Academic journal article AEI Paper & Studies

The Chinese State Funds Belt and Road but Does Not Have Trillions to Spare

Academic journal article AEI Paper & Studies

The Chinese State Funds Belt and Road but Does Not Have Trillions to Spare

Article excerpt

The Belt and Road Initiative (BRI) is characterized as an explosion of Chinese investment in Eurasian and African countries promising deals worth trillions of dollars. This is largely wrong. The BRI is better understood as construction projects worth hundreds of billions of dollars taken on by state-owned enterprises (SOEs). Belief in endless Chinese money notwithstanding, SOEs cannot by themselves deliver a multi-trillion-dollar BRI. (1)

Is the private sector willing to help? Probably not. Private investment in the BRI is rising, but it is still outpaced by SOE investment. BRI construction activity by private Chinese firms is almost nonexistent. With the BRI focused on developing countries, there is considerable commercial risk. SOEs can ignore much of this risk because they do not go bankrupt and usually have access to cheap financing; private firms are not as fortunate. The evidence to date indicates private firms are hesitant to participate, at least using their own funds. If that continues, the BRI will not be nearly as large as some anticipate. (2)

BRI Affordability

Xi Jinping announced the BRI in September 2013 as a program to connect China with a string of countries along the ancient Tang Dynasty Silk Road through new or improved transport infrastructure. The original list of countries included 64 countries and China, mostly in Eurasia. Recently, the Chinese government published an expanded BRI list (3) with 71 countries, tapping into Sub-Saharan Africa and Latin America. Every sector, not just transport, is counted in the BRI figures. Here we consider all 71 countries and BRI activity in all sectors since 2014.

Through the American Enterprise Institute and Heritage Foundation Chinese Global Investment Tracker, (4) we can assess the amount of Chinese investment and construction. Construction means a Chinese company is building for another party in a foreign country. In principle, its involvement ends after the construction is complete. Through investment a Chinese company takes an ownership stake in an asset and will likely have a longer-term presence. The construction data in the tracker usually arrive late; thus, the 2017 list is incomplete. For this reason, we expect the value of BRI construction contracts in 2017 to increase by roughly $8 billion (see Table 1).

Available data make clear the BRI has been primarily about construction. The dollar value of construction activity in BRI countries was higher than that for investment in each of the four years before the program's implementation and has been higher in each of the four years since. Since the start of the BRI, Chinese companies have won $208 billion in construction contracts, on top of $140 billion in contracts for the previous four years. Investment in the BRI period was $138 billion, compared to $76 billion in the same countries pre-BRI.

Investment and construction numbers should not be lumped together because they represent different economic activities. However, it is sometimes useful to look at the combined footprint of the BRI, which stands at around $340 billion through four years and is accelerating, if unsteadily. Investment rising toward $50 billion annually and construction increasing to about $60 billion are reasonable guesses at the trend. That would put a trillion-dollar total six to seven years away.

China can afford that. What it cannot afford is the multiple trillions being bandied about by some. (5) Nearly 70 percent of investment under the BRI has come from SOEs, and SOEs have done more than 95 percent of the construction. To put it bluntly, if BRI activity was consistently profitable, someone other than Chinese SOEs would engage in it. Chinese SOEs can sustain the unprofitable activities only due to state support.

For the BRI, that support takes the form of foreign currency. (6) China's official reserves have stabilized a bit above $3 trillion, (7) after heavy outflows of more than $500 billion in 2015 and $300 billion in 2016. …

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