For at least two years, it has been clear that the wheels have been coming off China’s Belt and Road Initiative, the $838 billion program launched by Beijing in 2013 to build infrastructure in about 160, mostly developing, countries. Yet as Beijing seeks to contain the fallout from stalled projects and non-performing loans, it risks complicating matters with an increase in “emergency loans”.
New data from AidData, a US-based research lab, has revealed evidence of Chinese bailout loans to Pakistan, Argentina, Sri Lanka, Mongolia, Kenya, Venezuela, India. Ecuador, Laos, Angola, Suriname, Belarus, Egypt and Ukraine. Three of the biggest recipients, Pakistan, Sri Lanka and Argentina, have together received up to $32.83 billion since 2017, AidData found.
This type of credit is very different from the infrastructure loans that dominate the BIS. It aims to save countries from defaulting on their external debt, including that borrowed from Chinese institutions and used to build ports, airports, roads, railways and other BRI infrastructure.
In one respect, such assistance should be applauded. The Covid-19 pandemic has hit many emerging markets hard and pushed more than 100 million people into extreme poverty, according to World Bank estimates. Without the Chinese bailout loans, it is likely that financial crises would have erupted in more countries least able to cope with them.
But a broad emerging market debt crisis remains a distinct possibility. Kristalina Georgieva, managing director of the IMF, said this month that about a quarter of emerging countries and more than 60% of low-income countries face difficulties, sometimes severe, in repaying their debts.
Georgieva called on major creditors like China to “prevent difficulties from arising”. What can and should China do? First, Beijing should cooperate with IMF-led bailouts, as it did in the case of Zambia and tentatively for Sri Lanka, under the auspices of an elaborate debt relief framework. by the Group of 20 largest economies.
But the next steps present a real test. Chinese creditors will have to set aside their longstanding aversion to book losses on their loans. Moreover, these creditors will have to allow the terms of their loans, which have long remained largely hidden, to be exposed to public view. Such transparency will be necessary if all creditors are to be satisfied that they bear a fair share of likely haircuts.
However, the number of different Chinese creditors, which include the central bank, strategic banks, state-owned commercial banks and others, may complicate the task of reaching quick resolutions. With the speed of gasoline, these institutions should move quickly to agree on seniority issues so as not to delay proceedings.
In the longer term, the G20 is the best forum in which China can cooperate with other bilateral creditors on debt restructuring in emerging markets. Beijing has long favored this forum in international affairs because its members include large emerging countries as well as rich Western nations.
Ultimately, however, it will be in everyone’s interest – including those in Beijing – to create an effective debt settlement and emergency lending system that can deal quickly with debt crises on Emerging Markets. This means bringing China’s “bailout lending” practices closer to those of other international creditor organizations such as the Paris Club and the IMF. The chances of averting crises, or dealing with them quickly, will be greatly improved by such a spirit of cooperation between China and Western-led agencies.
