After loans have gone sour and projects have stalled,
Beijing is revamping its troubled initiative
A construction site in Sihanoukville, Cambodia, part of China’s Belt and Road initiative, in 2019. BRENT LEWIN/BLOOMBERG NEWS
By Lingling
Wei
Sept.
26, 2022 10:10 am ET
China has spent a
trillion dollars to expand its influence across Asia, Africa and Latin America
through its Belt
and Road infrastructure program. Now, Beijing is working on an
overhaul of the troubled initiative, according to people involved in
policy-making.
A slowing
global economy,
combined with rising interest rates and higher inflation, have left countries
struggling to repay their debts to China. Tens of billions of dollars of loans
have gone sour, and numerous development projects have stalled. Western leaders
have criticized China’s
lending practices,
which some have labeled “debt-trap diplomacy,” embarrassing Beijing. Many
economists and investors have said the country’s lending practices have
contributed to debt crises in places like Sri Lanka and Zambia.
After nearly a decade of pressing Chinese banks to be
generous with loans, Chinese policy makers are discussing a more conservative
program, dubbed Belt and Road 2.0 in internal discussions, that would more
rigorously evaluate new projects for financing, the people involved said. They
have also become open to accepting some losses on loans and renegotiating debt,
something they had been previously unwilling to do.
Chinese President Xi Jinping once called the
initiative “a project of the century,” but the overhaul exposes limits to his vision to reshape the global order. At a November meeting with senior
officials, Mr. Xi noted that the international environment for Belt and Road
was becoming “increasingly complex,” and stressed the need to strengthen risk
controls and expand cooperation, according to state-media reports of the
meeting.
A coal power plant in Port Qasim, Pakistan, operated by a joint
venture including Power Construction Corp. of China.PHOTO: ASIM
HAFEEZ/BLOOMBERG NEWS
Chinese banks have already sharply
reduced lending for new projects in low-income countries as they focus on
cleaning up their existing loan portfolios.
Nearly 60% of China’s overseas
loans are now held by countries considered to be in financial distress,
compared with 5% in 2010, according to economists Sebastian Horn, Carmen
Reinhart and Christoph Trebesch, who have written about international
debt.
China has begun working
with other creditors to resolve current debt quagmires. To do so, Beijing has
had to abandon its longstanding resistance to working with international
institutions like the Paris Club, an association of large sovereign creditors
including the U.S., Japan and France. It’s coordinating with members of the
Group of 20 advanced and developing economies to negotiate debt relief in some
countries.
The process could force
Chinese banks to accept losses, something they’ve long opposed. For years,
Beijing preferred to extend
the maturity of troubled loans, a practice known in the
finance industry as “extend and pretend.” That strategy risks prolonging
countries’ debt woes rather than fixing them.
Beijing has also dialed
down its rhetoric in state media. While it used to tout the economic benefits
of Chinese lending for recipient countries, it now emphasizes managing risks
and improving international cooperation, said Weifeng Zhong, a senior research
fellow who tracks Chinese government propaganda at the free-market think tank
Mercatus Center at George Mason University. “China is attempting a course
correction,” Mr. Zhong said.
Xi Jinping addresses a symposium on the Belt and Road initiative
in Beijing in November 2021.PHOTO: SHEN HONG/XINHUA/ZUMA PRESS
The State Council, which serves as
China’s cabinet, as well as the country’s top economic planning agency and the
Ministry of Finance, didn’t respond to requests for comment, nor did China’s
central bank or several banks involved in China’s lending effort. In a written
statement, China’s Foreign Ministry said that “we will work with the
international community to promote high-quality development of Belt and Road
cooperation.”
The program’s roots date back a
little over a decade, when China saw an opportunity for its state-owned
financial institutions to extend their reach and earn better returns on their
cash holdings through investments overseas.
Authorities encouraged lenders to
finance projects like mines and railways to enable developing countries with
natural resources to better supply China’s market, and to create jobs for
Chinese contractors.
After taking power in 2012, Mr. Xi
expanded those efforts and promoted the initiative as part of his plan to
expand China’s influence and build markets for Chinese goods.
In 2015, when a stock-market
collapse in China damped domestic demand, Beijing used the initiative to export
products in oversupply at home, like steel and textiles. The Export-Import Bank
of China and China Development Bank often required countries that benefited
from their financing to source from Chinese suppliers.
In just a decade, according to the
Foreign Ministry, China handed out about $1 trillion in loans and other funds
for development projects in almost 150 countries, such as Ecuador and Angola.
China, for the first time, became the world’s largest official creditor.
The U.S. government and government-owned institutions now provide less than half of what China does in grants and loans to less wealthy nations, according to AidData, a research lab at the university William & Mary in Williamsburg, Va. Both countries were roughly on par in the decade before 2013.
Lending SpreeSince the
Belt and Road program's launch in2013, China’s international
developmentfinancing has surpassed that of G-7countries.Source: AidData
While the U.S. finances nearly all its
overseas development projects with aid, China acts more like a banker, said
Bradley Parks, executive director of AidData and co-author of “Banking on
Beijing.” AidData’s analysis shows that for every dollar of aid to low-income
and middle-income countries, China has provided $9 of debt. The opposite is
true of the U.S.: For every dollar of debt that it provides to low-income and
middle-income countries, it provides at least $9 of aid.
The lending fueled objections in
Washington and elsewhere that China was overloading countries with costly debt,
a charge Beijing regularly denied.
By 2017, Chinese banking executives
were complaining to Beijing that they were being asked to finance projects that
had little prospect of returns, according to executives involved in the
discussions. Some lenders threatened to stop supporting certain projects unless
regulators let them clarify that those loans were “policy-instructed,” the
executives said, so the banks wouldn’t be held accountable for defaults.
Prodded by Beijing’s enthusiasm,
Chinese banks had given loans to countries with limited capacity to repay them.
In Sri Lanka, a port project backed by Chinese money failed to generate enough
traffic to service the debt. Pakistan fell behind on payments for electricity from
new Chinese power projects, which led to a power crunch.
Many borrowing countries also built
up debt from private market creditors, who had similarly ramped up lending to
the developing world.
Chinese lenders began rolling over
old loans and handing out new ones to keep troubled borrowers afloat. They
lengthened payment timetables and extended grace periods to further ease
payment difficulties, though it often wasn’t enough.
Pakistan received around $23 billion
in fresh loans from Chinese sources between 2017 and last year, according to AidData—financing
that was intended to shore up the country’s foreign-exchange reserves and
credit ratings so its debt-servicing costs didn’t rise. Pakistan eventually had
to seek a bailout from the International Monetary Fund anyway.
In November 2020, with the effects
of the pandemic adding more pressure on borrowers, Beijing agreed to sign up to
the Common Framework, an international debt-relief effort endorsed by the G-20
that helps coordinate debt negotiations among creditors.
The Common Framework is built on
principles like those used by the Paris Club, an informal grouping of large
creditor nations that looks for solutions when countries have trouble paying
off debt. Despite repeated invitations to join the Paris Club, China has
resisted.
Chinese banks had often
insisted that borrowers promise to exclude Chinese loans from Paris Club-style
restructurings with other creditors, a tactic that could potentially help
ensure China would be paid first in any default. Dr. Parks of AidData has found
close to three-quarters of Chinese loan contracts contain “No Paris Club”
clauses.
It took six weeks of
night-and-day negotiations in the summer of 2020 among the G-20, the Paris Club
and China to get Beijing to reach a technical agreement to join the Common
Framework, according to people with knowledge of the talks. It took a few more
weeks for Mr. Xi to sign off.
What got China on board
was the belief that Chinese lenders would be better off defending their
interests if they were coordinating with other creditors, said the people. For
some in Beijing, the Common Framework provided a face-saving way out of its
longtime resistance to joining the Paris Club.
China’s Finance Ministry, which owns
stakes in major Chinese lenders like China Development Bank, has remained wary
of letting banks take losses on their loans, people involved in the
deliberations said, especially at a time when banks are under scrutiny because
of China’s deep real-estate downturn.
The central bank has argued China
needs to be more flexible in debt-restructuring talks to help fend off an
emerging-market financial crisis, according to the people.
Some officials at the People’s Bank
of China have pointed to the Federal Reserve’s rapid-fire rate increases as a
reason for China to act. U.S. rate increases are causing the value of the
dollar to rise and making it costlier for developing countries to service
foreign debts.
China is moving ahead
with negotiations involving creditors in Chad, Ethiopia and Zambia, which some
Chinese officials see as a test case for the new approach.
Chinese creditors
initially refused to participate in talks to restructure
Zambia’s debts after
it defaulted in late 2020 on $3 billion of international bonds. That changed a
few months ago, when China became a co-chair of Zambia’s creditors committee
with France.
The committee swiftly
reached an agreement this summer to unlock $1.4 billion in emergency IMF
funding. Now, negotiations are under way to secure a deal to restructure $17
billion in Zambian external debt, a third of which is owed to 18 Chinese
lenders.
A full retreat on Belt and Road is
unlikely. Mr. Xi, who is seeking to extend his rule for a third term at a
Communist Party conclave next month, continues to believe it has an important
role to play in promoting China’s role on the world stage, according to the
people involved in policy-making and readouts of recent speeches he has made.
For all its troubles, the initiative
has succeeded in drawing more countries into Beijing’s orbit over the past
decade, with many recipient countries voting alongside China at the United
Nations. More prudent lending by Beijing could make Chinese financing less
appealing to some countries, making it tougher to win over governments.
“If Belt and Road is going to retain
its importance in expanding Chinese influence, China may need to find a new
way,” such as moving away from lending in favor of giving grants and other aid,
said Brad Setser, a senior fellow and sovereign-debt expert at the think
tank Council on Foreign Relations.
Chinese officials are exploring
other ways to make Belt and Road more sustainable, such as forming
public-private partnerships to reduce risks, and shifting toward more lending
with below-market interest rates, people familiar with the discussions say.
Beijing is also signaling it’s more open to working with multilateral
institutions like the African Development Bank in financing new projects, the
people said.
Gabriele Steinhauser contributed to
this article.
Write to Lingling Wei at lingling.wei@wsj.com
https://www.wsj.com/articles/china-belt-road-debt-11663961638
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https://www.rferl.org/a/china-debt-crisis-belt-road-initiative-kyrgyzstan-pakistan-/31970756.html
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