China’s BRI plan caused debt to rise of its partners

China’s BRI plan caused debt to rise of its partners

According to a study, what has been found?

  • Under-reported debts to the tune of $385 billion in projects carried out in dozens of countries under China’s Belt and Road Initiative (BRI).
  • “Hidden” debt is on rise due to increasing number of deals struck not directly between governments but structured through often opaque arrangements with a range of financing institutions.
  • 42 countries now have levels of public debt exposure to China in excess of 10% of GDP.
  • The report studied 13,427 projects across 165 countries worth $843 billion, in the time period from 2000 to 2017.
  • 35% of the BRI infrastructure project portfolio has encountered major implementation problems, such as corruption scandals or labour violations, with Pakistan topping the list of countries with the most number of projects hit by scandals and corruption.

Why hidden debt is on rise?

  • The total debt was “systematically under-reported to the World Bank’s Debtor Reporting System (DRS) because, in many cases, central government institutions in LMICs [low and middle income countries] are not the primary borrowers responsible for repayment”.
  • The big difference between China and other prominent sources of overseas financing was that Chinese banks have used “debt rather than aid to establish a dominant position in the international development finance market”.
  • Since the introduction of the BRI, China “maintained a 31- to-1 ratio of loans to grants and a 9-to-1 ratio of Other Official Flows (OOF) to Official Development Assistance (ODA)”.
  • The report found the average loan from China has a 2% interest rate, a grace period of less than two years, and a maturity length of less than 10 years.
  • Many countries, such as Nepal and Sri Lanka in South Asia, turning to Chinese loans at higher interest rates is the lack of financing options elsewhere for infrastructure projects. This has seen a surge in lending from Chinese institutions over the past two decades.
  • Earlier most overseas lending involved central government institutions, now nearly 70% of China’s overseas lending is now directed to state-owned companies, state-owned banks, special purpose vehicles, joint ventures, and private sector institutions.
  • The other change with the BRI is the rising number of “mega projects” (worth $500 million or more), which has prompted Chinese banks to work through lending syndicates and financing arrangements to share the risk. The share of projects thus co-financed accounts for 32%, and is another reason behind the debt being “hidden”.
  • Chinese institutions use collateralisation to mitigate risk, for instance with loans collateralised against future commodity export receipts to minimise repayment risk, or later priced at higher interest rates, up to 6%.

Who are the biggest recipients of Chinese loans?

  • From 2000 to 2017, Iraq ($8.5 billion), North Korea ($7.17 billion) and Ethiopia ($6.57) were the biggest recipients of ODA.
  • Russia ($151.8 billion), Venezuela ($ 81.96 billion) and Angola ($50.47 billion) were the biggest recipients of Chinese loans.
  • India ranked 23rd in the list of top recipients of Chinese loans from 2000 to 2017, receiving $8.86 billion.

 

Source: The Hindu