View: China’s overseas loan crisis, a balloon that can burst at any time

When Chinese Premier Xi Jinping launched the Chinese government’s Belt and Road Initiative (BRI) program to much fanfare in 2013, he had no idea what was in store for us in the future. China at that time had huge foreign exchange reserves of 3 trillion dollars, and Xi Jinping thought of investing it in various countries to strengthen his ambitious supply chain model called BRI. The objective was clear, first to invest the excess foreign exchange reserves in poor countries, to start the projects with extremely high profits, and then to reap the benefits. Theoretically, everything was perfect and China expected very high returns on its investments. But fate had something else in mind, and today China is suffering its worst overseas loan crisis. Let’s analyze how the Chinese BIS balloon burst.

1. Loans: China is the world’s largest bilateral creditor to date, disbursing about 6% of global GDP in loans/debts to other countries. It is estimated that in the first seven years of the BRI (2013-2020), China disbursed loans worth a trillion dollars. Of this amount, nearly $160 billion is disbursed to Africa while an additional $125 billion is disbursed to Russia. In the initial phase of the BIS, the loans were in the name of project finance, but after 2018, when the distress signals became visible, Chinese banks began to convert these project funds into short-term emergency loans. where not only was the repayment period very short (1-3 years), but the interest rates were also very high (3-5% above LIBOR/SHIBOR). It was a turning point because after this event, most of the countries that sought funds from China, understood the infamous Chinese module and either withdrew from the projects or looked for alternatives, which led to the death of funding Chinese projects.

2. Hidden defects and credit ratings – China knew very well that the profitability of the projects it financed is very high and that there are hidden defects where it paid huge sums to politicians, military officials or to other influencers. That was the reason; he kept their debtors under strict rules of confidentiality and did not allow them to divulge any details or breakdown of their loans to anyone. While this kept their loan secret and initially secured their investment, it also backfired in a way that made it nearly impossible for international credit agencies to rank credit to these debtor countries and assess them. So, when the economies of these debtor countries collapsed, no alarm was given by these credit agencies as they did not have accurate data and so Chinese financial institutions were also taken by surprise. An article by the National Bureau of Economic Research in the United States found that half of the 5,000 loans and grants given to 152 countries from 1949 to 2017 were not reported to the IMF or the World Bank. Zambia, Sri Lanka, Laos and Pakistan are recent examples of this default where credit agencies have still not been able to find exact debt details.

3. Situations leading to default – Various factors have led to debt service default in poor countries. It is reported that while at the end of 2014, only 10% of Chinese borrowers had some kind of liquidity crisis, more than 70% of them were officially in default by mid-2022. In the initial phase of this loan, the non-viability of projects, internal unrest, terrorism, ethnic turmoil and global factors were the main reasons that led to the default, but after 2020 the chart dipped sharply and first due to the COVID19 pandemic, then due to the war between Russia and Ukraine, the situation spiraled out of control, resulting in China’s worst overseas debt crisis.

4. Debt restructuring and other measures – Debt restructuring is the most common method by which a country should seek relief from its lender. Most Chinese borrowers have done the same and in 2021-22 a long list of countries have requested debt restructuring or debt refinancing or a grace period to repay their debts. This was not expected by Chinese financial institutions. In the past two years alone, Chinese banks have carried out more than 60 debt restructurings with various countries. China also had no other choice as the borrowing country was bankrupt and unable to repay its money. The turnover not only creates an impact on the overall cost, but also creates a major liquidity crisis. China thought about it and started a currency exchange system with some countries, but due to the war between Russia and Ukraine and the increasing value of forex in the market, this system also failed miserably.

5. Poor Value of Collateral/Status of Projects – Wherever China has invested in projects, it has taken those projects as collateral, but in the current scenario, those projects have been shelved or have no commercial value. For example, the port of Gwadar in Pakistan is still under construction even though all the money given for it has ended. Power projects in Pakistan have been underway for several years, but the Pakistani government has not paid their dues for more than two years. Very few projects have been completed and in an unfinished state, no project has any commercial value. Similarly, Zambia International Airport, Port of Hambantota, Airport and Convention Centre, Port City of Colombo, various Special Economic Zones in Pakistan and several other projects in various countries were not viable or n had no value. They can’t even be sold because their costs have been greatly increased to give better profits to Chinese companies, so everything is at an impasse.

From a $360 million Zambian international airport project to a $1.4 billion urban port in the Sri Lankan capital of Colombo and an ambitious Gwadar port city project in Pakistan, China is everywhere but is stuck deep in the mud of an overseas debt crisis. According to the World Bank, almost 40% of the debt that the poorest countries have is owed to China and these countries are not able to repay it. Many of these countries have already exceeded their GDP in loans and have officially defaulted.

The projects don’t do well and they can’t even be monetized. Confiscating the assets of these countries will not bring in any money, which will lead to a severe liquidity crisis for China. All measures to improve the situation failed drastically. Although the Chinese economy is robust and still has large foreign exchange reserves, the future is totally uncertain because, under the cover of a confidentiality agreement, they cover their own ears to be informed. aware of a possible financial catastrophe. The next two years are extremely crucial for China and they need to watch carefully before the balloon bursts.

Janet E. Fishburn