China Must Bail Out Debtors » Leadersnet

The New Silk Road will become a multi-billion burden for China. According to an analysis by AidData, the Harvard Kennedy School, the Kiel Institute for the World Economy (IfW Kiel) and the World Bank, more and more emerging and developing countries can no longer service the loans to build infrastructure as planned. Beijing is therefore spending more and more money on bailout loans.

$240 billion lousy

According to the study, 60 percent of all Chinese foreign loans are at risk of default (as of 2022). For comparison: in 2010 this share was just five percent. According to the study authors, by the end of 2021 Beijing had already issued 128 rescue loans to 22 debtor countries with a total value of 240 billion dollars.

The bulk – $170 billion – is made through central bank lending, which is difficult for international organizations and rating agencies to understand. These are often refinancing loans, i.e. the extension of terms or payment terms or the granting of new loans to finance due debts.

Income matters

According to the analysis, debt cancellation is extremely rare. Chinese banks have sharply reduced regular lending for new infrastructure and energy projects as a result of the massive bailout loans, raising questions about the future of the New Silk Road.

For Beijing, debtor countries with payment difficulties are definitely problematic. Middle-income countries pose major balance sheet risks for Chinese banks because they account for 80 percent, or more than $500 billion, of China’s total foreign lending.

China’s leadership therefore has great incentives to prevent these countries from defaulting. In the event of payment difficulties, it usually offers them new loans in order to pay off the old debts. Since many of these countries have poor credit ratings and low foreign exchange reserves, the default risk for the new loans is correspondingly high.

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