• Trade along the Belt and Road Initiative (BRI) continues to increase, despite ongoing Covid‑19 waves, with China’s exports of electronics and furniture benefiting from the work-at-home trend.

• China’s investment in the BRI continues to outperform investment in other markets, but China is facing increasing competition from countries such as the US and Japan, especially after the introduction of a G7 infrastructure‑focused initiative in June (Build Back Better World, or B3W).

• The drive for carbon-emission reduction has implications for BRI projects, as well as for the banks and construction companies involved. Cancellation, postponement or increasing cost of inputs should be factored in by companies undertaking energy‑intensive projects.

The Economist Intelligence Unit expects global GDP to return to its pre‑coronavirus level by late 2021. However, the pace of recovery will vary across the world, including across the predominantly developing countries of the BRI, many of which have struggled to gain access to sufficient Covid‑19 vaccines. Despite a continuing improvement in BRI‑related economic activity in the first half of 2021, the programme is facing challenges amid a rise in geopolitical tensions, as well as the environmental policies adopted by China and other major economies.

The BRI trade and investment outlook

Merchandise trade with the countries along the BRI increased by 38% year on year in the first half of 2021, accounting for 29.6% of China’s total trade with the world. Exports of work-from-home consumer goods, pharmaceuticals, steel and automotives drove up exports. China’s imports from countries along the BRI increased by 66.6% amid a rise in commodity prices, with shipments of copper increasing by 51.1%. Investment in power transmission and new‑energy vehicle production has boosted demand for copper as China shifts to a stricter environmental policy on carbon emission.

The latest data from the Ministry of Commerce show that China’s non‑financial overseas direct investment (ODI) into BRI countries expanded by 13.8% year on year to US$7.4bn in the first five months of 2021, accounting for 17.2% of the total. Total ODI rose by 2.6% to US$43.3bn from the same period in 2020. Specifically, outbound investment into information transmission service sectors continued to grow strongly and increased by 49.4%. Construction-related investment has slowed, however, owing to difficulties in making country visits. The contract value of construction projects decreased by 1% to US46.5bn across BRI countries in the first half of 2021, accounting for 56.2% of the total.

Despite the increase in ODI along the BRI, Chinese companies are facing various headwinds, including rising geopolitical tensions and investigations into national security. Investment in the Association of South‑East Asian Nations (ASEAN) is also facing competition from countries like Japan, South Korea and the US to balance China’s influence in the region and tap into opportunities in ASEAN’s smart city development. For example, Japan announced a fund worth US$2.4bn in December 2020, supporting Japanese companies to compete with Chinese and foreign rivals. The US has reasserted its commitment to the US‑ASEAN Smart Cities Partnership (USASCP), which was launched in 2018, demonstrating the US’s desire to place ASEAN at the heart of its Indo‑Pacific strategy.

BRI policy watch

Domestic policy shifts and rising international competition are rearranging the priorities of the BRI and elevating the role of green finance. The G7’s announcement of B3W and the US administration’s hopes to stimulate interest in the Blue Dot Network (BDN), a joint US‑Australia‑Japan initiative, point towards increased competition in development funding.

In June the G7 met and announced B3W. The initiative plans to mobilise private-sector capital for climate, health and health security, digital technology, and gender equity and equality. It is designed to counter China’s strategic influence by providing an alternative to the BRI for emerging markets. The aim of the initiative is not to match the BRI project by project, but rather to promote transparency and global standards on good governance and environmental sustainability.

Domestically, implementing China’s carbon neutrality pledge and a greater focus on the digital economy are being echoed in China’s approach to the BRI in the form of calls for more green financing. Similar statements have been issued by the presidents of both the Asian Infrastructure Investment Bank (AIIB) and the China Development Bank. Soon after the announcement of B3W, the leaders of 29 countries under the BRI launched the Initiative for Belt and Road Partnership on Green Development (“BRI Green Partnership”) in June. Both the new BRI Green Partnership and the G7’s B3W highlight the importance of building green infrastructure. However, the BRI Green Partnership emphasises common but differentiated responsibilities, whereas the B3W values transparency, financial sustainability and anti‑corruption—issues that the BRI has been criticised over in recent years. This suggests that co‑operation opportunities between the BRI and B3W will be very limited or unlikely.

Project review

This shift in policy is being felt on the ground. Signifying the new priority in green development was the refusal by ICBC, one of China’s biggest state‑owned banks, to fund a US$3bn coal‑fired power plant in Zimbabwe. This is the second time that an ICBC‑funded coal project has fallen through; a permit to build a coal‑fired plant in Lamu, Kenya, was cancelled by the Kenyan government in 2020 owing to environmental concerns. With coal seemingly on the way out, the BRI is increasing its focus on renewables. In June a wind farm near Zhanatas, Kazakhstan, owned by China Power International Holding and Visor Kazakhstan, came on stream. The farm has a capacity of 100 MW and will power more than 1m homes, making it Central Asia’s largest wind farm. The project was funded by AIIB, ICBC, the European Bank for Reconstruction and Development, among others.

More broadly, between 2014 and 2020 Chinese entities were involved in financing 52 projects worth US$160bn in overseas coal‑fired power plants, but their completion is in doubt, according to a report published by a Beijing-based private think‑tank, Green BRI Centre. More than US$65bn‑worth of the projects have either been shelved or cancelled; 25 have officially been postponed and eight have been cancelled. This could have implications for investment return among the commercial banks that provided lending to the projects.

China’s recent policy to increase tariffs for steel exports could also complicate project completion. For example, China announced sweeping changes to its tax regimes for ferrous raw materials from May 2021, aiming to guide the producers to reduce carbon emission. The change will reduce import tariffs and increase export tariffs for ferro‑silicon, ferro‑chrome and high‑purity pig iron. Projects that rely on Chinese exports will be at risk of incurring increased costs.

Chinese companies are also facing technical competition and political challenges. In June 2020 a Chinese telecoms equipment manufacturer, Huawei, lost to Nokia (Finland) and Ericsson (Sweden) in a bid to provide Singapore’s main 5G network. In July 2021 Ericsson was selected as the provider for Malaysia’s nationwide 5G network deployment. The increasing competition may also point to a strategic need to balance the influence of major powers such as China, Europe and the US by the hosting countries.

To encourage countries to consider options other than Chinese 5G vendors, the US is offering funds to countries such as Brazil to purchase from non‑Chinese 5G vendors. With hosting countries avoiding choosing sides between the US and China in the competition in technology and aid projects, Chinese companies will continue to find business opportunities along the BRI, but at the cost of compromise on profit, given that most emerging markets are price‑sensitive.

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