Is the Belt and Road Initiative causing a debt crisis for China?

Chinese banks are overextended and facing the problem of loans not being repaid on time.

By Joseph Dana

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Published: Tue 13 Apr 2021, 11:08 PM

The Covid-19 pandemic has forced China to rethink the Belt and Road Initiative, the ambitious plan to connect large parts of the global economy through infrastructure development and lending.

Chinese banks, the bedrock of what President Xi Jinping called “the project of the century”, are overextended and facing the problem of loans not being repaid on time.

As a result, China is quietly scaling back the project, particularly in the emerging markets of Africa. Does this mean the sun is about to set on the BRI? Not so fast.

The BRI is the largest infrastructure project in the world and came with big promises to spend $1 trillion on developing transportation — roads, railways and the like — and telecommunications in emerging markets. State-owned and private Chinese businesses are key to the financing of it all. Chinese companies have been busy building and upgrading infrastructure all over the African continent, and Chinese banks have provided several types of loans.

Yet, even before the pandemic hit the global economy, Chinese lending for BRI projects was on decline. In 2020, it fell off a cliff. The Financial Times reported that the two largest state development banks, the China Development Bank and the Export-Import Bank of China, have had to redirect funding from the BRI to projects at home.

Several African countries are struggling to pay back their debt to Chinese lenders. Zambia was the first to default during 2020. It finally reached a deal in October to defer repayments to the China Development Bank. Other cracks are showing. Kenya has just announced it will terminate its contract with the Chinese-owned Africa Star Railway Operation Company (Afristar). The company was supposed to operate passenger and freight operations for 10 years. Kenya reportedly owes Afristar $380 million in fees.

The problem of debt repayment is driving a new wave of public-private partnerships (PPP). From Mozambique to Uganda, Beijing is encouraging Chinese companies to create new PPPs that will ease the debt burden on African countries by giving Chinese companies a share of profit from revenues such as road tolls. The push for more PPPs is a clear sign of how bad the debt crisis is for BRI projects.

Meanwhile, there has been a flood of warnings from American diplomats and think tanks. Jonathan Hillman, a senior fellow at the Washington-based think tank, CSIS, told the Financial Times that the recalibration of the BRI is “all part of China’s education as a rising power. It has taken a flawed model that appeared to work at home, building large infrastructure projects, and hubristically tried to apply that abroad.”

Some institutions take an even more critical view of the BRI. \Essentially, the BRI forces many countries to adopt China’s aggressive and environmentally insensitive approach to state-building. Still, the recent downturn in BRI spending suggests that even as China confronts economic crises at home and a sluggish global economy, the foundations of the BRI remain solid. In fact, the current economic climate is an ideal opportunity for China to stress-test its long-term plans for the BRI and consider ways to reform the primary challenge — debt sustainability.

It is the view of many analysts that China has used debt recklessly to finance its BRI objectives. Not only are countries like Zambia and Djibouti (among many others) struggling to pay back their loans, but the opaque lending practices of China itself are now under the microscope. The question is whether public criticism and attention on how the BRI is financed will curtail China’s questionable practices and thus usher in a new approach to debt sustainability.

We don’t know. But one thing is certain: the curtain on China’s approach to debt has been pulled back and the scene behind it is anything but sustainable.

Times are tough right now but the BRI is far from a dead — or even dying – duck. The Chinese are well-accustomed to taking the long view. The decisions and reforms put in place in the next couple of months will have huge implications for China’s grand plans. Once the dust of the pandemic settles, the BRI could well earn its “project of the century” label. — Syndication Bureau

Joseph Dana is the senior editor of Exponential View, a weekly newsletter about technology and its impact on society. He was formerly the editor-in-chief of emerge85, a lab exploring change in emerging markets and its global impact.

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