Nearly 40 world leaders gathered in Beijing last month for China’s second Belt and Road Forum. In his keynote speech, President Xi Jinping declared China’s commitment to reshaping the Belt and Road Initiative (BRI) to enhance its long-term sustainability.

Can Beijing pull off these ambitious goals?

BRI is an ambitious public/private initiative designed to redirect excess domestic capacity and capital for regional infrastructure development, and improve China’s relations with partner countries. While promising to link networks of highways, railways and pipelines with new special economic zones in more than 60 countries, this vision could cost more than $1 trillion over the next decade. And there have been complaints from Malaysia and other countries about the risks of falling into a “debt trap.”

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To achieve these goals, Beijing expects Chinese companies, as well as foreign companies and governments, to invest in infrastructure, energy and industrial parks in BRI countries. It also needs to persuade Chinese companies to modify their practices to address growing concerns about BRI-related corruption and environmental impacts.

Our research shows that state-owned enterprises (SOEs) in China are more likely than non-state firms to support the BRI. Why is this important? Private sector involvement has proven critical to the success of large-scale infrastructure initiatives — and this suggests the BRI goals may be in trouble if these firms are not on board, and not willing to invest.

The BRI showcases China’s economic statecraft

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Analysts tend to see the BRI as a major Chinese government push to increase the country’s political influence and diplomatic leverage — using tools of economic statecraft like promises of trade, aid and financing to expand China’s global influence. For the past five years, Beijing has deployed these tools strategically to persuade governments in partner countries to pursue greater cooperation through infrastructure and financial investment.

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Despite the benefits BRI might bring to all participants, the strategic importance Beijing attaches to the initiative means that public discussions tend to downplay the potential political and economic risks of the project for the Chinese government and companies.

Some Chinese firms have raised concerns about the challenges they face investing in countries with high political risks and poor regulatory institutions. How can Beijing persuade more Chinese firms to get involved in BRI projects even though business logic might suggest otherwise?

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State-owned companies may have little choice

Notably, SOEs lead most of the existing investments in BRI projects. Our research suggests that the clientelistic relationship between the government and SOEs makes it harder for these firms to resist government requests to change their trade and investment patterns to support China’s overall goals.

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Here’s why: State ownership facilitates government control in these companies. This means that SOEs cannot focus solely on whether an investment is a profit-maximizing activity. Instead, they may come under pressure to make economic decisions that reflect Beijing’s broader political, social or economic objectives, such as promoting domestic economic development or fostering the growth of strategic industries.

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Moreover, the government often has a say in these companies’ financial, operational and managerial decisions. Beijing exerts further regulatory and political influence over SOEs through shareholder control and personnel appointments.

Because SOEs face stronger imperatives to meet political mandates — and come under close government oversight — they are more likely to follow the government’s lead and invest in the BRI. In contrast, private firms have greater freedom to avoid BRI projects that appear financially risky, despite Beijing’s efforts to enlist the support of China’s growing private sector.

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We surveyed Chinese firms to gauge their interest in BRI projects

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To see if SOE and privately owned enterprises do indeed view the BRI differently, we conducted a survey of 569 firms across a broad range of industries in 27 Chinese provinces between May and June 2017. An online marketing research company randomly distributed our survey questions to its pool of firm managers. We asked these managers what they perceive to be the benefits and challenges of investing in the BRI, and whether their firms have plans to participate in the initiative.

We found that ownership has no discernible effect on firm perception of the potential challenges and benefits of BRI participation. Both SOEs and private firms identify poor and unfamiliar investment environments and political risks in the host country as the biggest challenges.

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Additionally, while an important BRI goal is for China to export overcapacity — the excess supply of goods and services in relation to market demand — neither SOEs nor private firms seem to consider this an area from which they would benefit the most. Instead, they expect that the BRI will help them grow by expanding into international markets.

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But we also found that SOEs are much more enthusiastic about the initiative — 60 percent of the SOE managers surveyed stated that their firms had plans to participate, compared to only 35 percent of the non-SOE managers.

But do SOEs expect Beijing to step in if things go wrong?

SOEs are not deterred by the challenges of investing in BRI countries in spite of the rapidly changing financial environment in China and the ongoing pressure for SOE restructuring these firms face. This raises “moral hazard” concerns -- would SOEs undertake riskier investments knowing that the Chinese government would bail them out if their investments go awry? Such behavior may lead to inefficient allocation of resources and financial losses in the long run.

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At a time when Beijing reportedly is re-evaluating its approach to BRI financing, what do our survey results suggest? The absence of concrete support from private firms to increase their participation may exacerbate the moral hazard issues, and undermine Xi’s ability to fully mobilize domestic resources to deliver his promises.

This puts an added spotlight on the government’s ability to direct the behavior of self-interested, profit-driven firms. And other complications have emerged. Beijing’s growing wariness to pump additional government funds into the initiative because of the ongoing trade war and the country’s falling foreign exchange reserves may further compound these challenges.

Xiaojun Li (@nujoaixil) is an assistant professor of political science at the University of British Columbia and a former Princeton-Harvard China and the World Fellow.

Ka Zeng is professor of political science and director of Asian studies at the University of Arkansas. She is the author of Trade Threats, Trade Wars and co-author of Greening China.

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