The UK Guardian noted on Monday that China has become the “world’s biggest debt collector” thanks to the massive loans poor nations took out from Chinese banks to finance Belt and Road Initiative (BRI) infrastructure projects.
Many of those projects generate far less revenue than expected, leaving borrower nations with loans that cannot repay – and Chinese bankers with hundreds of billions of dollars’ worth of possible defaults.
A rather gloomy picture was painted by a survey of China’s debtors conducted by the AidData research lab at William & Mary college in Virginia:
The researchers found that as the debts to Chinese lenders have mounted, the number of suspended or canceled projects has also increased. With a high share of lending directed towards countries in, or at risk of, financial distress, Beijing is now increasingly worried about the risk of defaults.
In June, Zambia reached a historic deal to restructure $6.3bn of debt, two-thirds of which is owed to the Export-Import Bank of China, one of the country’s two main policy banks.
To mitigate the risk of future defaults, Chinese policymakers have introduced a number of measures, including reducing loans for infrastructure projects while ramping up emergency lending. In 2015, infrastructure project lending accounted for more than 60% of China’s loan portfolio. By 2021, the share was just over 30%, with emergency lending accounting for nearly 60%.
BRI has been criticized as “debt colonialism,” a deliberate strategy by China to saddle Third World countries with debts they can never repay so Beijing can develop political leverage over client nations, but the AidData researchers preferred to give China credit for creating a financial “safety net” for developing nations.
The AidData report also disputed “conventional wisdom” that China’s international lending has “plummeted to nearly zero” as the Chinese economy weakened. Loans are still being made, but the terms are getting tighter, interest rates are getting higher, and China’s debt collection practices are growing more relentless. Among other things, China has increased the penalty interest rate for delinquent borrowers from a modest three percent in 2014 to 8.7 percent today.
These measures appear to have alienated the citizens of debtor nations, who are giving China lower approval ratings in public opinion polls and complaining about the terms of those gigantic Belt and Road loans, which were sometimes signed by predecessors to the current administrations.
“Beijing is trying to find its footing as the world’s largest official debt collector at a time when many of its biggest borrowers are illiquid or insolvent. And debt collectors don’t win a lot of popularity contests,” AidData executive director Bradley Parks told the Guardian.
Bradley said China is trying to “futureproof” BRI. Other contributors to the AidData report called it a “reboot.” Hitting Control-Alt-Delete on $1.3 trillion in loans to developing nations turns out to be a very difficult proposition.
The report said BRI grew with such impressive speed over the past two decades because China offered some “benefits” that competing Western financial programs and banks could not match. China became “the developing world’s go-to banker for big-ticket infrastructure projects” by minimizing red tape, not requiring competitive bids, approving projects with blazing speed, and skipping all the human rights and ESG baggage that Western lenders insist on. American or European bankers who attempted to mimic such practices would have either been arrested by their national governments, or boiled in oil by their shareholders.
“Chinese government-financed infrastructure projects between 2000-2021 took only 2.7 years to complete. Similar projects financed by the World Bank and regional development banks usually took 5-10 years to complete,” AidData noted.
“Beijing’s track record of bankrolling and building big-ticket infrastructure projects with record speed and near-term economic impact changed the nature of policymaker demand in the Global South,” the authors said, using a common term for the world’s developing economies.
On a darker note, the report said China got some of those BRI projects approved and completed so quickly because it worked with “political leaders, rather than technocrats” in client nations – and it counted on those political leaders to steamroll citizens who were “displaced or harmed by construction activities.”
A common grievance of those disgruntled locals was that good jobs promised by BRI salesmen never materialized. Instead, Chinese crews and managers were brought in, leaving the locals with only the least secure and remunerative jobs. BRI projects also ignored environmental standards imposed by American and European financiers. Local journalists and opposition politicians began chipping away at the wall of secrecy around BRI and discovered collusion between Chinese companies and regional politicians.
China is trying to repair the reputation of BRI during its “reboot,” including some lip service paid to the ESG standards it previously ignored, although the AidData authors were skeptical that China would actually implement standards approaching those of American and European projects. At the very least, the authors noted that BRI projects seem less prone to abrupt cancellation today than they were in the 2000s and 2010s.
Setting higher standards will slow the growth of BRI, but Beijing sees that “de-risking” is necessary to cut down on its loan default risks. The Chinese government appears to be pruning the Belt and Road financial institutions with the weakest safeguards and riskiest loans.
The riskiest portions of some existing BRI loans have been carved out and sold to multilateral financial institutions with tougher standards than the originating Chinese banks, while a steadily increasing percentage of new loans are made to select debtor nations that have a good track record of paying their notes.
AidData quoted some critics who said China was merely “greenwashing” BRI by making a few “virtue-signaling” loans under stronger ESG standards to generate good press, while the majority of the trillion-dollar project still fails to meet American or European standards.
AidData’s researchers thought Beijing was a bit more serious about improving its standards than that because it has concluded that sloppy loans are also risky loans – and because Western competitors to BRI, such as the U.S.-Japan-Australia “Blue Dot Network,” are making headway at convincing developing nations to avoid China’s less safe and sustainable projects.
Chinese Foreign Ministry spokesman Wang Wenbin was asked on Tuesday about AidData’s finding that some 80 percent of Belt and Road loans were issued to countries in financial distress. He replied with the usual Chinese Communist Party invective against allegations that Beijing built “debt traps” for the developing world, contemptuously repeating the phrase a dozen times in his response.
“Anyone who talks about only the negatives of debt without mentioning its benefits or even portrays it as a poison for development is simply being ill-informed or amateurish,” he said, without really addressing the point that loaning hundreds of billions of dollars to corrupt, unstable, and/or impoverished countries may not have been a good idea.
“Leaders of developing countries have noted that China shows up where and when the West will not or are reluctant and is a true good friend,” Wang insisted.