President Xi Jinping - Photo by Chinese President Office

JAKARTA (TheInsiderStories) – China increasingly looking to Belt and Road (BR) countries for export demand. But the country is also seemingly more selective with Belt and Road projects Moody’s Investors Service says last week.

Against the background of China’s rising tensions with the United States (US), the country is increasingly looking to countries that participate in its Belt and Road Initiative (BRI) as an important source of export demand as well as a source of vital raw materials.

“However, there are indications that China is becoming more selective in which BRI projects that it will pursue, as seen by the value of new Chinese-led BRI contracts and direct investment falling significantly for the first time in 2017,” says Michael Taylor, a Moody’s Managing Director and Chief Credit Officer for Asia Pacific.

Moody’s says that this fall could be due to several factors, including tighter funding conditions in China, as well as domestic political reactions in several BRI countries.

“Asia outpaces Africa in holding the highest contract value in BR regions,” says Lillian Li, a Moody’s Vice President and Senior Analyst. Moody’s points out that around 40 percent of the total value of Chinese-led direct investments and construction contracts is concentrated in the top 10 percentile countries.

She added, “During 2014 to June 2018, the top countries ranked by BR contract value were Pakistan, Nigeria, Bangladesh, Egypt, Malaysia, Indonesia, Russia, Laos, the United Arab Emirates and Iran.”

And, in 2017, Chinese contracts in BRI countries with the highest value were in the energy (39 percent), transportation (37 percent) and real estate (13 percent) sectors

The Belt and Road Initiative continues to expand, it now encompasses 115 countries, from 64 in 2013. There are indications that China is becoming more selective in which BRI projects it pursues as the value of new contracts in the BRI has significantly declined since 2016.

The change could be due to several factors, including tighter funding conditions in China and domestic political reactions in several BRI countries. Moody’s expect the economic linkages formed through BRI projects to become more important to China as its relationship with the US sours.

The BRI provides China with a mechanism to develop relationships with recipient countries on trade, investment, regulatory standards, and through forging closer political alliances. An example is the Digital Silk Road, which represents China’s vision of global internet expansion through building telecom infrastructure, promoting internet services, cross boarder e-commerce and trading in tech goods.

Increasingly, China appears to look to Belt and Road countries as an important source of export demand as well as a source of vital raw materials. Over time, Moody’s rated the BR countries to grow in importance in global supply chains as processing and transportation centers.

Improved manufacturing capabilities could foster their export of final value-added goods. Rising costs in China could drive a gradual shift of production from China to some BR countries in Southeast Asia.

Furthermore the agency rated, BRI remains predominately debt-financed, with Chinese entities, particularly policy banks and state-owned enterprises (SOEs), the largest source of funding.

While many BRI countries are comparatively high credit risk, being either speculative grade or unrated, about 40 percent of the total value of these Chinese direct investments and projects is concentrated in top 10th percentile BR countries, with external debt levels around or below 50 percent of GDP.

Large reliance on Chinese funding could worsen some BR host countries’ debt affordability, leading to weaker sovereign creditworthiness. If invested wisely, BRI funds have the potential to promote productivity and economic growth of BR countries through infrastructure improvement.

However, external vulnerabilities, balance of payment pressure and high leverage have been challenging the credit quality of some BRI host sovereigns. Several have a larger than average reliance on Chinese funding.

Most Chinese lending in BRI is likely to be on less concessional terms than offered by multinational institutions on average. Maturity of these loans is still long, varying from 12 to 20 years.

Data transparency remains a challenge in calculating debt levels of some BR countries and understanding the real cost of Chinese funding. Unlike those of multilateral official creditors, Chinese lending terms lack conditionality on economic and governance reforms, which may limit the long-term economic benefits to BR countries. 

by Linda Silaen, Email: theinsiderstories@gmail.com

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