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China’s overseas lending crisis, a balloon which may burst anytime

09 Aug , 2022   By : Kaushiki Mehta

 China’s overseas lending crisis, a balloon which may burst anytime

When in 2013, Chinese premier Xi Jinping launched the “Belt and Road Initiative (BRI)” scheme of the Chinese government with much fanfare, he had no idea as to what lies in the future. China at that time had a whopping 3 trillion USD foreign reserves, and Xi Jinping thought of investing it in various countries to strengthen its ambitious supply chain model called as BRI. The aim was clear, first invest the surplus foreign reserve in poor countries, start the projects at extremely high profits and then reap the benefits out of it. Theoretically everything was perfect and China expected very high returns on its investments. But destiny had something else in the mind, and today, China is suffering from its worst overseas lending crisis. Let us analyse how the balloon of Chinese BRI burst.

1. The Lending: China is the single biggest bilateral creditor in the world as on date which has disbursed about 6% of global GDP as loans/ dues to other countries. It is estimated that in the first seven years of BRI (2013-2020) alone, China disbursed loans worth one trillion USD. Out of this, nearly 160 Bn USD are disbursed in Africa while another 125 Bn USD are given to Russia. In the initial phase of BRI, the loans were in the name of project financing, but post 2018, when the signals of distress became visible, Chinese banks started converting these project financing into short term emergency loans where not only the repayment period was very less (1-3 years), but the interest rates too were very high (3-5?ove LIBOR/ SHIBOR). This was a turning point because post this event, most of the countries who were seeking the funds from China, understood the nefarious Chinese module and either withdrew from the projects or looked for alternatives resulting in Chinese project financing going into mud.

2. Hidden defaults and credit ratings- China knew it very well that the profitability in the projects where it funded is very high and there are hidden defaults where it paid huge sums to the politicians, military officials, or other influencers. This was the reason; it kept their debtors under strict confidentiality rules and did not allow them to release any detail or breakdown of their lending to anyone. Although this kept their lending secret and initially secured their investment, it also backfired in a way that made things near impossible for international credit agencies to classify the credit to these debtor countries and rate them. So, when these debtor countries’ economies were crashing, there was no alarm raised from these credit agencies because exact data was not available with them and hence Chinese financial institutions were also caught by surprise. A paper of the National Bureau of Economic Research in the United States revealed 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 & Pakistan are recent examples of this default where credit agencies have still not been able to find the exact details of the debt.

3. Situations leading to default- There were various factors which led to the default in debt servicing by poor countries. It is reported that while by end-2014, only 10% of Chinese borrowers had some kind of liquidity crunch, over 70% of them were defaulted officially by mid-2022. In the initial phase of this lending, non-viability of the projects, internal disturbances, terrorism, ethnic turbulences, and global factors were the prime reasons leading to default but post 2020 the graph took a sharp dive and firstly due to COVID19 pandemic and then due to Russia Ukraine war, situation went out of hand resulting in the worst ever overseas debt crisis of China.

4. Debt restructuring & other measures- Debt restructuring is the most common method by which a country should ask for relief from its lender. Most of the Chinese borrowers did the same and in 2021-22 there was a long list of countries who asked for debt restructuring or roll over of their debt or a grace period to repay debts. It was not planned by Chinese financial institutions. In the last two years alone, Chinese banks have carried out over 60 debt restructurings with various countries. China had no other options too as the borrower country was bankrupt and unable to pay back its money. Roll over not only creates an impact on overall cost but also creates a major liquidity crunch. China thought of it and initiated a currency swap system with some of the countries but due to the Russia Ukraine war and increasing value of forex in the market, this system too failed miserably.

5. Poor value of Collaterals / status of projects- Wherever China invested in projects, it took those projects as collateral but in the present day scenario, these projects have either been shelved or have no commercial value. For example, Gwadar port of Pakistan is still under construction while all the money given for it is finished. The power projects in Pakistan have been running for the last several years but the Pakistan government has not paid their dues for more than two years. Very few projects have been completed and in an incomplete state, no project has any commercial value. Similarly, Zambia’s international airport, Hambantota Port, Airport & Convention centre, Colombo Port City, various special economic zones in Pakistan & several other projects in various countries were either not viable or had no value. They cannot even be sold off as their costs were heavily escalated to give better profits to Chinese companies hence everything is in a stalemate.

From a $360 million project of Zambia's international airport to a $1.4 billion city port in Sri Lanka's capital of Colombo and an ambitious Gwadar Port city project in Pakistan, China is everywhere but is stuck neck deep in the mud of an overseas debt crisis. According to the world bank, nearly 40% of the debt which the poorest countries own is due to China and these countries are in no position to repay it. Many of these countries have already surpassed their GDP in loans and officially defaulted.

The projects are not doing well and they cannot even be monetised. Confiscating the assets of these countries will not give money, hence resulting in a severe liquidity crisis for China. All the measures to improve the situation have failed drastically. Although the Chinese economy is robust and it still has large foreign reserves, the future is totally uncertain because in the disguise of confidentiality agreement, they themselves shut their ears to know about any possible financial doomsday. Next couple of years are extremely crucial for China and it has to watch carefully before the balloon bursts.

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