(Bloomberg) –Terms of Trade is a daily newsletter that untangles a world threatened by trade wars.
Xi Jinping’s Belt and Road Initiative has long been seen as a way to project China’s influence around the world. Now, the coronavirus is showing how the trade and infrastructure program can help export the country’s troubles.
The deadly outbreak is prompting delays and disruptions to China’s construction and investment plans overseas, risking years of planning and hundreds of billions of dollars in economic diplomacy. Quarantine measures are preventing Chinese workers from making it to foreign building sites, domestic firms supplying overseas projects face acute labor shortages and fears are mounting that workers will inadvertently spread the virus to new locales.
Projects that have been affected since the virus emerged in December include a $5.5 billion high-speed rail line in Indonesia. There’s also a separate railway initiative in neighboring Malaysia, construction projects in Sri Lanka and corporate expansion plans in Pakistan.
The disruption has exposed another pitfall of the region’s growing dependence on China’s backing for major infrastructure projects. Even as the pace of new coronavirus cases slows in China, host countries remain wary of avoiding future outbreaks, with deadly infection surges in places like Iran, Italy and South Korea serving as a warning about how quickly a small cluster can spin out of control.
“While there are risks of delays and cancellation of projects, there are also risks in early resumption,” said Bonnie Glaser, who has advised the U.S. government and directs the China Power Project at the Center for Strategic and International Studies in Washington.
Xi “seems determined to demonstrate that life is returning to normal and he wants to get the economy churning again,” Glaser said. “Resuming BRI projects is probably among his goals, not only for economic reasons, but also because BRI activities are a lever to enhance Chinese political influence.”
Even before the outbreak, Xi had been seeking to rebrand and scale back his Belt and Road ambitions amid an economic slowdown at home and backlash from some partner nations concerned about the costs. The U.S. has led a global campaign against the program, arguing that China’s reliance on loans locked poorer countries in “debt traps” while advancing its own strategic aims.
The virus has thrown up another hurdle, as countries bar or quarantine Chinese visitors. One official involved in BRI planning in Beijing said last week that a failure to stop the virus spreading outside of China would inevitably take a toll on projects.
Still, another Chinese official in Beijing said that the impact to key projects remained limited and that significant disruptions were likely to remain an issue only in the short term. That optimistic assessment was echoed Thursday by Vice Chinese Foreign Minister Ma Zhaoxu at a briefing on international support for coronavirus actions.
“The impact of the outbreak on the construction of BRI is only temporary,” Ma told reporters in Beijing. “We are willing to work with all parties to continue to promote the high-quality construction of BRI. We have full confidence in this.”
The same day, however, Indonesian Coordinating Minister for Maritime Affairs and Investment Luhut Pandjaitan acknowledged that the multibillion dollar Jakarta-Bandung high-speed railway — a flagship BRI project — was likely to face delays. More than 300 workers remain stuck in China.
In neighboring Malaysia, a dozen of the roughly 200 Chinese workers building the $10.4 billion East Coast Rail Link hail from Wuhan, the city at the center of the outbreak. They’re not allowed back to the Southeast Asian nation, while other workers can return after a 14-day quarantine process.
In Pakistan, which hosts numerous BRI projects spanning power and construction, two companies — Engro Polymer & Chemicals Ltd. and Pakistan Oxygen Ltd. — have said their projects face slowdowns because their Chinese contractors alerted them to delays stemming from hampered mainland facilities.
There has been widespread disruption to efforts in Sri Lanka, where Chinese investment is building the massive Port City Colombo, an expansion of the capital city via land reclamation.
The Ceylon Chamber of Commerce recently reported that about half of 100 firms surveyed said that business was affected by the coronavirus outbreak. Government road and apartment construction projects involving Chinese contractors have slowed down, said Nissanka Wijeratne, secretary general of the Chamber of Construction Industry of Sri Lanka.
Chinese workers returning to Port City Colombo have self-quarantined and there have so far been no major delays at the country’s biggest construction site, said Thulci Aluvihare, head of strategy and business development for the project, which is being built by state-owned China Communications Construction Co.
The virus may prompt a shift in focus by Chinese firms in the future, according to Arv Sreedhar, Singapore-based executive director at investment firm Atlantic Partners Asia. “China is under incredible stress from the current situation and has other priorities for its money, such as coming to an acceptable agreement with the U.S. on the trade war, and fighting both the health and financial aspects of the coronavirus,” he said.
That puts political pressures on BRI partners, as well. Developing nations such as Cambodia, Laos, Myanmar and Pakistan might be afraid to aggressively tackle the virus for fear of alienating China, research firm Fitch Solutions said in a note on Thursday.
“That these countries, which are heavily dependent on China’s patronage, have so far reported zero or just a few confirmed cases, and we believe that this could be attributed to both low access to health care, which is likely to inhibit infection detection, and a desire to avoid antagonizing China by ‘overreacting’ to the outbreak,” Fitch Solutions said.
China’s overseas investments were already beginning to tail off and consolidate before the virus brought the country’s industry to a standstill.
The American Enterprise Institute and the Heritage Foundation, which have tracked 3,600 major Chinese overseas transactions since 2005, found that outbound investment last year totaled just $68.4 billion. That’s a 41% plunge from 2018 and the lowest in a decade. The figure is far less than the Chinese Ministry of Commerce’s official tally of $124.3 billion in total overseas investment last year.
Going forward, China could concentrate its BRI programs in fewer countries, working to avoid criticism by making its outbound investment less aggressive and one-sided, said Derek Scissors, a resident scholar at the American Enterprise Institute.
Xi could “retrench and advertise more loudly that the BRI is a group effort,” he added. “It’s going to be harder for host governments over the next year to tout their supposedly close relationship with China as contributing to development.”