The Rise and Fall of the BRI

China’s ascent as an international financier (especially in low-income countries) has been accompanied by claims that it engages in so-called debt-trap diplomacy. The term originated in 2017 to describe a deal that saw Beijing receive a 99-year lease for the Hambantota Port in Sri Lanka after the country fell behind on debt payments and has since been more widely applied to any Chinese project that conflicts with Western interests, especially those under the Belt and Road Initiative (BRI). Western media and senior policy officials seem to feel that China is using the BRI to exert undue influence over the world, especially because the initiative mostly funds infrastructure rather than the social sector projects, such as health or education initiatives, that are often favored by large multilateral donors and Western nations. Critics worry that China will be able to seize control of these assets for military use or use them as leverage in future negotiations.

In reality, this lending is nothing new; China has been providing economic aid and technical assistance to other countries since the 1950s, shortly after the official founding of the People’s Republic of China and a time when China itself was still a developing nation. The real reason why the BRI has struggled to sustain itself is not due to debt traps or predatory lending, but something far more mundane: poor risk management and a lack of attention to detail and cohesion from the Chinese state-owned enterprises and banks, private companies, and local governments involved.  

After the initial announcement of the project in 2013 and the subsequent formalization of the “One Belt, One Road Initiative (OBOR)” in 2015 (renamed the “Belt and Road Initiative” in 2016), Chinese companies, especially those involved in industrial production, jumped at the chance to sign onto various OBOR projects. These projects were seen as a solution to the issue of excess capacity that many Chinese companies faced after the 2008 global financial crisis and the Chinese government’s ensuing stimulus packages, leading to an explosion in the number and location of new overseas foreign contracted projects signed by Chinese companies. In addition to explicit government encouragement urging companies to reduce supply-side structural issues by exporting surplus to developing countries, participation in BRI is further fueled by implicit pressures borne from China’s socialist market economy structure. While state-owned enterprises (SOEs) are mandated to carry out projects that are aligned with state objectives such as the BRI, private companies could feel pressured to do the same to remain in good standing with the government and maintain some degree of operational autonomy. This coercion is especially prevalent for the BRI, which has been touted as Xi’s “flagship project”.  

The BRI was advertised as a “New Silk Road” inspired by the physical, economic, and cultural connectivity of the ancient Silk Road. The stated goals of the BRI are to “complement the development strategies of countries involved by leveraging their comparative strengths” and “enhance coordination with the policy initiatives of relevant countries,” including improving infrastructure, trade, financial, and people-to-people connectivity. This vision of the BRI as a cohesive initiative to be jointly coordinated by several state ministries has not been realized. The cohesiveness of the BRI was further undermined in late 2017 and early 2018, when key ministries involved in the implementation of the BRI (namely the State Council, MOFCOM, and NDRC), stopped requiring project application approval for overseas activities. The removal of such requirements made it easier for Chinese companies to engage in foreign contracted projects and overseas financial investment activities and reduced an additional layer of project oversight and quality control. 

The incentives for private companies to participate in the BRI are weighed against the private sector’s concerns over risk, bankability, and feasibility. There has been a decrease in the number and value of new foreign contracted projects signed in BRI countries and a simultaneous increase in the value of non-financial direct investment from Chinese companies into BRI countries from the period 2015-2022.

The scope of the BRI rapidly expanded after the formalization of the initiative in 2015. The annual cumulative number of new foreign contracted projects in BRI countries jumped from 3,987 at the end of 2015 to 8,158 at the end of 2016, a year-on-year increase of over 104 percent (where foreign contracted projects refer to the activities of Chinese enterprises or other units contracting overseas construction projects, which are usually infrastructure related).

The cumulative number of new foreign contracted projects peaked in 2016, early in the initiative. However, the cumulative value of new foreign contracted projects did not peak until 2019, indicating that although the number of new projects was decreasing, the value of these projects was increasing. 

There are many cyclical trends which may be significant; for example, both the number and value of new foreign contracted projects signed in BRI countries have always spiked highest in June, October, and December, which are roughly the ends of each quarter, and are typically reporting periods. Furthermore, the month with the greatest value of new projects is almost always December, which could reflect a last-minute rush to inflate numbers to improve the yearly statistics for government reports. 

The greatest jump in the monthly number of new foreign contracted projects signed occurred in 2018, from November (497) to December (4,081), amounting to a 721.13 percent increase in the monthly number of new projects signed and a 112.12 percent increase in the cumulative number of new projects signed (from 3,640 in November to 7,721 in December). By comparison, 2021 was the year with the next largest increase in the monthly number of new foreign contracted projects signed from November (532) to December (1,739), amounting to a 226.88 percent increase in the monthly number of new project signed and a 38.49 percent increase in the cumulative number of new projects signed (from 4,518 in November to 6,257 in December). Counterintuitively, when comparing the cumulative number of new foreign contracted projects in BRI countries for the period from January to November, 2018 was the year with the lowest cumulative number of new projects signed in the observation period of 2015-2022. The previous year, 2017, was the first year in which there was a decrease in the annual number of new foreign contracted projects signed. Given the growth in new foreign contracted projects after 2018, companies could have been actively pressured or felt implicit pressure from the government to make sure that this trend did not continue.  

Of particular interest is 2017, as the State Council announced the abolition of the approval mechanism for foreign contracted projects in late September, making it easier for companies to sign new deals. Until the third quarter of that year, 2017 recorded more new foreign contracted projects than any other year in the same observation period. The month after the announcement, there was a huge increase in new projects signed, with 2,461 new projects signed in October, compared to 321 signed in September. There was then a huge drop in new projects signed in November (only 255 new foreign contracted projects signed), with a jump in new projects signed in December (1,106 new projects signed, just in time for end-of-year reporting).

The increase in new projects signed the month immediately following the State Council announcement can be interpreted in a few ways: private companies could have been interested in participating in more projects but were previously held back by the need to receive ministry approvals, or companies could have felt that this announcement was a signal from the government urging higher private sector engagement with BRI, and therefore felt obliged to sign up for new projects. Despite this initial jump in BRI participation in October 2017, the subsequent drop in new projects one month later, record low numbers of new projects signed for most of 2018, and the steady decline of new projects signed through the present day indicate that the removal of some barriers to entry to BRI participation were not sufficient to promote sustained engagement with the initiative.  

Is it just that Chinese companies have an increasingly weakened appetite for new BRI foreign contracted projects, or is there a demand-side issue as well? While the number of new projects signed is declining year upon year, non-financial direct investment, MOFCOM’s classification for overseas direct investment in non-financial firms, has been increasing relatively steadily. 

This trend suggests that Chinese companies are not losing interest in BRI or overseas investment, but their preferences for engaging with the BRI have changed. It is possible that Chinese companies bit off more than they could chew when they began signing BRI foreign contracted projects at the start of the initiative, initially committing to a large volume of projects and leaving little room for participation in new projects in later years. It could be that they feel less protected or supported without strong government oversight and therefore become more risk averse. They could also have learned that they do not actually have the capacity to carry out these massive infrastructure projects, that these projects are not bankable, or that non-financial FDI is a less risky investment route and therefore a more attractive strategy. It is also possible that less projects are being signed because companies cannot find willing host country partners.

The truth seems to lie somewhere between these last two reasons. In recent years, there have been an increasing number of reports from BRI partner countries about construction flaws in major infrastructure projects, project cancelations initiated by BRI partner countries due to concerns over corruption and debt, project cancelations initiated by Chinese companies due to financial problems, and projects that have led to nowhere (in some cases, literally – such as a BRI-funded railway that ends in the middle of a field in Kenya).  

All of these factors do not point to malicious or predatory lending, but rather overzealous engagement on the part of both Chinese companies and BRI partners. BRI participants were so eager to see the gains from these projects (whether political, financial, or economic) that they rushed into deals without adequate planning. Most projects were completed as standalone enterprises, with little thought for the bigger picture of how different pieces of infrastructure need to fit together in order to function effectively. For example, standalone ports are essentially useless without accompanying roads and railways to transport goods from ships further inland. Such fragmentation has plunged both Chinese companies and BRI partners into billions of dollars of debt and a number of prolonged debt-restructuring deal negotiations. 

China is now realizing the true cost of the BRI, as it is forced to choose between repayment on the hundreds of billions in loans its companies and state banks have issued and whatever goodwill it may have accumulated through this initiative. Top Chinese officials such as Wang Wen, chief economist of China Export and Credit Insurance Corporation (aka Sinosure), and even Xi Jinping himself, have warned Chinese developers and financiers of BRI projects to step up their risk management and stressed the need for improved quality control. For all of its faults, the original vision of the BRI has its merits – infrastructure and connectivity projects are key to fostering development in low-income countries, and sometimes China is the only willing financier. If the BRI can be saved, it will require both the Chinese government officials and host countries to implement rigorous risk management procedures and to improve coordination at all project stages. China should be wary lest the BRI follow the path of its ancient predecessor, with fragmentation contributing to decline and eventual collapse.

Nadia Clark is a Research Associate for International Political Economy at the Council on Foreign Relations.