China is falling into its own debt trap as the country’s banks have sharply reduced lending to low-income countries under its flagship Belt and Road initiative (BRI) after the crumbled economies of borrowing countries have left the Asian giant with huge piled up loans, a report has said.
Under the BRI, China dumped over USD 1 trillion as loans to nearly 150 developing and least developed countries at high rates of interest, becoming the world’s largest official creditor for the first time.
But the country is learning hard lessons as the borrowing countries are facing foreign exchange crises and cannot pay back the Chinese debts. Nearly 60 per cent of China’s overseas loans are currently held by countries considered to be in financial distress, compared with just 5 per cent in 2010.
Countries like Pakistan and Sri Lanka are recent examples of China’s worrisome situation. Amid the continued political instability, the economy of Sri Lanka collapsed recently and Pakistan is also on the brink of an economic collapse. The two countries are failing to repay their loans, posing a threat to the Chinese economy, the European Times reported.
The recent floods in Pakistan have forced Islamabad to go to the International Monetary Fund for a bailout package. Similarly, Bangladesh is also finding it difficult to service its external debts. Several African countries have also been unable to complete the BRI projects and are finding it difficult to repay their loans.
According to the European Times, in the first six months of 2022, BRI investment and financing was only 40 per cent of what it was in the same period in 2019. Sri Lanka received no new BRI loan in 2022. Lending through BRI has slowed sharply since 2017, primarily because a growing number of infrastructure projects are facing difficulties and a domestic campaign against financial risks.
According to a study, to secure these BRI projects Chinese agencies often pay large sums to politicians and military officials in the borrowing countries because of which the terms of these loans are kept a secret.
As a result, international credit rating agencies cannot assess the borrowing countries’ creditworthiness. Hence, when the economies of these borrowing countries started crashing, the Chinese agencies funding the BRI projects were the first to be taken by surprise, reported the European Times.
It is significant that while in 2014, only about 10 per cent of the borrowing countries under BRI were faced with any liquidity crunch, by mid-2022 about 70 per cent of them were defaulters. About 40 per cent of the debt which the poor countries owe is due to China.
The COVID-19 pandemic, followed by the Russia-Ukraine conflict, has adversely affected emerging economies. As countries struggle to meet debt obligations, China is likely to face more problems, the report said.
Unfortunately for China, its design to keep as collateral the projects where it had invested has also failed. The projects have either been shelved or are of no commercial value.
Gwadar Port in Pakistan is yet to be completed. For the past two years, the Pakistan government has not paid their dues for the power projects; agreements are being violated since 2018. The international airport at Zambia, Hambantota Port in Sri Lanka and Colombo Port City are not viable and of no commercial value, reported European Times.
The report further said that in late August 2022, Beijing once again parried the request from Colombo for the restructuring of its debt to China, saying “the ball is in Sri Lanka’s court.” It is estimated that in 2022-23 Sri Lanka owes China about USD 2 billion by way of debt repayment.
Still reeling under its economic crisis, the island nation has made several requests for restructuring of debt to give it breathing space but has each time been cold-shouldered.
For Sri Lanka, it is vital to arrive at a debt restructuring arrangement with China to obtain a bailout from the IMF. But Beijing has asked Colombo to discuss the issue with Chinese banks instead.
According to the State Bank of Pakistan, the central bank of the country, Pakistan is on the brink of economic collapse and poised to go the Sri Lanka way. With the pressure of debt servicing, the situation is unlikely to change.
The only hope for Pakistan to avoid bankruptcy is to secure a deal with the IMF for a USD 6 billion assistance package. It is reported that the IMF wants to ban Pakistan from borrowing more from China for the projects under China Pakistan Economic Corridor before extending the assistance, reported European Times.
On the other hand, the rising anti-China feelings on Pakistani nationals are another concern for China for its strategy of land-grabbing and providing employment to its own people at the cost of the local population.
China has also threatened Pakistan to shut down their power plants unless payments are made upfront, alleging payments have not been made for already used power.
Moreover, many African countries have voiced their concerns over the unsustainable BRI loans. Zambia has already cancelled its foreign loans which mainly constitute Chinese ones to stop aggravating its debt distress. This means 14 projects under the BRI are withdrawn.
Earlier, this month Zambia received a USD 1.3 billion financial loans from IMF, with a grace period of five and a half years and a final maturity of ten years.
Zambia has specifically stated that it will completely cancel 12 planned projects, half of which were expected to be funded by China EXIM Bank, along with one by ICBC for a university and another by Jiangxi Corporation for a dual highway from the capital.
Additionally, the government cancelled 20 of the unpaid loan sums, some of which were for brand-new projects and others for ongoing ones. Such cancellations are not unusual for Zambia, but almost 30 per cent of Zambia’s debt comes from Chinese partners compared to non-Chinese private creditors.
According to an Observer Research Foundation study, Chinese loans account for over one-fourth of the total external loans of African countries with high debt distress. The total loan of China to countries in the African continent is estimated to exceed USD 140 billion. Among the major recipient countries of Chinese loans are Angola, Ethiopia, Kenya, the Republic of Congo, Zambia and Cameroon.
China’s debt trap policy BRI is often criticised which China is alleged to be used to take control of vital installations in other countries and expand its military presence, the European Times reported.
Meanwhile, According to a Wall Street Journal report, “After nearly a decade of pressing Chinese banks to be generous with loans, Chinese policymakers 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,” the report added.
“As China is increasingly isolated from the international community, the ‘Belt and Road’ has become increasingly important to Xi Jinping’s strategy. Beijing hopes that the 2.0 version of the ‘Belt and Road’ will become more sustainable”, the report concluded.