How to Define “Xiao Er Mei” (Small or Beautiful) in the Belt and Road Initiative

Author: Edwin Li, Partner, Beijing Dacheng Law Offices, LLP

Takeaways:

• A more accurate English expression for ” Xiao Er Mei ” (in Pinyin) would be “small or beautiful”, which is more in line with the “hard connectivity” and “soft connectivity” of the Belt and Road Initiative (BRI) itself, rather than imposing both as criteria.
• The Chinese government, financial institutions and enterprises investing in and/or financing a small percentage of individual large-scale projects is the essence of “small or beautiful”.
• The economic feasibility of a project should be a decisive criterion for judging the “beauty” of a project in overseas investment and financing by Chinese market players.
• In the past 10 years, Chinese financial institutions and enterprises have not made use of this time window to expand and improve their capabilities of “beauty selection”, “beauty comparison”, “beauty examination” and “beauty creation”.

Since the beginning of 2022, the BRI theme which China’s outbound investment focused on seems to have shifted from the “high profile” and “hard connectivity” projects to the “ Xiao Er Mei ” (小而美in Chinese) and “soft connectivity” projects.

The term “ Xiao Er Mei ” itself was not in the original official documents of the BRI, nor did it seem to be the intended criteria for selecting BRI projects at that time. But as the BRI was implemented and after summarizing the lessons from the BRI investment, financing and construction in the past eight years, China officially proposed at the Third Belt and Road Construction Symposium in 2021 that “Xiao Er Mei projects affect the people directly. In the future, we should make Xiao Er Mei projects a priority for foreign cooperation, strengthen the high-level planning, have the foreign aid fund leverage more investment, and present more down-to-earth and popular projects.”

This is the first time that the government officially and publicly adjusted and gave a new connotation to the BRI, and it also means a partial shift of BRI investment and financing policies.

So how to define and understand “ Xiao Er Mei ” in the BRI context? How Chinese investors, financial institutions and EPC contractors can implement and enforce “ Xiao Er Mei ” in their BRI-related operations has become a major challenge for all parties involved and has hindered or delayed the advancement of many BRI projects. As a result, Chinese companies are losing opportunities in these markets that they used to gain with financing advantages in the past. For example, Uganda terminated China Habor’s contract in connection with its standard gauge railway project for not obtaining financing from China and turns to a Turkish contractor. This article attempts to define “Xiao Er Mei” from a more neutral stance, hoping to enlighten relevant Chinese government departments, policy and commercial banks, as well as other market players.

1. The expression of “Xiao Er Mei” in the English context

Since “Xiao Er Mei” is used in the context of BRI, it is necessary to clarify how to translate and use this expression in English and have it better understood by foreign stakeholders.

In the English press, the phrase “Xiao Er Mei” is mostly translated as “small is beautiful” (perhaps influenced by a movie of the same name, although the movie is about a small house story). But “small is beautiful” in the English context means more accurately the small itself is beautiful only because it is small, and does not have the meaning of “not only small, but also beautiful” as understood in Chinese and intended to express. So the English translation of “small is beautiful” does not have the literal meaning of “not only small, but also beautiful”.

Some Chinese background media in English will express “Xiao Er Mei” as “small and beautiful”. Literally, this English translation can reflect the meaning of “not only small, but also beautiful”. This may also be the meaning understood by Chinese government officials, financial institutions, enterprises and other Chinese background parties. As a result, large projects can’t be moved forward, since no entities are willing to finance and invest. They always ask whether “small and beautiful” projects are available. Therefore the parties mostly focus on “small” projects and exhaust themselves from finding, screening or creating “beautiful” projects among those “small” ones.

A more accurate and practical English expression for “Xiao Er Mei” should be “small or beautiful”, which is more in line with the “hard connectivity” and “soft connectivity” of BRI itself, rather than imposing both as criteria. In terms of project selection, either small or beautiful projects should fall in the scope of financing and investing targets of Chinese financial institutions and enterprises, rather than using “small” as a preconceived criterion and excluding the major projects. This article will elaborate on the specific meanings of this “small or beautiful”.

2. The two aspects of “small”

a). The single project itself is small

A single project is small-scale, which is understood in common as “small” by Chinese parties till now. Generally speaking, projects with a total investment amount of less than 50 million USD may be classified as small projects. But there may not be a unified standard for how tiny this “small” is at present. Depending on the actual situation of the countries along BRI, the real small projects may range from a few hundred thousand dollars to a few million dollars. Unfortunately, these projects are probably to be ignored and uninterested by Chinese financial institutions and enterprises. Such small-scale projects are mostly invested by private enterprises from China. Chinese financiers and investors should, under appropriate circumstances, lower the criteria and thresholds for investment and financing to a certain extent, as long as the investment and financing decision is made through a sound procedure. These projects will be very beneficial to local employment and improve China’s reputation. Furthermore, such projects should be more often led by China International Development Cooperation Agency (“CIDCA”). The policy banks may participate on a necessary basis. This is also the exact and correct understanding of “have the foreign aid fund leverage more investment” proposed at the Third Belt and Road Construction Symposium. All financial institutions, including policy and commercial ones, should not limit their financing targets ONLY to those single small-scale projects.

b). Small percentage of participation in a single large-scale project

The small percentage of financing and investment by the Chinese government, Chinese financial institutions and Chinese companies in a single large project is the essence of “small”. Such large projects are the most worthwhile opportunity for Chinese financial institutions and companies to identify and explore. For a large project, it has been a common practice in the past that one or several Chinese financial institutions provided all the loans for the project, one Chinese company was the sole equity investor, and one Chinese EPC contractor undertook all the construction. Hence, all the risks of the project were borne by the Chinese parties. When the current global economic situation or other crises arise, the Chinese government will be forced to step in and clean up the mess though it is not good at it. This compulsion is more precisely imposed by the previous behavior of the Chinese entities, or perhaps by its own mechanisms (without discussing the legal nature of the SOEs as market players).

After the Chinese government proposed “small or beautiful”, Chinese entities should abandon the mindset of Chinese capital domination and shift to the option of small percentage participation in the large-scale project along BRI as an investor and/or lender. This is also a method to achieve the “small” required by the government, and at the same time ensure that Chinese financial institutions and enterprises can still have the opportunity to participate in the development and construction of large-scale infrastructure, power, energy and mining projects abroad. With the decline of foreign trade, the small percentage participation method is critical to the international economic cycle of the “dual-cycles”.

This small percentage of financing and investment is also a proper part of BRI third-party market cooperation and is more in line to leverage private investment. This goal is what all types of official and multilateral investors in the international market are pursuing. Such small percentage participation will exaggerate the advantages of China’s financial and institutional regime.

Compared with the strategy of grasping the big and putting aside the small in the past years, in the future, the Chinese parties need to make full use of the large projects they have successfully obtained in the past to create the small projects that may be generated by the surrounding areas, related industries and upstream and downstream enterprises of such large projects, so as to expand the radiation effect and influence brought by the “large” projects. In turn, it will create conditions for revitalizing and promoting the success of large projects.

3. The criteria of “beauty”

a). Government preference

For commercial investment and financing, the “beauty” criteria based on political preference should be abandoned to a large extent. In the past decade, BRI investments and financing have been somewhat oriented by government attitudes, so the criteria for judging beauty or ugliness differ from international market evaluation standards. In particular, those projects whose sole and ultimate purpose is to enhance political mutual trust between the two countries are the most criticized in the non-Chinese media. The countries where those projects are located are facing the challenge of the sovereign debt crisis. China may have to accept the “haircut” if there is no innovative reform to the existing sovereign debt restructuring scheme at the multilateral and bilateral levels. Therefore, such purely politically-oriented projects should fall into the responsibility of CIDCA. Those Chinese EPCers without any investment capability and intention may be more interested in these projects.

b). Economic feasibility

The economic feasibility of a project should be a decisive criterion for judging the “beauty” of a project in overseas investment and financing by Chinese market players. As long as the project is economically feasible, investors will be willing to invest equity and the financial institutions will actively participate in the loan arrangement. For the BRI projects, traditional corporate financing has lost control of project risks and is not a solution. In terms of how to judge the economic feasibility of projects, Chinese financial institutions and enterprises still have a long way to go and a lot to learn. In the past 10 years, Chinese financial institutions and enterprises have not made use of this time window to expand and improve their capabilities of “beauty selection”, “beauty comparison”, “beauty examination” and “beauty creation”. The decision-makers of Chinese parties need to spend on improving the capabilities of their employees in the design of project financing structures, the building and audit of financial models, the expansion of networks among those international financial institutions and the understanding of financing contracts’ importance.

c). ESG, climate change and others

The main objectives of ESG and climate change, a globally-accepted standard, should be the important criteria for Chinese investors to judge the “beauty” of the BRI projects. On the other hand, the parties need to balance such criteria with the right to live, development and equity. Not every principle in such criteria has to be applied in all aspects of the project, rather it is a practical solution to select some principles as applicable and appropriate.

The Chinese government has also issued many green investment and financing guiding documents that can be used to examine the “beauty”, for example, the Green Investment Principles (GIP) for the Belt and Road, jointly developed by the governments of China and the UK, and the “Opinions of the National Development and Reform Commission and Other Departments on Promoting Green Development of the “One Belt, One Road”, issued by the Chinese government. GIP provides a good explanation of how to align the BRI with international standards through its seven principles, but there is still a gap for GIP to be recognized and accepted by the market.

4. Conclusion

Creative thinking is the key to solving the challenges of outbound investment and financing along BRI. In the existing international political and geopolitical situation, the Chinese government, financial institutions and enterprises should each do their own work in the light of the above “small or beautiful” connotation and criteria. They need to design financing and investment structures suitable to both China’s national conditions and international rules. Project finance, as a popular way to finance a large project in the global market, should be one option. All Chinese parties need to behave in the long-term interests of enterprises and the nation and contribute to the sustainability of the BRI investment and financing, which will benefit all parties.

Learning is still the only way to solve problems and listening to different voices is always an effective means of self-progress, by which a way out for sustainable BRI investment and financing becomes possible.

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