China’s stiff resistance to write-offs has held up debt relief to countries like Pakistan
China’s Belt and Road Initiative (BRI) is the greatest global infrastructure initiative in history. China has lent over one trillion dollars to Third World countries, becoming a bigger lender than the World Bank, regional development banks, and western financiers combined. This worries western countries embroiled in a new Cold War with China. Two years ago, they planned a rival infrastructure spree to combat BRI. This got nowhere.
That is now history. Today, BRI is in trouble and lending has been slashed. One Foreign Affairs columnist called BRI “a road and belt to nowhere.” Over 60 developing countries today face a debt crisis brought on by overborrowing during the heady 2010s. In 2022, 60% of Chinese overseas loans went to distressed borrowers, up from 5% in 2010. Many cannot repay.
Since 2013, BRI has been endorsed by 139 countries, including European ones. BRI contracts are typically opaque and the terms secret. They typically carry commercial terms with high-interest rates — concessional lending is a tiny fraction.
That is now history. Today, BRI is in trouble and lending has been slashed. One Foreign Affairs columnist called BRI “a road and belt to nowhere.” Over 60 developing countries today face a debt crisis brought on by overborrowing during the heady 2010s. In 2022, 60% of Chinese overseas loans went to distressed borrowers, up from 5% in 2010. Many cannot repay.
Since 2013, BRI has been endorsed by 139 countries, including European ones. BRI contracts are typically opaque and the terms secret. They typically carry commercial terms with high-interest rates — concessional lending is a tiny fraction.
Indermit Gill, chief economist of the World Bank, says the debt crisis is so bad that a case-by-case approach to debt relief will not work— a wholesale debt write-off is required. Western lenders are willing to listen but not China. It claims it has already renegotiated a number of loans. But such renegotiation has focused on extending repayment periods at lower interest rates, or accepting payment through future commodity sales (which western lenders call extortion).
China has stiffly resisted write-offs. Bureaucrats who made such loans fear retribution at home if they have to write off millions. China’s intransigence has held up debt relief to many countries — including Pakistan — and worsened the debt crisis.
Biting more than it can chew
Hence BRI today is hitting China’s finances and influence too. Borrowers love lenders who lend massively with few conditions and don’t worry about the environment, displacement and rehabilitation of people, or labour issues (as the World Bank does). Hence BRI once helped China win friends. But the same borrowers dislike going bust and finding that the big lender resists write-offs. Instead of buying influence, BRI today is buying hostility.
India has criticised BRI, and said it lures borrowers into a debt trap. China’s total loans are a minority of total Third World debt, so it cannot be held responsible for the whole debt crisis. But it is guilty of lending recklessly without due diligence, financing white elephants like Hambantota in Sri Lanka. Many BRI projects — such as railways from China to Europe — are great successes. But the pressure to lend has often affected lending standards.
China’s citizens do not spend enough, creating a huge savings rate of 46% of GDP, well in excess of its investment needs. China has tried channelling surplus savings into real estate but created a bubble ready to burst.
The mirror image of China’s savings surplus is a large trade surplus. China’s trade surplus has been exacerbated by large inflows of foreign investment, creating an excess of billions of dollars. Once, China put these excess dollars into foreign exchange reserves, mostly US securities. But this, in effect, amounted to lending to the US at very low-interest rates.
Biting more than it can chew
Hence BRI today is hitting China’s finances and influence too. Borrowers love lenders who lend massively with few conditions and don’t worry about the environment, displacement and rehabilitation of people, or labour issues (as the World Bank does). Hence BRI once helped China win friends. But the same borrowers dislike going bust and finding that the big lender resists write-offs. Instead of buying influence, BRI today is buying hostility.
India has criticised BRI, and said it lures borrowers into a debt trap. China’s total loans are a minority of total Third World debt, so it cannot be held responsible for the whole debt crisis. But it is guilty of lending recklessly without due diligence, financing white elephants like Hambantota in Sri Lanka. Many BRI projects — such as railways from China to Europe — are great successes. But the pressure to lend has often affected lending standards.
China’s citizens do not spend enough, creating a huge savings rate of 46% of GDP, well in excess of its investment needs. China has tried channelling surplus savings into real estate but created a bubble ready to burst.
The mirror image of China’s savings surplus is a large trade surplus. China’s trade surplus has been exacerbated by large inflows of foreign investment, creating an excess of billions of dollars. Once, China put these excess dollars into foreign exchange reserves, mostly US securities. But this, in effect, amounted to lending to the US at very low-interest rates.
Instead, China decided to finance infrastructure projects abroad on a massive scale. This utilised surplus dollars, spurred its own exports, and offered substantial financial and diplomatic returns. Thus, BRI was born.
But all good things come to an end. BRI has now become too large to productively utilise Chinese capital, so additional lending goes too often into dicey schemes and over-borrowed countries.
Learnings for India
What are the lessons for India? First, do not worry over much that BRI will give China friends galore. For decades after Independence, India loved foreign aid but did not love the US and other donors. Similarly, Third World borrowers love BRI loans but that does not mean love for China, least of all when they have a debt crisis and China is the least willing to write off the debt.
The second linked lesson is that an aid spree will not win India friends. India is still a poor country with a savings gap and current account deficit. For such a country to lend abroad is risky and must be done carefully on a limited scale. India should provide modest aid to neighbours in distress (Sri Lanka), or those hit by tsunamis (Indonesia) and earthquakes (Syria and Turkiye). But not even in theory should India dream of its own BRI.
Third, India must exercise strict diligence in giving foreign loans. Diligence is needed to ascertain the viability not only of projects but of borrowers. Diplomats tend to ignore commercial possibilities and think only of buying friends. This unwise approach must be checked.
Learnings for India
What are the lessons for India? First, do not worry over much that BRI will give China friends galore. For decades after Independence, India loved foreign aid but did not love the US and other donors. Similarly, Third World borrowers love BRI loans but that does not mean love for China, least of all when they have a debt crisis and China is the least willing to write off the debt.
The second linked lesson is that an aid spree will not win India friends. India is still a poor country with a savings gap and current account deficit. For such a country to lend abroad is risky and must be done carefully on a limited scale. India should provide modest aid to neighbours in distress (Sri Lanka), or those hit by tsunamis (Indonesia) and earthquakes (Syria and Turkiye). But not even in theory should India dream of its own BRI.
Third, India must exercise strict diligence in giving foreign loans. Diligence is needed to ascertain the viability not only of projects but of borrowers. Diplomats tend to ignore commercial possibilities and think only of buying friends. This unwise approach must be checked.
This article was originally published by The Times of India on February 18, 2023.
