1. China's "Belt and Road" investment in global comparison
After foreign direct investment (FDI) reached pre-pandemic levels in 2021** and grew further in the first quarter of 2022, a number of crises on the global stage (e.g. debt stress, invasion of Ukraine) led to a slowdown in FDI growth in the following quarters, resulting in a 12% decline in global FDI in 2020. According to UNCTAD, project finance and M&A "are most affected by deteriorating financing conditions, rising interest rates and increased uncertainty in financial markets". In 2022, the value of international project finance increased by 30%. However, the impact of the decline in FDI was most pronounced in developed countries, while greenfield project announcements increased by 21% in ASEAN economies. Similarly, Brazil saw a 30% increase in greenfield announcements. The other winner was India, which attracted just as many people with R&D projects from the United States, the United Kingdom, and China combined. In 2022, it also surpassed China to become the largest greenfield FDI destination and destination in the Asia-Pacific region. India received $60 billion in foreign direct investment and $35 billion in other countries.
With regard to the number of greenfield projects, developing countries increased by 26 per cent, particularly in Africa, while international project finance transactions fell by 6 per cent. Similarly, cross-border M&A sales fell by 6% in developed countries, particularly in Central, Southeast and South Asia. A particular focus of global FDI in 2022 was in semiconductors (e.g., a $28 billion investment by Taiwan semiconductor manufacturing companies in the U.S.) and renewable energy (e.g., a $13 billion investment by India's ACME Group in Egypt). Europe is the main ** and destination for FDI for wind energy projects, with Western European wind energy developers committing $55 billion, of which $23 billion is for North America, Latin America, Africa and Asia-Pacific. However, another focus of FDI is oil and gas extraction, which reached 421 as of August 2022US$500 million, the same as cumulative FDI from 2018 to 2021.
Figure 13: FDI in oil and gas extraction from 2008 to 2022 (top) and R&D projects from 2014 to 2022 (bottom).
FDI outlook
According to the OECD, cross-border M&A and foreign direct investment (FDI) in 2023 face a "bleak outlook", as do emerging market and developing economies. Reasons for the challenges include high inflation and interest rates, which dampen financing opportunities for projects and M&A, as well as soaring geopolitical tensions and protectionism. However, some optimism has returned as inflation levels have fallen and excessively irrational economic activity has shown a greater margin of error than expected. Countries that are expected to perform well and attract FDI include those with relevant natural resources to finance the green transition (e.g., lithium), and those with relevant markets or technologies that have the ability to ensure the localization of the ** chain (e.g., semiconductor manufacturing). The performance of African countries will vary greatly depending on their governance, debt levels and opportunities (e.g., as markets or commodities**).
Developing Asia is expected to grow by 49%, which may also be due to the shift of investment in China to neighbouring countries with a much-needed green energy transition and some willingness, in addition, foreign direct investment in the renewable energy sector should be further accelerated.
3. Financing and investment prospects of the Belt and Road Initiative
In the first half of 2023, China's financing and investment in Belt and Road Initiative countries remained stable and partially increased. For the remainder of 2023, with the full lifting of COVID-related ties in China, broad coverage of BRI investment and construction contracts seems likely. On the one hand, there is a clear need to invest with the support of global financial institutions to promote growth in the post-COVID world, including development financial institutions (e.g. the World Bank, the Asian Development Bank, the AIIB), from which Chinese contractors can benefit. On the other hand, with the lifting of travel restrictions, Chinese developers are free to travel to negotiate, plan, and implement new projects. China's Belt and Road Initiative is not expected to reach the levels of 2018-2019. It is also a recognition of China's Ministry of Commerce, which paused rapid overseas expansion in its 14th Five-Year Plan from 2021 to 2025: a planned Chinese investment of $550 billion (including non-BRI countries), a 25% decline
$740 billion for the period 2016-2020. In addition, China's contract value is planned to be reduced from $800 billion in the previous fiscal year to $700 billion in the current fiscal year. However, due to the relatively low level of participation in the Belt and Road Initiative in 2021 and 2022, it should be possible to pick up the pace. In line with our previous **, this should mean that the number of transactions is increasing. As we saw in 2021 and early 2022, many small projects have been financed even in a more difficult economic environment, providing the means to promote sustainable economic development, provide jobs, and better protect the environment. At the same time, we see two types of large-scale projects continuing to take place: strategic engagements (e.g., strategic transport infrastructure in the region) and resource-backed deals (e.g., mining, oil, gas). In order to advance investment along the Belt and Road, we have expanded our recommended investment outlook, and we have expanded on the recommendations in our previous report:
Figure 14: A five-step framework for accelerating green BRI investment in the wake of the pandemic19
1.Focusing on financially sustainable projects and reducing losses on non-profit projects, investors in Belt and Road Initiative projects in China and abroad should focus on smaller projects that are easier to finance and faster to implement. Especially in terms of infrastructure and energy investment, scalable solar and wind investments appear feasible as long as local conditions allow the relevant grid to handle renewables**. As the cost of renewable energy decreases, we also see an opportunity to invest in an early phase-out of existing old coal projects, which will be good for both the economy and the environment.
2.Support partner countries and partner enterprises in addressing the (sovereign) debt repayment of BRI projects in which they have already invested, for example through natural debt guarantees and natural performance bonds. Debt is a major issue for future growth in many BRI countries. As we have analyzed the debt problems of BRI countries in depth, China has a unique opportunity to support BRI countries in dealing with their debt bilaterally and multilaterally. Addressing the debt problem is critical to providing BRI countries with the fiscal space they need for future investments. While debt-for-resource or debt-for-equity swaps appear to help China reduce the debt burden of BRI countries in the short term, these swaps tend to undermine future domestic growth opportunities for BRI countries. Instead, relevant Chinese stakeholders, working together with international partners through multilateral frameworks, should support the green recovery by swapping some of their debt for nature, and provide the necessary framework to improve transparency and accountability in the use of funds.
In addition, sustainable debt instruments can be used to provide additional funding, for example through nature-bound bonds. Strengthen international cooperation on Belt and Road Initiative projects so that existing and useful projects can continue even in difficult times. Tripartite cooperation with international financial and implementing partners can support Belt and Road Initiative projects through better access to financial resources, risk sharing, and knowledge sharing. In particular, non-state-owned enterprises (SOEs) that deal with the heavier investment burden of China's large financial institutions can benefit from a wider range of financing channels. For example, the Zanatas wind farm in Kazakhstan, which is jointly funded by the European Bank for Reconstruction and Development, the AIIB, GCF and the Industrial and Commercial Bank of China, is built by China International Power Holding Company and. In addition, Chinese financial institutions can benefit from de-risking project financing by expanding their international cooperation. The "China Third Party" report, "Market Cooperation Manual on Infrastructure Financing Mechanisms", was released in September 2021 to accelerate tripartite project financing. In addition, the Belt and Road Initiative is becoming increasingly competitive with the launch of the European Union's Global Gateway and the United States' push to build back a better world.
However, if project financing and the development of cooperative economies are carried out in the merger market, especially if they are able to share standards. Increase the use of common environmental and social criteria in project assessments (e.g., Environmental Impact Assessment, EIA) and Environmental and Social Risk Management (ESMS). In July 2021, the Ministry of Commerce, together with the Ministry of Ecology and Environment, issued the Guidelines for the Greening of Overseas Investment and Cooperation, and in January 2022, the Guidelines for Ecological and Environmental Protection of Foreign-invested Cooperative Construction Projects were issued. This is a formalization of a series of previous guidelines, including the "Guidelines for Baseline Research on Green Development Projects" and "Guidelines for Enterprises and Financial Institutions to Apply" supported by relevant Chinese ministries and issued by the Belt and Road Green Development Alliance in December 2020 and October 2021, respectively. These guidelines call for the China Overseas Investor Management System (ESMS) to ensure that projects and investments are environmentally friendly with minimal harm and maximum environmental benefits.
In addition, the Green Investment Principles (GIP) integrate sustainability into corporate governance, requiring boards of directors to understand environmental, social and governance risks and disclose environmental information. By applying international standards, Chinese financial institutions can more easily raise capital in global capital markets, accelerate co-financing with international partners, and take responsibility for achieving the goal of building a Green Belt and Road. Developing a socially and environmentally conscious phase-out strategy for distressed investmentsSeveral BRI investments have been mothballed or cancelled for financial reasons (e.g. financing or debt servicing difficulties) and operational reasons (e.g. travel restrictions or **chain issues). According to our research, more than 50% of coal-fired power plants have been mothballed. In order to avoid reputational, social and environmental risks, projects that have been shelved or cancelled should have a plan developed and implemented by financial institutions, including insurance companies, developers, local and Chinese authorities, to compensate workers and companies for any losses to some extent, and to ensure that the nature of the projects that have been shelved and, in particular, suspended can be repaired.
To be continued
Stay tuned for the next installment