Financial Consequences of the Belt and Road Initiative

Abstract

As the largest-ever infrastructure project, China’s Belt and Road Initiative (BRI) is expected to reshape the global economy for the coming decades. This paper provides the first analysis of BRI's effects on financial markets and real economic activity in Europe. It exploits the opening of a subway tunnel under Istanbul's Bosporus Strait that geographically positions nearby countries on BRI's railway corridor. Governments of countries that gain access to BRI respond by sharply increasing sovereign debt issuance and devoting resources to collective consumption spending rather than much-needed infrastructure investments. In these countries, outlooks for inflation, financial stability, and economic uncertainty worsen, and sovereign yields surge. Businesses issue less debt, lower capital investments, and observe reductions in their valuations. Additional findings on foreign aid, international trade, and BRI program membership highlight China's growing footprint in corridor economies.

Keywords: Belt and Road Initiative, Sovereign Debt, Sovereign Risk, Investment

JEL Classification: E22, F40, H63, H74, O16, G15, G21