Comrade Xi’s legacy project has been built on debt

China has forked out US$240 billion to bailout heavily-indebted Belt and Road nations in a move to prop up its banking sector.

Rampant global inflation and the lingering impact of the Covid-19 pandemic have turned President Xi Jinping’s $1 trillion foreign policy dream into a nightmare.

Up to 80% of Beijing’s rescue loans were made between 2016 and 2021, a 40-page report released this week by the World Bank, Harvard Kennedy School, AidData and the Kiel Institute for the World Economy revealed.

“Beijing is ultimately trying to rescue its own banks. That’s why it has gotten into the risky business of international bailout lending,” Harvard Kennedy School Professor Carmen Reinhart, one of the study’s authors, said. 

“But if you are going to bail out a borrower that is in default or teetering on the edge of default, it’s important to have a clear understanding of whether you are trying to solve a short-term liquidity problem or a long-term solvency problem,” the former World Bank chief economist added.

Road to debt:

• The B&R Initiative was the jewel in the crown of Xi’s foreign policy.
• These New Silk Roads included a maze of multi-billion-dollar infrastructure projects and digital links.
• They involved 150 nations and five billion people across the globe.
• They also accounted for 3,000 projects worldwide, China’s Ministry of Foreign Affairs stated last year.
• Yet many of the countries that joined the B&R “family” are now struggling to pay off the interest on loans.

The report makes grim reading for the low-income countries.

Delve deeper: Most of China’s emergency funding went to mainly middle-income countries including Argentina, Mongolia and Pakistan. Argentina, for example, received a $111.8 billion “bailout,” followed by Pakistan on $48.5 billion and Egypt on $15.6 billion.

Between the lines: “Middle-income countries, which represent 80% or more than $500 billion of China’s total overseas lending, pose major balance sheet risks, so Chinese banks have incentives to keep them afloat via bailouts,” AidData, an international development research laboratory at The College of William & Mary in the United States, pointed out.

State of play: But the report makes grim reading for “low-income countries” caught up in China’s debt trap diplomacy. “[They] represent only 20% of China’s total overseas lending [and] are less important to the health of the Chinese banking sector and rarely get bailed out,” AidDate said. 

Big picture: The working paper was released on the day that the Boao Forum, or China’s answer to Davos by the sea, kicked off on the tropical island province of Hainan. Before the Covid-19 crisis, it had become Comrade Xi’s cheerleader for the Belt and Road Initiative. 

China Factor comment: A key takeaway from the report is that Beijing bailouts are “not cheap.” Interest on loans from the International Monetary Fund runs at 2% compared to 5% “attached to” Chinese rescue packages. So much for Xi’s “project of the century.”