The coronavirus pandemic, which began in China and has sickened over 2 million people globally, is threatening to derail one of the country's most ambitious projects yet — the Belt and Road Initiative (BRI) — dealing a major blow to Beijing's aspirations to become a great power.
The outbreak that has claimed more than 140,000 lives worldwide is prompting delays and disruptions at BRI projects which rely heavily on Chinese labor and supplies, as lockdowns and other sweeping measures to contain the virus prevent workers and supplies from reaching building sites.
Projects worth billions have been hit in Indonesia, Cambodia, Malaysia, Sri Lanka and Pakistan.
Beijing's global ambitions could be further hurt by domestic economic troubles being stirred by the pandemic, which are likely to limit the ability of Chinese financial institutions to splurge on overseas projects as they weigh between spending on domestic health and economic recovery and making loans abroad, said a report by New York-based consultancy Rhodium Group.
Chinese lenders' appetite for outbound lending could also be limited by an "avalanche of [debt] renegotiation" that appears imminent amid the COVID-19 economic shock, it added.
The coronavirus is the latest setback to China's colossal Belt and Road Initiative — often described as a 21st century Silk Road — a gargantuan global infrastructure development project mostly backed by Beijing. Even before the outbreak, the ambitious project was reeling from slowing economic growth in China, criticism from some recipient countries who flagged high project costs, and accusations of predatory loan practices.
"China will not be making the enormous loans that we have seen it make in the past for example in a big rail project, a big port project, or a huge dam project," Agatha Kratz, the lead author of the report, told DW.
"The Chinese banks facing turmoil at home might not have as much liquidity to make huge new loans to developing countries. Besides, they might be criticized in Chinese public opinion for diverting very important resources from the domestic market to foreign markets."
To be clear, Chinese banks had begun slowing lending to BRI projects well before the current crisis as Beijing sought to improve its lending practices amid global criticism. The outbreak is only expected to accelerate the trend.
"One out of five dollars that China has lent were already potentially in trouble. But if you add to that COVID, there's going to be a huge realization that lending patterns and lending quality must improve," Kratz said.
Chinese Marshall Plan
According to one early estimate from mining company BHP, total spending on BRI-related projects could touch nearly $1.3 trillion (€1.16 trillion) in the decade to 2023 — more than seven times the investment made under the US Marshall Plan to rebuild European economies after World War II.
Some extol the Chinese project as a new Marshall Plan that could substantially reduce trade costs, improve connectivity and eventually help pull several countries out of poverty. Others accuse China of bankrolling poor countries to boost its influence, even if it means extending loans for economically unviable projects.
They cite Sri Lanka's Hambantota Port as a cautionary tale of the pitfalls of reliance on Chinese financing. China took control of the strategically important port in 2017 after Sri Lanka struggled to repay the Chinese loan.
However, a 2019 analysis by Rhodium, which analyzed 40 cases of Chinese debt renegotiations with 24 countries, showed the claims surrounding China's "debt-trap diplomacy" might be overblown, with the Sri Lankan case being the only confirmed instance of Beijing seizing control of an asset in a recipient country.
Kratz does not see Sri Lanka-like asset seizures even during these desperate times when many of the BRI host countries would find it difficult to repay their debts.
"The Sri Lankan case was actually a big wake-up call for Beijing," she said. "The criticism was so high and the impact and implication in terms of narrative and in terms of public diplomacy was so bad that I would really not expect any kind of similar moves in the future."
'Playing savior is cheap'
China, however, will not shy away from opportunities to score diplomatic gains and project itself as a dependable development partner, especially at a time when the US seems to be ceding that role on President Donald Trump's watch.
As the pandemic takes a toll on global economies and desperation sets in, Beijing could achieve the same or greater political goodwill even by spending less than in the past, the Rhodium report said.
"Given COVID stress, any support from China will be welcome," Kratz said. "It would be enough to make donations, enough to make equipment available to countries in need, enough to be making small low-interest loans to build field hospitals."
China has already begun dispatching medical equipment and personnel to the coronavirus-stricken BRI countries, including Italy. Beijing has reacted angrily to Western assertions that its aid efforts were driven by a desire to gain influence.
China could also use debt renegotiations as a tool to curry political favors with deferral or grace period extensions expected to be the most common outcome. Many of sub-Saharan and Latin American countries owe some 30-40% of their total external debt to the Asian economic superpower. The poorest of these countries are likely to struggle to repay their loans as the pandemic takes a toll on their economies.
Beijing is well-placed to finance its "altruistic" gestures despite financial difficulties afflicting its lenders. Most of the external loans that China has made over the past 15 years have been through its policy banks such as China Development Bank (CDB) and China Export-Import Bank (EXIM), which are closely linked to the Chinese government and have huge balance sheets.
"A lot of those banks enjoy government backing and support. And so, if the Chinese government thinks that politically, because of the image that it projects to the world, it is a good idea to make new loans or defer repayment, or even maybe forgive some of the debt, which is highly unlikely, then those banks will do it," Kratz said.