External publications

China's new silk road: financing opportunities and risks

Berensmann, Kathrin
External Publications (2019)

in: Diplomatisches Magazin 2/2019, 32-35

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In 2013, the Chinese government launched the Belt and Road Initiative, also referred to as the ‘New Silk Road’, the largest and most extensive economic and commercial project in history. The geopolitical aim of the New Silk Road for China is to strengthen the economic ties between the participating countries and China.
One of the main goals of the New Silk Road is to develop infrastructure in order to close a global investment gap. On the one hand, the initiative around these huge infrastructure investments offers tremendous growth potential in a multipolar world for all participating countries. On the other hand, it is as yet unclear how such a huge project can be financed. What are the opportunities and risks in financing the New Silk Road, and in particular the financing of infrastructure projects? For one thing, the Chinese government has provided substantial funds via various national and multilateral institutions. For another, there are substantial risks inherent in this financing. The immense financing needs pose an enormous challenge for many countries that are already heavily in debt, such as Tajikistan, Kirgizstan, Mongolia and Pakistan.
Furthermore, the financing of infrastructure projects already involves significant risks. Infrastructure projects are often very complex and include a large number of stakeholders. In addition, they can take several years to generate profits. The initial phase is extremely risky since investment costs as well as failure rates are so high. This is the case for investments in road networks, water supply and wastewater disposal infrastructure, for example. As a result, financing projects in this sector are only amortised over long periods of time. 
Multilateral Development Banks (MDB) play a unique and essential role in the financing of infrastructure projects because they can provide certain advantages for the special financing needs of infrastructure investments. MDBs bring financial resources together with specialised knowledge and regional expertise in the implementation of infrastructure projects. MDBs are also able to offer long-term financial resources under affordable conditions. 
Like the ADB, the two new multilateral development banks, the AIIB and the NDB, are directing their focus on infrastructure financing. As such they will also help close the financing gap for infrastructure projects in developing and emerging countries. But the financing of infrastructure projects in the countries participating in the New Silk Road through the new multilateral development banks also poses certain risks. For example, it is unknown whether the new MDBs, of which China is a major stakeholder, do in fact comply with adequate environmental and social standards. Overall, the provision of enormous Chinese financing resources for infrastructure projects will help close the infrastructure gaps in the participating countries. However, the foreign financing of infrastructure projects by other countries should be approached with caution.
If other countries acquire property rights through investments in infrastructure projects, they will be able to exert a significant economic influence. It remains to be seen whether all the countries involved will benefit equally from the New Silk Road.