Financial Consequences of the Belt and Road Initiative

Abstract

China's Belt and Road Initiative (BRI) aims to reshape the global economy by creating economic corridors that encompass two-thirds of the world's population and 40% of the global GDP. This paper uses the inauguration of a railway tunnel between Europe and Asia as a quasi-natural experiment to investigate the financial implications of the BRI for countries along its economic corridors. It demonstrates that countries gaining access to the BRI's main freight corridor along the Ancient Silk Road issue significant amounts of high-yield debt instead of utilizing Chinese loans, which are known to result in asset seizures if not repaid. Surprisingly, the borrowed funds are used for collective consumption instead of investments needed to address freight infrastructure deficits and achieve the BRI's promised efficiency gains. Furthermore, the supply of BRI-induced public debt is primarily absorbed within domestic markets, diverting capital away from local businesses. The paper provides evidence on economic mechanisms based on political alliances with China, exposure to China's trade policy uncertainty, and topographic fit for freight infrastructure based on Orient Express routes from the early 1900s.

Keywords: Belt and Road Initiative, Sovereign Debt, Leverage

JEL Classification: F30, F40, H63, G15, G32