When in 2013, Chinese premier Xi Jinping launched the “Belt and Road Initiative (BRI)” strategy of the Chinese government with much pomp, he had no suggestion as to what lies in the forthcoming. According to the top market research companies China at that time had a whopping 3 trillion USD foreign capital, and Xi Jinping thought of financing it in various countries to strengthen its ambitious supply chain model called BRI. The aim was clear, first diverse the surplus foreign capital in poor countries, start the projects at excessively high profits, and then reap the perquisite out of it. Apparently, everything was excellent and China expected a very high premium on its investments. But circumstance had something else in the mind, and today, China is adversity from its lowest overseas lending crisis. Let us analyze how the balloon of Chinese BRI burst.
1. The Lending: China is the single biggest bilateral acceptor in the world as of date which has finished about 6% of global GDP as loans/ dues to other countries
In the initial phase of BRI, the loans were in the name of project funding, but post-2018, when the conspicuous distress became visible, Chinese banks started reorganizing these project financing into short-term necessity loans where not only was the compensation period very less (1-3 years), but the interest rates too were very high (3-5% above LIBOR/ SHIBOR). This was an effective point because post this event, most of the countries who were seeking the funds from China, understood the nefarious Chinese module and either withdrew from the projects or looked for alternatives resulting in Chinese project financing going into the mud.
2. China was well aware of the high profitability of projects that it funded, as well as the hidden defaults that occurred when it paid numerous sums to politicians, military officials, or other influencers. As much as this kept their lending secret and initially secured their investment, it also made assessing and rating these debtor countries near impossible for international credit agencies.
According to the National Bureau of Economic Research, half of the 5,000 loans and grants given by the IMF or World Bank between 1949 and 2017 went unreported. Credit agencies have not been able to find the exact details of the debt in Zambia, Sri Lanka, Laos & Pakistan, which are recent examples of this default.
3. Situations leading to default- Poor countries defaulted on debt services because of a variety of factors. In mid-2022, more than 70% of Chinese borrowers defaulted. By the end of 2014, only 10% of borrowers had any kind of liquidity crunch. There were a number of reasons why defaults occurred in the initial phase of this loan, including non-viability of the projects, internal disturbances, terrorism, ethnic tensions, and global factors. But after 2020, the graph dropped sharply. First, due to the COVID19 pandemic, and then, due to the Russia-Ukraine war, the situation exploded, resulting in the worst ever debt crisis for China.
4. Restructuring debt and seeking relief from lenders- The most common way for a country to seek relief from its lenders is through debt restructuring. A number of Chinese borrowers did the same in 2021-22, and a long list of countries asked for debt restructuring, rollovers, and grace periods to repay their debts.
More than 60 debt restructurings have taken place between Chinese banks and countries over the past two years. In addition, China had no other option since the borrower was bankrupt and unable to repay the loans. There is a major liquidity crunch as well as an impact on overall costs when you roll over. It was this that led China to initiate a currency swap system with some of the countries, however, this too failed miserably due to the Great Russian War and the increase in the value of currencies in the market.
5. More than two years have passed since the Pakistan government last paid the dues on the power projects. The number of completed projects is very small, and those that remain incomplete do not have any commercial value. In a similar fashion, Zambia’s international airport, Hambantota Port, Airport & Convention Center, Colombo Port City, many special economic zones in Pakistan, and other projects in several countries were either not viable or of no value.
Globally, nearly 40% of the debt that the poorest countries owe China is unrepayable, according to the World Bank. A number of these countries have already surpassed their GDP in debt and are in the process of defaulting.
In spite of all the measures taken to improve the situation, the situation has deteriorated dramatically. As a result of disguised confidentiality agreements, the Chinese government shuts its ears to any possible financial doomsday, despite the robust Chinese economy and large foreign reserves. There are a couple of crucial years ahead for China, and it must watch carefully before the balloon bursts.
