Welcome to BLP’s ‘Belt and Road Insights’ March 2017 issue – a selection of interesting Belt and Road news items, distilled into a monthly ‘speed read’.

Updates from the New Silk Road

The Belt and Road Initiative is a major development strategy launched by the Chinese government in September 2013 to sponsor and promote economic co-operation among countries along the proposed Belt and Road routes. With our focus on built environment and infrastructure development, we aim to keep you updated on the latest developments.

British PM invited to Silk Road summit in Beijing

Theresa May’s decision to visit China in May to attend the ‘One Belt, One Road Summit’ could mark the first signs of a shift in attitude towards Chinese relations.

As Home Secretary she had openly expressed reservations on Chinese investment in nationally sensitive projects, and back in July one of her first moves as Prime Minister was to delay approval for the Chinese funded £18bn Hinkley Point nuclear power station, amid concerns over security. This was a bold move, especially in the wake of a Brexit vote where it was widely thought that the U.K might seek to build a closer relationship with China. This more cautious attitude noticeably contrasts with the approach adopted throughout the Cameron-Osborne years, where Mr Cameron urged and actively sought Chinese investment in U.K infrastructure.

That said, aides of the Prime Minister confirmed she would be visiting China this year to discuss trade ties. The One Belt One Road Summit is potentially China’s most important diplomatic event of the year and to receive the invite demonstrates that China sees the U.K as an important ally in moving their Silk Road initiative forward. Equally for May this is an important trip, there is no doubt that securing friendships with major powers before negotiating the U.K’s divorce with Europe, will be vital.

Fitch Report highlights political risks of Belt and Road projects

A recent report from Fitch (the ratings agency) has sounded a note of caution amidst an otherwise optimistic response to the Belt and Road Initiative. The report raises the risks involved in making loans to countries which have “speculative” or “junk” credit ratings, with some recipient countries having no credit rating at all.

The report specifically points out the lack of commercial logic behind many OBOR projects, which may in turn jeopardise the repayment of the loans used to finance these projects. An example of this is Sri Lanka’s Mattala Rajapaksa Airport, completed in 2013 with a US$ 190m loan from the Export-Import Bank of China. The airport is currently served by just three airlines (SriLankan Airlines, flydubai and Indonesian Sriwijaya Air), and was put up for sale in June 2016.

There is a risk that, in countries along the Belt and Road route, it becomes politically unpopular to use limited public funds to repay loans for projects which are seen as “white elephants”. In such cases, there is clearly a higher risk of default. However, the Belt and Road initiative is an inherently political project; as such, building political influence and exporting excess industrial capacity are equally important objectives as obtaining a financial return on loans. Accordingly, China may be willing to accept a higher level of risk.

Protests delay Chinese investment in Sri Lankan USD1.1 billion port project

Plans for China to invest USD1.1 billion in the Hambantota port project have been delayed in light of violent protests, and political opposition supported by trade unions and former president Mahinda Rajapaksa, with the likelihood of an official challenge to the project to be launched through the courts.

The opposition stems from an agreement signed in December, whereby state run China Merchants Port Holdings was expected to purchase an 80% stake in the port with an original date kick off date set for January 2017. It has been reported Beijing also had in place a separate understanding with the Sri Lankan Government to develop a connected 15,000-acre industrial zone.

Unrest in country stems from eviction concerns of surrounding villages in order to make way for the new industrial zone.

Sri Lanka stands as an important piece in China’s maritime silk road route with its strategic position in the Indian Ocean and access to a major transshipment route to India. However, China has taken a tough stance on negotiations with any break-through in talks to be postponed until Sri Lankan Prime Minister Ranil Wickremesinghe state visit to Beijing.

EU set to investigate Serbian-Hungarian high-speed rail project.

In February, the European Commission announced it is set to investigate whether China’s first European rail project, geared towards expanding the Belt and Road initiative into Central Europe, has violated EU laws in respect of public procurement and overall concerns over the financial viability of the project.

The project under scrutiny is a new 350km long high-speed railway route valued at approximately USD2.98 billion which will reduce traveling times between Belgrade and Budapest from nine hours to three hours. Viewed as core example of how China can develop infrastructure according to EU standards, the Commission in particular is set to probe as to whether Hungary as an EU member state, had breached EU competition laws by awarding the works contract to China Railway International Corporation without holding a public tender.

The Serbian-Hungarian rail link holds immediate importance to China’s Belt and Road initiative as it plays a core component in its planned “Land Sea Express Route” which would connect Central Europe to the Chinese owned port of Piraeus located southwest of Athens.