The Belt and Road Initiative (BRI), launched by Xi Jinping, completed its tenth anniversary this year. It has entered a third phase.

The initiative brought a seal to China’s financing and construction of infrastructure abroad that had already totaled more than US$400 billion in the previous 10 years. In addition to the use of investment projects as part of Chinese “soft power”, the BRI served to increase levels of usage of the country’s excess installed capacity.

China’s economic rebalancing beyond its overinvestment-based growth model of the decades before the global financial crisis was implemented gradually, with real estate and infrastructure construction bubbles allowing it to undergo a very gradual slide of growth rates, from double-digit GDP growth rates up to 6% in 2019, the last year before the pandemic. BRI fit like a glove.

In addition to offering a source of investment for developing countries in dire need of infrastructure, the BRI proposed itself to be a platform with rapid implementation and without much due diligence regarding environmental, social and governance standards. Furthermore, the BRI would reinforce what we called at the time an “overlapping” or “parallel” globalization to the existing one, based on Chinese industry in this case.

Indeed, China has become the largest bilateral source of international development financing. By 2018, mainly directed towards infrastructure and the energy sector, China’s development loans to Latin America and the Caribbean reached levels greater than the sum of loans from the World Bank, the Inter-American Development Bank (IDB) and the Bank of Development of Latin America (CAF). The presence of such operations in the region came to be seen as a “competition for influence”. Something similar happened in Africa.

​According to data collected by Boston University’s Global Development Policy Center, the volume of loans from Chinese public development banks – Exim and China Development Bank – surpassed those from the World Bank, in the period from 2008 to 2021, in areas such as oil extraction and pipelines, transport, energy, telecommunications and others. The World Bank maintained its lead only in health, education, governance, and agriculture, in addition to direct budgetary support. In total for the period, loan commitments by the two Chinese public development banks reached US$498 billion, that is, 83% of the World Bank’s total (US$601 billion).

A change occurred, however, from 2018 onwards. Volumes fell and the BRI entered a phase that can be called a “correction” (Parks et al, 2023) (Miller, 2023). A brake was applied by imposing more demanding approval standards and shifting financing from Chinese official development banks to state-owned commercial banks. The downside of the laxity of standards with respect to environmental, social, and governance risks became increasingly clear and the number of canceled or suspended infrastructure projects rose significantly.

With many borrowing countries entering “debt distress” situations, the country’s central bank also opened emergency lines of credit. Strictly speaking, most of the resources since 2020 went to emergency loans to prevent several low- and middle-income countries from having to default on the service debt of previous projects and not to finance new ones, left side).

Total debt owed to China by low- and middle-income countries is between US$1.1 and US$1.5 trillion, right side). About 80% of China’s loan portfolio is in countries currently experiencing financial difficulties.

In 2021, 58% of Chinese loans were bailouts, with less than a third for new infrastructure projects. More than half of the loans to low- and middle-income countries came in the form of currency swap lines with China’s central bank or from the external reserve manager: the State Administration of Foreign Exchange Reserves. This year Argentina avoided defaulting on the IMF thanks to the credit line between its central bank and the Chinese one.

More than half of China’s official BRI loans have already entered their principal repayment periods, with the number expected to reach 75% by 2030. This means that China’s debtors are beginning large repayments at a time when interest rates have risen, the US dollar has appreciated, and global economic growth is slowing down. As Parks et al (2023) puts it, China is now transitioning from being the world’s largest bilateral development creditor to “the world’s largest official debt collector”.

China’s emergence as the world’s largest bilateral creditor and its insistence on bilateral debt restructuring processes on its own terms (which rarely include repayment of principal), without fully participating in multilateral processes, means that the resolution of the debt distress that developing countries are grappling with is expected to drag on for several years.

But after the “peak” (2014-17) and “correction” (from 2018 onward) phases, the BRI seems to have entered a third phase, judging by the statements made by Chinese authorities during the Third BRI Forum in Beijing in October. The focus will now be on “smaller, smarter” projects, in coordination with the country’s clean energy industrial policies.

The BRI will now want to expand markets for Chinese solar and wind energy manufacturers, in addition to ensuring access to critical minerals for its battery production value chain. Given the context of technological rivalry – including in clean energy – between China and the United States and its allies, a comparable reaction to the BRI in its third phase, if any, has yet to be seen.

Otaviano Canuto, based in Washington, D.C, is a former vice president and a former executive director at the World Bank, a former executive director at the International Monetary Fund, and a former vice president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at the University of São Paulo and the University of Campinas, Brazil. Currently, he is a senior fellow at the Policy Center for the New South, a professorial lecturer of international affairs at the Elliott School of International Affairs – George Washington University, a nonresident senior fellow at Brookings Institution, a professor affiliate at UM6P, and principal at Center for Macroeconomics and Development.