China’s Soaring Debt Could Sink the Belt and Road Project

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The New York Sun

Warning signs are evident that China’s highly touted Belt and Road initiative is becoming a bridge too far for that increasingly debt-burdened country.

Economists are cautioning that China, with its domestic corporations carrying high debt loads and its external investments faltering, might lack the capital to finance its global infrastructure mega-project.

On the home front, Chinese developer Evergrande defaulted on $300 billion of bond debt in December. Many are skeptical of the business’s viability even after the company’s announcement that it has resumed work.

Nikkei Asia reports that China Railways has racked up $850 billion of debt, according to the company’s public financial disclosures. The state-owned company has won accolades for building more than 23,000 miles of high-speed rail, but low ridership and high maintenance made it unprofitable, with interest payments outpacing profits.

With nearly a trillion dollars of debt, China Railway quickly turned into an economic liability. Both Evergrande and China Railway are heavily indebted and potential examples of a larger trend: debt-fueled overdevelopment.

In the third quarter of 2021, China’s debt to GDP ratio stood at 266 percent, one percent lower than the previous quarter, according to the Atlantic Council.

While the Western press has mostly focused on Belt and Road’s potential extension of Chinese hegemony, the growing cost — and shaky financing — of the project have largely slipped under the radar.

As of January 2020, 138 countries have signed on to the Belt and Road plan in some way, and estimates for the total number of projects range from around 800 to more than 2,500.

The Center for Strategic and International Studies reports China’s Belt and Road investments total at least $1 trillion and as much as $8 trillion. The exact total isn’t known due to the secrecy surrounding the project terms, which is itself a problem.

Projects are funded through policy banks, state-owned banks, state-owned funds, and international financing institutions.

Belt and Road is not only an economic project but an extension of China’s growing wealth and global influence. By opening export and import markets, such projects are meant to stand as a lasting testament to Beijing’s power.

Yet in 2017, researchers at the Hong Kong University of Science and Technology warned Belt and Road might prove too expensive for China to finance alone: “Initial presumptions that China would be able to provide all the finance are now unrealistic.”

Yasheng Huang, an economics professor at MIT, said in 2019 that Belt and Road “may entail risks and uncertainties that could become problematic for the Chinese economy.”

Since then, experts at the Council on Foreign Relations have noted a significant decline in investment from China, signaling a “new phase of smaller, more rigorous lending to projects that have a greater chance of success.”

The Covid pandemic slowed investment and development further. According to China’s Ministry of Foreign Affairs, the pandemic has “seriously affected” about 20 percent of Belt and Road projects.

Requests to renegotiate Chinese loans have multiplied in the past few years, as borrowers ranging from Zimbabwe to the Maldives seek to renegotiate or fully cancel their Belt and Road projects amid financial concerns and the economic fallout of Covid.

According to the Council on Foreign Relations, China deferred or rescheduled about $40 billion in debt payments it was owed between 2001 and 2020. An additional $20 billion in loans were modified or had their terms changed.

Debt negotiations, sinking prospects on returns, and slowing investments into Belt and Road Initiatives signal “signs of slowing,” the Council reports.

Unfavorable deals, like Kyrgyzstan’s renegotiation on a $35 million loan, demonstrates a scenario for borrowers to avoid. The Exim Bank of China (Exim Bank) deferred Kyrgyzstan’s payments for 2020 but added 2% interest to the loan.

With projects and payments stalling, Chinese banks will not be getting the deal they originally hoped for. By 2020, $12.6 billion in projects were canceled, and another $64 billion were put on hold, according to the Council on Foreign Relations.

Canceled and delayed Belt and Road projects leave China with no profitable investment, economic boon, or the political benefits of the infrastructure they financed.

The problems with Belt and Road are not the only economic troubles facing China. The World Bank points to banking instability and risky lending practices as sources of instability. Observers also note an unprecedented flight of capital from that country as investors seek safer havens.

Meanwhile, accusations of neo-colonialism are also dogging Belt and Road. A Ugandan parliamentary probe disclosed a condition of that nation’s loan from China’s Exim Bank stipulating potential forfeiture of the Entebbe airport in the event of a default.

Chinese officials responded by stating that they have not yet seized any project in Africa — small comfort to Uganda.

In 2017, Sri Lanka was forced to sign over Hambantota maritime port to Beijing after defaulting on a loan. Critics pointed to this as Chinese debt-trap diplomacy. A similar clause is found in Exim Bank’s 2014 loan to Montenegro.

Authors of the “How China Lends” report, a study of 100 Chinese international loans, also pointed to debtor countries being required to keep large sums of cash on hand in case of default.The same report points to numerous strategies enabling China to “influence debtors’ domestic and foreign policies” as well as including clauses to “keep the debt out of collective restructuring.”

What are the implications for China’s global reputation in the event that Belt and Road falls prey to the same shaky financing that has brought Evergrande to the brink of insolvency?

As the late John Maynard Keynes said: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at yours.”


Image: Chinese flag from CIA World Factbook, public domain, via Wikimedia Commons

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