The news for China's ambitious Belt and Road Initiative (BRI) has been unrelentingly bad.
Prime Minister Mahathir Mohamad of Malaysia has canceled two mega BRI projects, including a $20 billion railway, citing high costs. Pakistan's new government has called for a review of the crown jewel of BRI -- China-Pakistan Economic Corridor (CPEC), to which China has committed more than $60 billion in funding. Myanmar's government has just told Beijing that construction of a suspended China-funded hydropower dam would not be allowed to resume. The Maldives, the tiny island nation in the Indian Ocean, is trying to renegotiate down the $3 billion debt -- equal to two thirds of its gross domestic product -- it has borrowed from China to fund BRI projects.
But, inside China, it is hard to detect overt signs of any wavering in support for BRI the pronouncements from top Chinese leaders, especially President Xi Jinping. For Xi, BRI's architect, this vast project spanning half the globe with infrastructure links connected to Beijing represents his vision to project Chinese power and influence.
But beneath the surface there is growing unease in China about BRI. And rightly so. With the country feeling an economic squeeze, fighting a trade war with the U.S. and facing criticism from nations receiving BRI funds, Chinese skeptics, including academics, economists and business people, of BRI are quietly asking if their government is putting its scarce resources to the right use. To be sure, there are no official announcements that Beijing is about to pare back Xi's BRI dreams. Tight censorship has removed any direct criticisms of BRI from the media.
Yet, one can detect tantalizing signs that Beijing is already curtailing BRI, at least rhetorically. The official propaganda machine, cranked to full steam to tout BRI's achievements not too long ago, has turned down the volume these days. In January 2018, the People's Daily, the Communist Party's mouthpiece, carried 20 stories on BRI. In January this year, there were only seven. If we keep track of BRI stories in the official Chinese media in 2019 and compare the coverage with previous years, we should have a clearer picture about where BRI is headed.
In all likelihood, we will see a significant decline in the hype Chinese official media outlets devote to BRI. It is also a safe bet that Beijing's funding for BRI will decline measurably this year -- and in the coming years.
The economic headwinds against BRI are obvious.
For starters, China's external environment has changed almost beyond recognition since Xi rolled out BRI in 2013. At that time, China foreign exchange reserves were approaching $4 trillion. It seemed a brilliant idea to use some of the foreign exchanges to invest in infrastructure. Coupled with the use of Chinese contractors and materials, BRI could also help solve China's problem of excess capacity in its steel, cement, and construction industries.
But the world has changed in the last five years. China's economic slowdown has triggered a capital flight, draining more than $1 trillion from its foreign exchange reserves. If we factor in the trade war's impact on Chinese balance of payments in the future, China will unlikely generate sufficient foreign exchange surpluses to finance BRI on the same scale. The tariffs imposed by the U.S. and the uncertainty about U.S.-China commercial relations will significantly reduce Chinese exports to the U.S. and, to a lesser extent, other developed markets.
Since China's trade surplus with the U.S. accounts for nearly all its overall current account surplus, a substantial fall in Chinese exports to the U.S. will result in a current-account deficit for China if it cannot offset the shortfall with increased exports to other markets (an impossible feat). China's deteriorating balance of payments will force Beijing to use it foreign exchange reserves mainly to defend its currency, the yuan, and maintain investors' confidence in China's macroeconomic stability.
As a result, Beijing will have to review its external commitments carefully. Grandiose projects conceived and launched when it was flush with foreign exchange will be reassessed. Some will have to be curtailed or even abandoned altogether.
But the trouble for BRI does not just stem from the near-certainty of China's declining foreign exchange earnings in coming years. On the domestic front, Beijing faces a perfect storm of rising pension costs, slowing economic growth and dwindling tax revenues.
The grim fiscal outlook was conveyed with unusual bluntness by the Chinese Minister of Finance at the annual finance conference at the end of December last year. Minister Liu Kun warned, "All levels of the government must lead by tightening their belts and do their utmost to reduce administrative expenses." Shortly after the meeting, Shanghai, the richest city in China, ordered a 5% cut for most departments in 2019.
This bout of austerity fever was precipitated by declining fiscal revenue growth and Beijing's decision to cut taxes to stimulate faltering growth. In 2018, the growth of fiscal revenues fell 1.2 percentage points compared with 2017. The fiscal outlook is expected to worsen this year due to tax cuts and slower growth.
The biggest hole in Beijing's budget is spending on pensions for a rapidly aging population. The province of Heilongjiang had a net deficit of 23 billion yuan in its pension account as of 2016, and six other provinces, with a combined population of 236 million, were taking in less pension contributions than outlays in 2016. The pension picture for the entire country looks equally grim. According to the Ministry of Finance, the government had to contribute 1.2 trillion yuan in 2017 to fund the shortfalls in pension spending.
Some may argue that BRI would be safe from Beijing's budget cutters because it is Xi's top foreign policy priority. But harsh economic reality will present Chinese leaders increasingly unpalatable choices as various demands compete for limited resources. President Xi and his supporters may continue to back BRI. But they must also know that BRI has few domestic supporters and taking money away from Chinese pensioners to build a road to nowhere in a distant land will be a tough sell politically.
In what might be an early sign of newfound Chinese parsimony abroad, Beijing has granted cash-strapped Pakistan just $2.5 billion in new loans -- compared to the $6 billion Islamabad reportedly sought.
What appears to be happening in Beijing is that while its leaders continue to stand by BRI, Xi's original ambitions are being rolled back out of public view. We should not be surprised if Beijing eventually lets BRI, at least BRI 1.0, die quietly.
Minxin Pei is a professor of government at Claremont McKenna College and currently holds the Chair in U.S.-China Relations at the Kluge Center of the Library of Congress