Beijing’s global ambitions have hit a wall of sorts. The problem is money or rather the lack thereof. Apart from annoying and dangerous military demonstrations, Beijing’s quest for influence has always rested on money — how much China has at its disposal to invest abroad and how much China buys from others. For a while it seemed China possessed limitless amounts. But that is no longer the case. The global drive of China’s leadership has begun to face severe constraints, which seem likely to become more severe.
The Middle East is the epicenter of the problem. There Beijing has met is biggest diplomatic success so far, when it orchestrated the resumption of diplomatic relations between Saudi Arabia and Iran, a feat that reverberated around to world’s capitals and to China’s great benefit. To do this, China drew on its status as an enemy of neither of these two oil-exporting nations — something that few western capitals could claim – but mostly its advantage lay in its status as a premier buyer of the oil in both Saudi Arabia and Iran.
China no longer has the buying power that made the diplomatic triumph possible. Beijing’s open support of Russia has forced China to take energy that Russia can no longer sell the west. Chinese purchases of Russian crude oil through the third quarter of this year rose 42 percent from year-ago levels. But China can only use so much imported oil, especially since its economy is slowing. To buy the Russian supplies, it has cut back on imports from the Middle East. According to the U.S. Energy Information Administration, China’s combined purchases from Saudi Arabia and Kuwait grew barely at all. A Wall Street Journal source suggests a bigger 11 percent cut in Saudi oil imports. China seems to have maintained high imports from Iran, no doubt to retain influence but also because U.S sanctions have forced Iran to offer discounts.
Pressure to take Russian crude will only likely intensify. Presently, a lack of available pipelines limits how much Russian crude can get to China, but both countries are working on pipeline infrastructure. Unless geopolitics changes radically, Russia, when these facilities become available, will surely want to sell still more in China, and Beijing’s diplomatic commitments will compel it to comply. China will probably prefer the Russian sources anyway, because in these uncertain geopolitical times, the overland pipelines will offer much greater security and reliability than the sea routs on which China must rely to receive Middle Eastern oil.
With a decline in buying oil Middle Eastern oil, Beijing’s investment portfolio in that part of the world will necessarily stagnate or even shrink. And China’s developing problem is not just with oil producers. China has in recent years developed huge trade and investment flows with Israeli technology, and that advantage for China has already begun to shrink in recent weeks because of Beijing’s refusal to label Hamas a terrorist group. At the same time, domestic Chinese financial problems have created a challenge for Beijing’s investment ambitions, in the Middle East and more generally.
Limiting China’s financial resources further are the problems with Beijing’s Belt and Road Initiative (BRI). Many of the projects that Beijing had chosen to support have failed to pay sufficient returns for client states of the initiative to repay the loans they incurred to build. So many BRI participants have run into trouble that they have begun to describe the BRI as a “debt trap.” Their failure to pay has put Chinese lenders under pressure. Beijing has had to pull back. According to the consulting firm Statista, Chinese projects in the BRI have fallen steeply, by almost half in fact, from the over $100 billion a year they averaged at their height. This year it looks as though BRI deals have come off their lows, but at an estimated $80 billion they remain well short of the initiative’s halcyon days.
When China was booming and flush with surplus funds from exports, it could easily have filled the financial gap left by the failures of some BRI participants and others overseas unable to pay their loans fully and on time. But that is no longer the case. China’s economy will struggle this year even to meet Beijing’s 5 percent real growth target and according to Beijing’s National Bureau of Statistics, the nation’s exports are in decline. What is more, domestic debt problems have made the country’s financial system more fragile than it has ever been and certainly unable to withstand the failures of BRI participants and other Chinese overseas investment projects.
if this were not pressure enough, major property developers – Evergrande, Country Garden, and others – have collapsed and left China’s financial system with a considerable overhang of questionable loans. Mortgage borrowers have refused to pay on loans they took out to prepay on apartments that these developers will likely never complete. Under these domestic pressures and because of the financial distress common among BRI participants, China’s banks – long the source of financing for overseas projects – are in no position to extend themselves. If this were not trouble enough, local governments in China have begun to experience financial strains. As the major issuers of debt to finance domestic infrastructure projects, they have overextended themselves during the last few years of first Covid and then several failed efforts by Beijing to use infrastructure spending to stimulate economic activity. Some local governments are in such difficult straits that they are experiencing difficulties providing citizens with essential services.
No solutions to these strains stand on Beijing’s horizon. Some, such as Beijing’s obligation to Moscow, will only become more imposing. Without its once huge surplus of funds — to invest aggressively abroad and to buy oil in the Middle East and other raw materials elsewhere – Beijing will continue to face significant economic and financial limits to its global influence.