China’s leadership in Beijing must feel as though the world of finance has ganged up on them. Especially since they spent so many years sitting atop a rapidly growing economy with strong national finances, recent setbacks must have shocked them.
First came the news that property developer Evergrande could not manage its debt obligations. And with it clear that this matter would not resolve itself and strong signs that Evergrande is not alone, China’s financial system has suddenly come under threat. Now it appears that things are not going as smoothly as expected in China’s Belt and Road Initiative (BRI). Especially because the client states working with China may fail to meet their debt obligations, the project has added considerably to Beijing’s financial headaches.
The BRI was supposed to enhance China’s global influence and stature. Through it, Beijing approached poorer countries with offers to help them realize needed infrastructure projects—roads, bridges, ports, and the like. Beijing offered loans to pay for the work and tied the monies to the use of Chinese firms, mostly state owned, for construction and management once the project was completed. Sometimes the People’s Liberation Army took a role. If for some reason the client state could not meet its financial obligations, the Chinese firms involved in the project would take ownership. Beijing’s foreign minister described the initiative as “the largest international cooperation platform in the world today.” It certainly benefits China, giving Beijing influence elsewhere in the world and Chinese firms profitable deals while getting the client state to pay for it.
Deals grew rapidly after the BRI began in 2013. Today, there are some 13,427 projects, according to research done by a group called AidData at the College of William and Mary. Almost half of these are in Africa, but they also extend through East Asia, Central Asia, and the Middle East. These efforts are supported by the equivalent of $813 billion in loans. Some 400 of these projects, valued at $8.3 billion, involve the Chinese military. For a while it looked as though the initiative would serve its purpose well. It still may, but problems have arisen.
Increasingly, nations invited in by Beijing are balking at the debt involved. Malaysia is a standout, only because Beijing denied that nation trade deals presumably as punishment for refusing a Belt and Road offer. Meanwhile, some 35 percent of the projects record cost overruns or delays, both of which enlarge the amount of debt involved. Most telling and perhaps most ominous is the growth of that debt. It has expanded so that today some 42 of the countries involved with the BRI now owe China more than 10 percent of their gross domestic product (GDP). In other words, many of the debtors cannot pay. China already had to suspend payments for 19 African countries.
So far, Beijing has avoided any write downs of this BRI debt, as it has done with the nation’s domestic debt overhang. That reluctance might serve a political purpose, but the unpaid and unpayable debt still burdens China’s financial system whether it is acknowledged or not. And it will continue to burden it. To be sure, the BRI debts are owed to China not by the Chinese, as is the case with Evergrande and firms like it. But the burden exists because a failure to pay, regardless of who does it, undermines everyone’s trust in financial arrangements. The old financial saw neatly captures the essence of the problem: “If you owe the bank $10,000 and cannot pay, you have a problem; if you owe the bank $10 million and cannot pay, it has a problem.”
It is little wonder then that Beijing has pulled back some in promoting the Belt and Road. Some have blamed Beijing’s loss of enthusiasm on the pandemic, but Beijing’s rethink began even before most of the world knew of COVID-19. Chinese leader Xi Jinping signaled the change in 2019 when he told the heads of state of the largest BRI partners that China would increasingly emphasize financial stability and transparency. Perhaps Xi was troubled by the amount of borrowing that recipients kept off their national accounts, a figure approaching the equivalent of $385 billion, according to the researchers at William and Mary, almost half the total. And it is clear that Xi has followed up. Outlays in Africa fell 30 percent in 2019. Though more recent data are not yet available, indicators suggest that the cutbacks have continued. Some in China promise that the funds will flow freely again soon, but that seems highly unlikely with so much unpaid debt overhanging so many of these relationships.
Diplomatic needs will ultimately direct Beijing, even if the debt builds and much of it fails. But it is also clear that the unresolved debt overhang, especially combined with domestic debt problems, has given China’s leadership in Beijing an important lesson in finance. It is one that, Xi’s insouciant pose to the contrary notwithstanding, will continue to affect policy and do so more intensely still when the full extent of the debt failures—domestic and within the BRI—become clear.
