Parties to the BRI have reason, on security and geopolitical grounds, to befriend China, or at least not to alienate it. Home to 1.3 billion people, and already the world’s largest economy by some measures, it is both a source of fear and attraction. On narrow commercial grounds alone, China’s offer to participate in the BRI is one that many countries cannot refuse.

To start with, China’s rise as an importer acts as a powerful incentive to join the BRI. China’s imports of goods and services in 2017 amounted to $2,208 billion, third in rank after the US and the EU (intra-EU imports excluded). Since 2007 these imports have grown at an annual rate of 8.8 percent compared to 3.9 percent in the US and 3.2 percent in the EU (intra-EU imports excluded). Over the same period, China’s economy is less reliant on exports as its exports as a percentage of GDP have declined from 35 percent to 20 percent, and its current account surplus in percent of GDP has declined from 9.9 percent to 1.4 percent (World Bank, 2018a). China is no longer perceived as just a source of cheap imports. It is now the largest export market for 20 countries,¹⁰ including large and medium-sized economies such as Brazil, Indonesia, Australia and South Korea, and 48 countries ran a merchandise trade surplus with China in 2016. The Chinese trade balance reflects its role as a manufacturer and assembler in global value chains — China runs a trade deficit on primary products and a trade surplus on manufactured goods. Countries that run a trade surplus with China are those that supply raw materials (especially oil but also agricultural commodities, metals and rubber), those that supply components for electronics, such as integrated circuits or LCDs, especially the Asian newly-industrialized economies, and those that supply high-end machinery and consumer goods, e.g. Switzerland. China holds an especially strong hand in negotiating with these countries. Countries that run the largest trade deficit with China are those that have the largest consumer markets: the United States, the European Union and India. They are among the most openly sceptical of the BRI.

Second, China has become a large foreign investor and finance provider. Since 2007, China’s outward FDI flows increased from $27 billion to $125 billion, ranking fourth in the world, after the US, EU and Japan (UNCTAD, 2018). China has also rapidly become a large foreign creditor, as its external assets have increased from $2,416 billion in 2007 to $6,926 billion in 2017, the 8^th rank in the world (IMF, 2018). Although it is difficult to compile precise data, partial statistical evidence and anecdotal evidence suggests China is now the largest foreign investor in many developing countries across Asia, Africa and Latin America. For example, Sun et al. (2017) estimate that, in addition to being Africa’s largest trading partner by a factor of three, China is now the first provider of infrastructure financing, third provider of aid, and owns the fourth largest stock of FDI in Africa despite being a latecomer.

Third, insofar as the BRI is seen as an infrastructure arrangement, it fills a large unmet need. The Global Infrastructure Outlook (Global Infrastructure Hub, 2017) finds that over half of global infrastructure investment needs in the next decades are going to arise in Asia, where $21 trillion is needed in the period up to 2030.¹¹ Comparing these needs with current investment trends, the Outlook identifies an investment gap in Asia of $3.3 trillion up to 2030, with $1.4 trillion missing for telecommunication projects, $0.9 trillion missing for energy projects and $0.5 trillion missing in each case for transportation and water projects. Taking these numbers at face value, in Asia alone there is an annual infrastructure investment gap of $275 billion. To put this number into perspective, it compares with $18.5 billion in total lending by the World Bank Group (World Bank, 2018b)¹² to South Asia, East Asia and Pacific and Europe and Central Asia, and to $29 billion of combined operations by the Asian Development Bank¹³ in 2017. Infrastructure investment needs on the African continent and in the Americas are smaller but the investment gaps are still significant, amounting to $2 trillion and $3 trillion, respectively (Global Infrastructure Hub, 2017).

The need for infrastructure in developing countries is unmet for many reasons, the most important of which is the high-risk and uncertain return associated with long-term investment in environments with weak governance, volatile macroeconomic and political conditions, and fragile public finances. Compounding these deterrents to infrastructure investment, foreign creditors, beginning with the multilateral development banks, have been led by a combination of unhappy experience and the pressure of civil society to adhere to extensive conditions. These come in four main types: a) safeguards relating to sustainability, impact on the environment and on communities; b) conditions relating to governance and macroeconomic stability; c) conditions relating to the financial sustainability of the project; d) procedures relating to procurement, such as open competitive bidding. A pervasive concern about corrupt decision-making underpins the adoption of several of these safeguards. While many of these precautions are clearly necessary, their cumulative effect can result in extremely long project design, approval and execution times. For example, the average duration of all World Bank projects (not just infrastructure), from board approval to conclusion is 5.6 years.¹⁴ However, this estimate does not include project preparation and, for infrastructure, the complete project cycle might take twice as long. To communities with urgent needs for water, roads or electricity (not to mention to politicians who want to respond to these needs within an election cycle) the attraction of proposals that can cut through many of these impediments, can be approved quickly and that are turn-key, thus avoiding complicated procurement rules and coordination between multiple providers, is obvious.

Fourth, initial participation in the BRI requires only the signing of a brief four or five page confidential memorandum of understanding, which commits the country to very little beyond agreeing to work with China in line with Xi’s framework to identify specific infrastructure projects that might or might not materialize.¹⁵ In short, the BRI appears to bring with it significant opportunity while not asking for much other than for giving consideration to specific projects or deals that improve the “connectivity” to China. The devil is in the details of the projects that follow, which typically require government guarantees and the pledge of collateral.

It is thus not surprising that many countries near and far from China’s neighbourhood have expressed a strong interest in the BRI, and that the Chinese have responded. Since its formulation as a proposal to nations in Central Asia, the BRI offer has been extended to South East and South Asia (The “Maritime Silk Road” sailing south from China along the Indian coast onto the coast of Eastern Africa and onto Europe), and then to eastern and southern Europe, Russia, the Arab countries, East Africa and, most recently, Latin America. In a short time, the BRI has become the touchstone of China’s bilateral economic diplomacy and central to its foreign policy. It is Xi’s signature initiative and China’s Communist Party formally adopted the BRI under its Party Constitution at the National Party Congress in 2017.

Many critics claim that the BRI is not really a trade or development initiative but a drive to extend China’s influence. This charge is partly true but is also disingenuous. From the Marshall Plan to the European Coal and Steel Community and to the (ill-fated) Trans-Pacific Partnership, initiatives such as the BRI have been motivated by geopolitical and security considerations as much as by economics.

Undoubtedly, China’s heft and the rapidity of its rise present a unique challenge to the established powers. It does not help that the BRI is gaining traction at a time when the United States and the European Union are on the defensive. The US Administration has embraced protectionism. The EU is reeling from Brexit and from the advance of national populism across the continent. To assuage worries about its growing weight, China’s leaders never tire of declaring that they have no ambition to dominate or to replace the United States in its global leadership role. But should China be believed?

At the core of the debate over China’s influence are vastly different perceptions about what China is trying to do. For example, Yan Xuetong, a prominent Chinese political scientist wrote that China believes countries should follow their own paths: “[China] views national sovereignty, rather than international responsibilities and norms, as the fundamental principle on which the international order should rest ” (Yan, 2019). In contrast, Jim Mattis, the former United States Secretary of Defence, widely considered a moderate, stated in his letter of resignation to President Donald Trump that it was “clear that China and Russia, for example, want to shape a world consistent with their authoritarian model — gaining veto authority over other nations’ economic, diplomatic, and security decisions — to promote their own interests at the expense of their neighbours, America and our allies.”¹⁶

To these political debates must be added the hand-wringing over China’s “Made in China 2025” plan,¹⁷ which sets leadership in high-tech industries as an objective, in direct competition with Germany, Japan, the United States and the other advanced economies — and with a hefty dose of state support to boot. Although the two dozen or so high-tech firms with the highest stock market capitalization are still predominantly American, Chinese firms in the digital and other sectors are quickly catching up in terms of R&D expenditure and are increasingly replacing European and US incumbent firms in leading R&D positions (Veugelers, 2018).

Valid as these geopolitical and macroeconomic concerns might turn out to be — a matter on which we choose not to deliberate here — it is important to judge the BRI on its merits as a trade and development initiative.

The world is by now familiar with the EU’s and the US’s trade agreements. Stakeholders might accept or object to specific provisions in the US and EU agreements, or they might accept or reject them outright, but they know quite precisely what they are dealing with. Similarly, the World Bank’s approach to lending and the conditions associated with it are clearly spelled out, as, typically, are the Bank’s priorities in engaging with specific countries. In contrast, the BRI’s objectives as stated, for example, in Xi’s Astana speech and as subsequently applied in practice, are extremely broad and its modalities are undefined.

For some observers, this passes as pragmatism (“The Chinese Way”), but in reality, it reflects China’s difficulty in coordinating such a vast overseas enterprise. As a result, many inside and outside China are confused about the scope of the BRI. Thus, international observers such as the World Bank, the Center for Global Development and the Center for Strategic and International Studies, describe the BRI differently as “an ambitious effort to improve regional cooperation and connectivity on a trans-continental scale” or as a “vast investment scheme,” or as “an infrastructure financing initiative for a large part of the global economy.” In the 2015 white paper (National Development and Reform Commission, 2015), the Chinese government described the BRI as aiming to create a single market, i.e. as “promoting orderly and free flow of economic factors, highly efficient allocation of resources and deep integration of markets.”

The lack of clarity has political consequences since those who oppose the BRI can define it pretty much as they wish. It also has economic costs since those tasked with executing the BRI can assume that “everything goes” and pick and choose those projects or activities that suit them best, rather than those that correspond to well-defined development priorities.

If the BRI’s objectives are not clearly communicated and understood, its geographic priorities are even less so. Intended to replicate the “Silk Road” in Xi Jinping’s original formulation, in the 2015 white paper the BRI is described as covering, but not “limited to, the area of the ancient Silk Road. It is open to all countries, and international and regional organisations for engagement, so that the results of the concerted efforts will benefit wider areas” (National Development and Reform Commission, 2015). In one analysis, the BRI is intended to link China with some 65 other countries that account collectively for over 30 percent of global GDP, 62 percent of population, and 75 percent of known energy reserves (World Bank, 2018c). More recent estimates put the number of countries that are part of the BRI in triple digits.

Even the largest development programmes are normally directed at specific regions, or at countries belonging to a well-defined group (e.g. the least-developed countries). These programmes also provide some sense of country priorities within them. Not so the BRI. For example, Hillman (2018) identifies the six main geographic channels most often mentioned as constituting the BRI, and the countries most often mentioned as part of each channel. He finds that except for Pakistan — a BRI poster programme — Chinese projects are just as likely to be found outside this group of countries as within it.

It is difficult to identify a shared agenda among BRI countries, even within the same geographic corridor. Clearly the needs of poor nations such as Pakistan, Myanmar and several in Central Asia and East Africa, are very different than those of EU members such as the Czech Republic, Portugal and Greece, which the BRI supposedly aims to reach. Countries within the same corridor have world-class infrastructure; in others infrastructure is inadequate. In the same corridor there are countries with good and bad logistics, liberal and restrictive trade policies, and strong and weak business climates (Fig. 1). No guide is available from the BRI on how interventions across such a diverse group will be identified and prioritized.

China’s state-owned enterprises play a major role in the BRI. These firms certainly display genuine advantages, such as low costs and well-honed skills in their areas of specialization, but they also often benefit from subsidized financing, soft budget constraints, monopoly or oligopoly positions at home, privileged supplier and customer relationships, an implicit or explicit state guarantee and various forms of other non-transparent subsidies. These SOEs will also tend to favour Chinese suppliers.¹⁸

Here is yet another indication that China’s state capitalism and its one-party political system sit uneasily in a liberal-democratic world order. The US Congress agrees on little nowadays, but there is consensus across the political spectrum that Chinese policies have to change and that if they do not “something has to be done about China.” This view is shared to a greater or lesser degree by the US’s major allies.¹⁹

These criticisms of China are well-grounded as they relate to the internationally most competitive products, such as steel, aluminium, solar panels, semiconductors and the already mentioned high-tech sector. But it is unclear whether this argument also extends to the kind of infrastructure projects being realized under the BRI. If Chinese firms withdrew from the infrastructure sector in developing economies, would others take their place? A dataset²⁰ of World Bank infrastructure projects open to internationally competitive bidding suggests that over the last decade, Chinese firms have superseded western firms and gained a dominant share in construction, provision of capital equipment, and project design and engineering. In 2007, 5.5 percent of funds for World Bank projects outside of China were awarded to Chinese companies; in 2017 this share stood at 36 percent of total procured project costs outside China. Chinese firms now mostly face competition from developing countries such as Turkey. As mentioned previously, few private-sector investors are eager to underwrite the risky long-term infrastructure projects that Chinese SOEs are eagerly taking on. Perhaps this is the reason why, while many policymakers and politicians are vocal about the distortions associated with the BRI, the private sector is quite silent.

The BRI is also often criticized inside China. The main objection is that it is a waste of resources in a country that is still relatively poor and requires more investment in its own backward regions. Estimates by Dreher et al. (2017) suggest that total official finance given by the Chinese government could amount to $350 billion between 2000 and 2014, equal to approximately 0.5 percent of GDP generated in that period in China. This is a significant sum for a developing country and compares favourably with the $360 billion of official development aid (ODA) and official development finance that was spent in the same period by the United States government. However, most of China’s estimated $350 billion outlay consists of export credits and loans extended at market rates. Counting only official finance granted on ODA-like terms, Dreher et al. (2017) estimate Chinese foreign aid between 2000 and 2014 to amount to at least $75 billion, an amount similar to ODA disbursements from the Netherlands in the same period (OECD, 2018). Thus, China’s ODA may amount to only 0.1 percent of GDP between 2000 and 2014.²¹

Lack of transparency is perhaps the defining trait of the BRI and the projects carried out under its umbrella. For example, the BRI is undoubtedly a very large programme, but how large? The amount China has committed under the BRI is unknown and the additional amount envisaged is vague. Numbers mentioned, which may include projects launched before the BRI, range from $1 trillion over an unspecified period to $8 trillion over 20 years (Hurley et al., 2018). But the formal pledges made up to 2014 to the Silk Road Fund, managed by the Central Bank of China, stood at just $40 billion.

The discrepancy in these numbers reflects the fact that China’s finance comes principally on commercial terms from its state-owned infrastructure firms and development banks, the China Development Bank and the Export-Import Bank of China, and that the grant element in most loans is small or non-existent. These banks do not disclose their lending sums and precise terms are difficult to identify.

The situation is especially murky for those projects that are non-debt generating and take the form of BTO (build, transfer and operate) arrangements, where the main obligation is to buy the product (e.g. electricity) at a predetermined price. Other projects are paid off in the form of natural resources according to agreed price formulas, and some are carried out in exchange for a share of ownership in the mine, port or facility in question. How the cost and risks of BRI projects are shared between China and partners and according to which criteria, is not specified.

This lack of transparency in projects financed contrasts with the way in which development finance is normally provided through multilateral channels and most bilateral ones. The provision of aid and the clearance of a World Bank or, say, United Kingdom Department for International Development investment project is subject to a well-defined and transparent review process. In contrast, deals struck under the BRI and involving Chinese commercial banks are not.²² Even the BRI memorandum of understanding between China and its partners is typically not publicly available. The involvement of China-supported multilateral banks could provide a remedy, but their participation remains marginal at this stage.

Another criticism levelled at the BRI is that some projects, such as a $12 billion refinery in Ecuador²³ or a $4 billion railway line between Addis Ababa and Djibouti²⁴ have been discontinued or seen enormous financial losses. To be sure, as the long and difficult experience of the World Bank shows, this is not the first time when infrastructure projects in a difficult developing country context have run into trouble. Most recently, the World Bank had to cancel a $265 million road project in Uganda.²⁵ However, there is a widespread view, which is also often shared by Chinese observers, that not enough due diligence is present in BRI projects. The ability of the client to repay, either because of risks inherent in the project, or because of macroeconomic and fiscal constraints, stands out as an issue to which Chinese operators are not paying enough attention.

The possibility that over-eager lenders can push unwary borrowers into bankruptcy or default is not new and not limited to China — as shown by the collapse of banks and companies during the Asian financial crisis, the sub-prime crisis in the United States, the sovereign debt crisis in the euro area and the large official lending to poor countries that eventually had to be forgiven (with stringent conditions) under the Highly-Indebted Poor Countries Initiative and the Paris Club. Nor is the build-up of unsustainable sovereign debt usually associated with a single project. Still, the fact remains that some BRI projects are very large compared to the size of the economies of the countries where they are implemented, as in the case of Laos and Montenegro, and that, moreover, projects tend to come in bunches (port, airport, road, all to develop in the same region), which can make the overall package too large for the recipient’s GDP.

There are well-known examples of Chinese lending proving unsustainable. An international airport and a deep-sea port near Hambantota in Sri Lanka, financed largely with loans from the Export-Import Bank of China, have been running large losses since completion. To escape mounting debt, the maritime port has since been leased for 99 years to China²⁶ and the airport will be operated by the Indian Airports Authorities.²⁷ Recently, the government of Pakistan ran into a current account crisis on the back of large BRI infrastructure projects that increased public debt and worsened the balance of trade. Now the country is seeking financial assistance from the IMF.²⁸ Related worries arise over the financial sustainability of the China-Laos railway line as the project cost, $6 billion, is equivalent to half of Laos’s yearly GDP.²⁹ Several of the countries interested in the BRI have low credit ratings, high debt and weak governance, and appear set to borrow new large amounts from China. Hurley et al. (2018) identified eight countries where high debt levels, low credit ratings and high likely borrowing under the BRI cause concern: Djibouti, the Maldives, Laos, Montenegro, Mongolia, Tajikistan, Kyrgyzstan and Pakistan. Most of these countries have borrowed from the Export-Import Bank of China for very large infrastructure projects, the costs of which amount to double digit percentages of the countries’ GDPs.