“The strong rebound of the Chinese economy since its post-pandemic lockdown is a boon to global growth”, the International Monetary Fund (IMF) chief Kristalina Georgieva said the other week.
The IMF, in its World Economic Outlook released on 11 April, forecast China’s growth at 5.2%, a +0.8% upward revision to the IMF’s October projection.
The IMF chief said, “We have been pleased to see this rebound of China not only for China, of course for China, but also because of China’s role in the world economy… China this year is going to contribute about one-third of global growth. We calculated that 1% more growth in China translates into 0.3% more growth for the economies that are connected to China.”
The Belt and Road Initiative (BRI) Has Gone Global – Official BRI participants by year of joining
Source: Council on Foreign Relations
That’s all good, as far as it goes. But we should be aware of a growing debt problem associated with China’s BRI, once hailed by Xi Jinping as the “project of the century”.
China’s BRI, a colossal infrastructure investment program launched by President Xi Jinping in 2013, sometimes referred to as “the New Silk Road”, is one of the most ambitious infrastructure projects ever conceived. The vast collection of development and investment initiatives was originally devised to link East Asia and Europe through physical infrastructure. In the decade since, the project has expanded to Africa, Oceania, and Latin America, significantly broadening China’s economic and political influence. While promoted as ushering in a new era of trade and growth for economies in Asia and beyond, sceptics worry that China is laying a debt trap for borrowing governments.
Some analysts see the project as an unsettling extension of China’s rising power, and as the costs of many of the projects have skyrocketed, the opposition has grown in many countries. Meanwhile, the US is concerned that the BRI could be a Trojan horse for China-led regional development and military expansion. US President Biden has maintained his predecessors’ sceptical stance towards Beijing’s actions, but Washington has struggled to offer participating governments a more appealing economic vision.
With Beijing-backed projects in more than 100 countries, the BRI is one of the world’s most ambitious development programmes. But critics fear it could become the conduit through which some of China’s debt problems are transmitted overseas.
Controversies have flared in countries as far apart as Pakistan, Sri Lanka, Laos, Malaysia, and right across Africa, all related to debt sustainability — either because of the perceived inability of countries to handle outsized debts to China or because many Beijing-funded infrastructure projects do not appear to justify their costs.
Disconnects between the creditworthiness of a project or a country and the size of the loans made by China have led to project delays, political turmoil, and allegations of corruption in contract award procedures.
Some mismatches are baked into the BRI’s design. An FT study showed that many countries selected by China to participate included some of the world’s most risky economies. On an Organisation for Economic Co-operation and Development (OECD) scale of 1 to 7, in which 7 represents the highest level of country risk, the BRI countries show an average of 5.2, considerably worse than the 3.5 average for emerging markets.
Pakistan, which rates a 7/7 on the OECD risk scale, offers an example of BRI stress, forced into negotiating with the IMF for a bailout after its import bill for Chinese capital goods and its debt repayment obligations contributed to a critical shortage of foreign currency.
Difficulties in many countries could see massive write-offs required, with Chinese government-related lenders bearing the costs. As John Paul Getty was supposed to have said, “If you owe the bank $100, that’s your problem. If you owe the bank $100M, that’s the bank’s problem.” China is the latest to find itself in a predicament after lending nearly a trillion dollars to developing countries under the BRI.
Some have described the lending effort that funds infrastructure projects as a “debt trap,” designed to create political leverage and cement Chinese influence on the world stage. China, in turn, refers to it as a public good, or an equivalent of the Marshall Plan, with 151 countries so far listed as having signed up to the BRI. The initiative was even incorporated into the Constitution of China in 2018, but a series of crises are threatening to push the project off the road, including the aftermath of the pandemic, inflation challenges, slowing global growth, and major loan repayments that are coming in a high-interest rate environment.
As of last year, 60% of China’s overseas lending portfolio supported debtors in distress, up from just 5% a decade earlier. African nations like Zambia, Ghana, Ethiopia, and Kenya are all trying to find their way out of a default, while Sri Lanka and Pakistan remain under huge debt clouds with Beijing as their largest bilateral creditor. In the past, emergency rescue lending and write-downs were explored, but China is taking a heavier hand this time around, complicating sovereign debt restructurings and the situation in emerging markets.
Debt risks and debt crises have the attention of G20 finance ministers who met in Washington recently, for a “Global Sovereign Debt Roundtable” co-chaired by the heads of the IMF and World Bank. China softened its stance following the gatherings, saying it was willing to drop a demand that multilateral lenders share some of the pain and would work through the G20 Common Framework for Debt Treatments. Only time will tell how things will play out.
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