China’s New Silk Road holds 60 percent bad loans

Belt and Road Summit in Hongkong am 31. August 2022.Foto: ISAAC LAWRENCE / AFP via Getty Images

China’s global trade offensive New Silk Road finances infrastructure projects worldwide. However, an international analysis shows that 60 percent of these loans are at risk of default. Billions more flow.

China is currently struggling with many economic problems. Years of zero-COVID policies have left their mark. Added to this is the real estate crisis and the slump in export business. Enormous defaults in international loans in connection with China’s global trade offensive New Silk Road (Belt-and-Road) are now also to come – defaults on a previously unimagined scale.

For the first time, a comprehensive international analysis brings the dimensions of these processes to light. A collaboration between researchers from the AidData Research Laboratory at the College of William & Mary in Williamsburg (Virginia, USA), the Harvard Kennedy School at Harvard University in Cambridge (Massachusetts, USA), the Kiel Institute for the World Economy (IFW) and the World Bank clear that in recent years Beijing has had to grant large amounts of bailout loans for the Silk Road loans to emerging and developing countries.

Because these countries could no longer meet their loan obligations from the infrastructure projects financed by China.

60 percent risk of non-payment

As recently reported by the Kiel Institute for the World Economy from the research results of the study “China as an International Lender of Last Resort”, the proportion of bad Chinese foreign loans in 2010 was still five percent. Meanwhile – as of 2022 – there are already 60 percent who are at risk of default.

To compensate for this development, Beijing granted bailout after bailout. The lending has to do with the major balance sheet risks for Chinese banks, it said, and that Beijing is trying to save its own banks.

$240 billion bailout loans

It should have been a total of 128 billion US dollars by the end of 2021 alone. According to the researchers, 240 billion US dollars flowed to 22 debtor countries – including Egypt, Argentina, Ecuador, Laos, Mongolia, Pakistan, Suriname, Sri Lanka, Turkey, Ukraine, Venezuela and Belarus.

According to the information, the majority of the loans – a total of US$170 billion – were granted via central bank loans, which makes them particularly difficult for international organizations and rating agencies to understand.

But what was the result of that?

China’s banks drastically reduced further regular lending for new infrastructure and energy projects. The analysis even assumes that these problems endanger the future of China’s New Silk Road.

“Chinese banks have drastically reduced regular lending for new infrastructure and energy projects as a result of the extensive bailout loans,” writes the IFW. According to the analysis, however, this raises questions about the future of the New Silk Road.

Expensive Chinese rescue

The expensive Chinese bailouts average an interest rate of 5 percent, while typical International Monetary Fund (IMF) bailouts are 2 percent.

In addition, according to the IFW, China rarely waives debt.

“Thanks to our data, we can understand China’s growing influence on the international financial order,” explained study co-author Christoph Trebesch from the IFW. So far it has not been known that China has set up a system to rescue crisis countries, “let alone the large extent and the recipients of the rescue loans”.

According to the study, 80 percent of all Chinese foreign loans – a loan volume of more than 500 billion US dollars – relate to middle-income countries. “Therefore, China’s leadership has great incentives to prevent these countries from defaulting at all costs,” writes the IFW. Therefore, in the event of payment difficulties, the regime gives priority to new loans to repay the old ones.

However, the poor creditworthiness and the low foreign exchange reserves of these countries are also driving up the default risk for the new loans.

For the remaining 20 percent – the weaker countries – there is rarely refinancing. According to the IFW, in the event of payment difficulties, the only options are debt restructuring by extending the due dates or the option of state bankruptcy.

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