China’s Emerging Belt and Road Debt Crisis

Only five years ago, Chinese leader Xi Jinping proclaimed the Belt and Road Initiative (BRI) to be the “project of the century”. Today, the vast program of construction of often interesting infrastructure in developing countries is transformed into a financial operation of fighting fires on a large scale.

The total value of loans from Chinese financial institutions to projects in BRI countries that had to be renegotiated in 2020 and 2021 reached $52 billion, according to data collected by the Rhodium Group, a New York-based research group. York. This was more than three times the $16 billion of the previous two years.

In this way, Xi’s scheme becomes China’s first external debt crisis. The renegotiations – which mainly involved loan cancellations, deferred payment schedules and interest rate cuts – were necessitated by deteriorating financial conditions in debtor countries as well as project-specific issues.

The magnitude of the BRI makes it a matter of global importance. China ranks as the world’s largest source of development credit for the rest of the world, having eclipsed the World Bank and the IMF. It also provides more overseas development loans than the 22 Paris Club members combined.

Admittedly, the sharp deterioration in the BIS loan portfolio in 2020 and 2021 was largely due to the pandemic. But Beijing should also acknowledge that flaws in the design of the program – including a general lack of transparency, insufficient risk management on projects and the participation of many of the world’s riskiest debtor countries – have also taken their toll.

Environmental and social impact assessments are almost always absent from BRI infrastructure projects funded by China’s two major political banks and its state-owned commercial banks. While this may speed up implementation, it increases downstream risks. Public protests, chronic delays and allegations of corruption have hampered many high-profile BRI projects.

The selection of key risk debtors – including Pakistan, Venezuela, Russia, Angola, Ecuador, Argentina, Sri Lanka, Zambia and Iran – is another design shortcoming. As project lending soars, Beijing has become forced to provide ‘tens of billions’ of US dollars in ‘bailout loans’ to BRI countries to avoid default, according to research by AidData, a group of research.

The pressing question now for China and for BRI debtors who have already defaulted – such as Sri Lanka and Zambia – is how to quickly resolve crises alongside other creditors such as the World Bank, other multilateral lenders and international bondholders.

Although cooperation with multilateral lenders goes against the bilateral conception of the BRI, Beijing should seek to respect a general principle of parity. Rather than positioning itself as a priority creditor, China should accept loan repayments on nearly equal terms with the World Bank and other multilateral bodies, and take a similar discount on repayments. This would speed up resolutions and reduce the economic distress of defaulting countries.

In the longer term, China should also review the way it provides development loans through the BRI. Here too, it should adopt a more multilateral approach, cooperating with the multilateral development banks and carrying out sufficient studies on risk management before financing is granted.

In this he has an example ready to follow. The Asian Infrastructure Investment Bank, a China-led multilateral lender headquartered in Beijing, conducts a full range of risk management studies before making loans. In the six years since its inception, the AIIB has maintained one of the highest quality loan portfolios in the world.