Monday, May 20, 2024

Mint Explainer: China’s Belt and Road Initiative has dug itself into a hole

A new study seems to confirm that China’s Belt and Road Initiative (BRI) is in trouble. It reveals that Beijing’s bailout lending to debt-ridden countries, who are overwhelmingly participants in China’s BRI program, has shot up to a colossal $240 billion. Mint breaks down the report’s findings:

  • Researchers from Harvard’s Kennedy School and the Kiel Institute found that China has emerged as a major crisis lender to developing nations in debt distress. Since 2000, over 20 countries have received more than $240 billion in bailouts.
  • The study found that around $185 billion in Chinese rescue funds came in just the five years between 2016 and 2021. A deeper look revealed that the primary recipients of this aid are countries that are already heavily indebted to China. Many of them acquired their exposure to China during the lending boom of the 2010s, associated with the BRI.
  • According to the report, China has a few key ways of providing relief funding for countries in distress. The People’s Bank of China, its central bank, has set up a currency swap arrangement with a number of debtor nations. The study found that developing countries in financial distress, like Pakistan, borrowed heavily from this facility – to the tune of $170 billion.
  • Another method is providing monetary support directly to governments in need of financial support. The study estimated that China spent a total of $70 billion by providing bridge loans and other financial support to debtor nations.
  • China’s emergency financial relief is also more expensive than that provided by other foreign governments and multilateral banks, the study found. A typical Chinese rescue loan comes with an interest rate of 5% while a loan from the IMF or the World Bank is considerably cheaper.
  • “In sum, China has developed a system of “bailouts on the Belt and Road” that helps recipient countries to avoid default, and continue servicing their BRI debts, at least in the short run,” the report noted.
  • It also seemed to confirm a worrying trend for Beijing – the wheels seem to be coming off the ambitious BRI. China has chosen to back developing countries and build a host of mega-projects across Asia, Eastern Europe and Africa. However, prominent project failures and massive increases in debt burdens have led to accusations of “debt trap diplomacy”.
  • The report makes the case that China’s bets appear to have gone badly wrong, at huge cost to the country’s exchequer. Beijing has already begun to change tack and new lending for ambitious infrastructure projects under the BRI has dropped sharply.
  • China’s often opaque methods of delivering financial relief may be setting a questionable precedent. The report found its behaviour an instructive example of how new creditor nations may “use central banks and other state-controlled institutions to channel rescue loans in opaque ways. These developments may indeed foreshadow a deeper shift towards a more multipolar and fragmented international financial architecture”.

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