here – a global infrastructure slowdown seeing reduced impact in the BRI sphere – is difficult to reconcile in the murky variables that surround COVID-19. BRI countries remain highly sensitive to Chinese debt in both political and fiscal terms and are expected to become even more so in light of stalled progress in the multilateralization of BRI financing as well the budgetary tightening of the virus-driven downturn. 

At the investor level, these pressures can be seen in the recent dormancy of China’s main BRI policy banks, six of which are said to account for 90% of commitments to date. At the national level, China is still running a large trade surplus and has a high savings rate – factors that are expected to underpin continued infrastructure spending abroad. But BRI countries suffering from COVID-19 are prioritizing emergency healthcare services and general liquidity support.  

The Asian Infrastructure Investment Bank (AIIB) is one of the few China-based investors to remain active in this space, although doing so has required a strategic pivot. The multilateral development bank has launched a crisis recovery program for its member countries – which largely fall along the BRI trail – facilitating non-infrastructure financial support during an 18-month period ending in October 2021. The program has deployed about $6 billion so far, most recently a $100 million loan last week to Vietnam’s VP Bank.

“Projects are still going through where it’s very high quality. There’s been a shift where the money is going to projects that have very strong environmental and social governance and strong property and political risk profiles,” says Laurel Ostfield, AIIB’s head of communications. “That’s where there’s still a lot of opportunity in mobilizing the private sector, but post-crisis, there is going to be an even more uphill battle to get private funding engaged in emerging markets – and there were already quite a lot of challenges to that.”

A flight to quality piles further pressure on BRI agendas in developing economies. In a study published last month, AIIB concluded that developing countries get less bang for their buck in terms of connecting economic uplift to infrastructure investment. They must therefore allocate a relatively high percentage (6-10%) of GDP to infrastructure to maintain national growth rates. COVID-19 is expected to clip these allocations for years to come, and with them, the foundational supports for other private investment activity.

Mixed fortunes

The multi-continental scope of BRI ensures this will not play out evenly. Some countries will continue to be debt orphans with poor sovereign credit. They will be able to host economically viable BRI projects, but they will struggle to negotiate favorable terms with Chinese lenders. Other countries will be able to take advantage of increasing transparency in BRI planning to cancel unneeded projects and court more international investors to dilute China’s influence on their economies.

“Even if Belt & Road is at a standstill, that doesn’t mean the private sector isn’t going to have opportunities to go directly into these market because these countries are the ones that now need to raise money by privatization,” says Parag Khanna, founder of FutureMap, an advisory firm focused on the effects of globalization. “A lot of these countries in Asia have a long list of assets that they’ve talked about privatizing but haven’t actively done so. Now they have to. I think we’ll start to see enormous buying opportunities in the next two years.”

For international investors, much of the opportunity here will hinge on how well the local legal and regulatory framework de-risk assets such as banks, airlines, hospitals, hotels, and agricultural properties. For Chinese investors, including BRI banks and the private equity firms that follow their lead, more feasible near-term inroads could be in categories that propose creative workarounds for societies coping with an infrastructure drought. 

“The longer term strategy of the Chinese government is still making investments in these countries, so the slowdown we’re seeing [in outbound M&A] is just a blip. There’s just so much liquidity coming from China now, it has to make some sort of return,” says Deloitte’s Yip. “If it’s not in the infrastructure, it will likely be in technology, media and telecom-type investments.”

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• Topics
• Greater China
• Southeast Asia
• Infrastructure
• China
• One Belt One Road
• M&A
• Deloitte
• Asian Infrastructure Investment Bank