Booster or Brake? COVID and the Belt and Road Initiative

As the COVID-19 pandemic thrashes the global economy, a key question is how outbound financing for China’s Belt and Road Initiative (BRI) will be affected. Before the crisis China’s policy banks were already reducing new BRI loans. Now there is much speculation about Beijing opening the door for its institutions and firms to go on a buying and lending spree, given global needs and lower prices for assets. The question is whether China’s financial system permits that, given China’s ongoing domestic challenges and the need to prioritize investment at home. China’s long-term strategic answer to that is uncertain, but three short-term dynamics are clear:

• If Beijing wants to keep BRI lending in high gear, it can. Policy banks are in a position to sustain the 2015-2019 pace. BRI loans are just a small part of China’s overall lending portfolio, and China Development Bank (CDB) and China Export-Import Bank (EXIM) have enough political backing to bear the cost.
• Playing savior is cheap. Given the COVID-19 impact, China could achieve the same proportional impact on emerging and frontier markets, and the same or greater political goodwill, even with diminished financing.
• Forbearance is not just for home team debtors. Regardless of new lending, Beijing will have no choice but to defer and renegotiate past loans across the world this year as macro conditions deteriorate.