Financial Consequences of the Belt and Road Initiative

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 economic corridor. Governments of impacted countries sharply increase sovereign debt issuance and devote more resources to collective consumption spending. Meanwhile, their strategic infrastructure investments stagnate, news-based macroeconomic sentiments for inflation, financial stability and economic uncertainty worsen, and sovereign yields rise. Businesses in these countries issue less debt, lower capital investments, and observe reductions in their valuations. Overall, my findings highlight the distortionary effects of BRI on European businesses and raise concerns about the effectiveness of BRI-driven government spending in Europe. I provide additional findings on developmental aid, international trade, and BRI program membership that highlight China's growing influence over corridor economies.