China’s Belt and Road Initiative Reaches the Debt Bailout Stage

When China’s Belt and Road Initiative was announced a decade ago in 2013, it had an appealing intuition behind it.

China would help to finance the building of land and sea infrastructure links across Asia and Africa. It seemed plausible to believe that, on average, infrastructure spending in that rapidly growing part of the world economy would have a reasonable payoff.

But as I looked into it further, the economics looked more dicey. As it turned out, many of the projects that China was financing had been proposed to other banks and development agencies, but had been turned down. Thus, China was in effect becoming the subprime lender to infrastructure projects in that part of the world. China’s motives for these projects clearly had a substantial political dimension. For example, the loans that China was providing to other countries were often paying for Chinese construction firms to do much of the work. China’s lenders often seemed more concerned with expanding the Chinese political footprint than with issues like how these large-scale projects affected local workers and the environment in the borrowing countries.

I laid out some of the issues over the last few years in “China’s Belt and Road Initiative: Grand or Grandiose?” (September 10, 2018), ”China’s Belt and Road Initiative: The Perils of Being a Subprime Global Lender” (July 30, 2019),  ”China’s Belt and Road Initiative: Could It All Come Crashing Down?” (November 18, 2019), and “China’s Belt and Road Initiative Collides with Pandemic Realities” (December 9, 2020).

When countries took out big loans from state-owned Chinese banks to build these infrastructure projects, it was all smiles and rainbows. But as we reach the stage where loans are due for repayment, there’s a lot less cheeriness. China has recognized that the international reputation of the Belt and Road Initiative is on the line: Is it a win-win arrangement for financing infrastructure, or a cover for a Chinese political power grab? China has been actively bailing out Belt and Road borrowers. Sebastian Horn, Bradley C. Parks, Carmen M. Reinhart, and Christoph Trebesch provide the evidence in “China as an International Lender of Last Resort” (AIDDATA: A Research Lab at William & Mary, Working Paper 124, March 2023.”

From the abstract:

This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. … In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China’s Belt and Road Initiative.

In the past, when countries experienced a debt crisis, international agencies like the IMF would take a leading role in negotiating a resolution. It was recognized that if debt burdens just drove the national economies of the borrowers further into recession, then the lenders weren’t going to be repaid much. However, if a negotiation could lead to a situation where some of the debt could be forgiven and restructured, along with a dose of economic reform from the borrowers, then both the borrowers and lenders could end up better off.

Some of the bigger recipients of bailouts include Argentina (!), Belarus, Mongolia, Suriname, and Sri Lanka, Pakistan, Egypt, and Turkey. The authors write (citations omitted):

We therefore find that China has emerged as a key lender of last resort for a growing number of developing countries. However, its role in the international financial system is less central, by far, than that of the established global lenders of last resort. China’s bailouts are small compared to the IMF’s global lending portfolio and dwarfed by the sweeping international USD liquidity support extended by the U.S. Federal Reserve (Fed) since 2007, primarily to advanced economies. We also find that Beijing has targeted a limited set of potential recipients, as almost all Chinese rescue loans have gone to low- and middle-income BRI [Belt and Road Initiative] countries with significant debts outstanding to Chinese banks.

In sum, China has developed a system of “Bailouts on the Belt and Road” that helps recipient countries to avoid default, and continue servicing their BRI debts, at least in the short run. China’s role as an international crisis manager can therefore be compared to that of the US Treasury during previous Latin American debt crises or to a regional financial institution like the European Stability Mechanism, which helped to avert, delay, or resolve defaults by highly indebted borrowers, rather than to a global financial backstop with “deep pockets” …

A challenge that arises here is that Belt and Road borrowers may also have borrowed heavily from countries outside of China as well (as in the case of Argentina). When a debt crisis for such a country comes to a head, there will be calls for the IMF to step in and facilitate negotiations. But negotiating debt relief with a range of financial institutions including China’s state-owned banks will not be easy. China tends to view the IMF and other international agencies as controlled by US and European interests (and it’s not obviously wrong to do so).