How the coronavirus pandemic has trapped China’s Belt and Road Initiative between a rock and a hard place

China deviated from its usual policy by joining other nations in agreeing to a debt moratorium for countries in economic distress
Some of China’s principal loan recipients, with weak health systems and large populations, are going to be hard hit by the pandemic. Restructuring their debt will be no easy feat

Brian P. Klein

Published: 3:00am, 20 Apr 2020

Why you can trust SCMP

A looming crisis in the developing world has caught the attention of major international lenders, including the Group of Seven, Paris Club and the World Bank, with a notable addition – China. For years, Beijing has resisted efforts to coordinate its lending with international financial institutions. And yet consensus has formed that temporary financial relief is essential for developing countries facing a mountain of debt, the spreading Covid-19 pandemic, and an impending global recession.

The larger G20 group of advanced economies, which China is a part of, have agreed to a debt moratorium for poorer countries in economic distress. Some finance ministers even insisted that their support for the relief package, which halts both principal and interest payments through at least 2020, was contingent on China agreeing to join in.

This is a sign, albeit limited, that not only is Beijing considered on par with the wealthy and powerful of the world, but that its interests coincide with a coalition of developed nations – at least for the moment. If China breaks ranks and pursues its own narrow interests, when many of these loans eventually default, it will lose the status it has long sought by developing its global soft power.

China has long preferred often secretive bilateral deals over coordinated lending efforts. These deals have included loose standards for projects of dubious utility, including transportation projects in Pakistan, Montenegro and Kazakhstan. National assets have been used as collateral. Actual loan amounts have often not been disclosed, making credit assessments by international institutions like the World Bank inaccurate.

This global lending spree, most recently through the Belt and Road Initiative, and China’s mishandling of the coronavirus outbreak are largely responsible for the developing world’s recent economic dislocation.

Even with the temporary halting of debt payments, these countries will not be able to service their debts months from now or for the foreseeable future. The G20 agreement is not likely to solve this longer-term payment problem because the current debt relief is simply debt delayed.

The International Monetary Fund has estimated that the current pandemic will plunge the global economy into the worst recession since the Great Depression and it may go well into 2021. Developing countries – some of China’s principal loan recipients – with weak health systems and large populations are going to be especially hard hit.

A recent United Nations University study projected that roughly half a billion people may fall into poverty if consumption worldwide drops by 20 per cent. The World Bank estimates sub-Saharan Africa’s first recession in 25 years.

Major developing country exporters like Nigeria, which was recently downgraded by S&P and Moody’s, is under growing financial pressure as global energy demand plummets. Estimates suggest the country owes China upwards of US$4 billion. Oil and oil-related products account for 94 per cent of its exports. Even with anticipated Opec and Russia production cuts, oil prices are unlikely to return to pre-crisis levels any time soon.

The Abuja light rail train arrives at the airport station in Abuja, Nigeria, on July 12, 2018. The rapid-transit system was built by the China Civil Engineering Construction Corporation. Photo: Xinhua

Calls for China debt relief had been gathering momentum over the past month. The former vice-president for the Africa region at the World Bank, Obiageli “Oby” Ezekwesili, has said the continent “must be accorded damages and liability compensation from China, the rich and powerful country that failed to transparently and effectively manage this global catastrophe”.

Ghana’s Finance Minister Ken Ofori-Atta has also said that over US$8 billion in interest payments African countries owe to China this year needs to be “looked at”, while Nigerian Finance Minister Zainab Ahmed said the country would seek to defer interest payments to China.

Had Beijing not gone along with the G20 proposal to push payments back to next year, at the earliest, the Export-Import Bank of China and the China Development Bank, which have collectively lent US$339 billion since 2013, would have likely been facing a wave of defaults.

Restructuring this debt, however, will be no easy feat. Part of the reason so many of these countries accepted China’s loans was precisely because they did not want to abide by highly restrictive IMF and World Bank lending standards. These borrowers, which lack transparency and have high levels of corruption and weak governance, were willing to pay higher interest rates and put up valuable collateral in exchange for easy money.

Chinese President Xi Jinping (centre right) and South African President Cyril Ramaphosa (centre left) attend the 2018 Beijing Summit of the Forum on China-Africa Cooperation at the Great Hall of the People in Beijing on September 2018. Photo: EPA-EFE

In 2017, when Sri Lanka’s debts became unsustainable, Colombo gave a Chinese company a 99-year lease to run their Hambantota port. Some countries, including Myanmar, Malaysia, and Sierra Leone took notice and cancelled or scaled back Chinese lending agreements.

Their reticence now looks prophetic. Partly due to this brewing backlash, China’s overseas lending spree has slowed considerably over the past few years.

Defaults are highly likely as poor countries struggle to pay for their fight against Covid-19. If China seizes their assets, Beijing will then be seen as a health-crisis profiteer. That will certainly not win friends in a rapidly polarising world.

Perhaps that is one reason Beijing agreed to go all-in with major lending officials, like those of the Paris Club, a group of creditor countries which try to find workable solutions to payment difficulties faced by debtor countries, which China has still not officially joined.

Mistrust of China has been mounting due to its initial coronavirus cover-up, unreliable and low-quality medical equipment exports, and diplomats promoting conspiracy theories about the disease’s origin. The central government recently forced medical studies to go through government vetting before being sent out for publication.

There will be little tolerance among the world’s poorest countries for this type of control and misinformation as the novel coronavirus spreads. China’s approach to development assistance needs to change. It requires a broader conception of what funding means, including helping countries with non-loan assistance to strengthen public health.

It means acting like a longer-term stakeholder in the success of other countries, rather than simply an extractor of resources and opener of new markets for their own companies. It also means making sure that wealth circulates throughout the societies in which they do business rather than being siphoned off by the elite.

Either Beijing will find innovative ways that benefit debtor nations or it will be seen as just another predatory lender in a long history of empire builders. The backlash to China’s presence in lands around the world will soon follow, along with fractured political and economic relationships that become difficult, if not impossible, to mend.

Brian P. Klein (@brianpklein) is the founder and CEO of Decision Analytics, a New York-based strategic advisory and political risk firm. He previously served as a US diplomat focused on Asia

Post