By: Toh Han Shih
The global economic fallout of Covid-19 can be expected to strengthen China’s ties to countries involved in Beijing’s Belt and Road Initiative, leaving some debt-strapped economies in worse shape and increasing their need for Chinese bailouts – a “make-or-break for the increasing globalization of the BRI,” said Andre Wheeler, chief executive officer of Asia Pacific Connex, an Australian consulting firm focusing on business in the Asia Pacific.
The Belt and Road Initiative (BRI) is Chinese President Xi Jinping’s ambitious project to link China with regions including Africa, Southeast Asia, Central Asia and Europe through infrastructure projects like railway and ports. Indeed, according to Yigal Chazan, the head of content at Alaco, a UK-based risk consultancy, some heavily-indebted BRI countries including Central Asian countries like Kyrgyzstan and Tajikistan, may be forced to call on Beijing to renegotiate loan repayments.
But if many countries seek renegotiation on their debt to Chinese companies and banks, that could prove challenging for China as it tries to tackle its own economic problems, Chazan warned.
The International Monetary Fund predicts the pandemic will cause the world to experience the worst recession since the Great Depression and the global economy may fall by 3 percent this year. Covid-19, which broke out in China late last year, cut China’s GDP by 6.8 percent in the first quarter, the first negative growth of the world’s second-largest economy since 1992.
With forecasts of a significant economic downturn in China this year, Beijing's focus will be on stimulating domestic growth, Chazan said. “Consequently, what you might see is a streamlining or prioritization of Chinese investment in infrastructure around the world.”
Some BRI projects could be scaled down, postponed or even canceled, Chazan said. “Yet given the importance President Xi attaches to BRI he will want to avoid any suggestion of diminishing commitment to recipients of Chinese investment - particularly those in Asia."
“The Belt and Road Initiative is likely to remain a key foreign policy initiative of China,” said Oh Ei Sun, senior fellow at the Singapore Institute of International Affairs.
The new Malaysian government includes people from the earlier administration of Najib Razak which was friendly to China and does not have Mahathir Mohamad’s anti-colonial ideology, so it is expected to be very friendly to Chinese investments, Oh explained.
Mahathir replaced Najib as Malaysian Prime Minister after the Malaysian elections in May 2018 but was forced out in late February, when Muhyiddin Yassin became Prime Minister on March 1. Malaysia needs China to keep its economy going because the Southeast Asian nation is in dire financial straits, said a Malaysian engineer who declined to be named. The pandemic may delay Chinese projects and investments in Malaysia by a year or so, and then they will continue, the engineer predicted.
“Opportunities for China to play a savior role worldwide have boomed, and China’s money stretches further as conditions around the world deteriorate and desperation sets in,” said a report by a US consultancy, Rhodium Group, on April 15.
“There is obviously a foreign policy impulse for Beijing to make use of these circumstances, burnishing its investment portfolio at the same time as it bolsters China’s diplomatic image as a dependable development partner,” said the Rhodium report.
Depressed demand inside China encourages Beijing to pursue construction, transport or energy projects overseas with export credits and other forms of lending support, Rhodium added.
Beijing has conflicting motives towards BRI amidst Covid-19, grasping the opportunity to increase its international influence, yet being more financially conservative due to economic pressures back home, Rhodium said.
Belt and Road debt renegotiations
There have been a number of significant delays in BRI projects due to the pandemic, said Asia Pacific Connex’s Wheeler. “China has suggested that it is open to renegotiate terms of debt by extending repayment periods. I see Chinese banks going out of their way to extend credit terms and will look to guarantees to secure debt or write off debt.”
Wheeler has learned from sources that China Development Bank, a leading state-owned policy bank, has reduced its interest rates for loans to BRI projects to 2 percent, lower than international commercial rates.
In early March, China Development Bank announced it would provide support in the form of low-cost financing and special foreign exchange liquidity loans to companies involved in BRI that have been affected by the pandemic.
Wheeler urged governments of other countries to ensure debt negotiation contracts with Chinese lenders include legal protections. For example, if debt repayments are extended and an asset is used as a guarantee, there should be an expiry date for this guarantee, Wheeler suggested. Governments need to resist selling their assets to Chinese parties to offset debt, Wheeler said.
In 2017 for instance, the Sri Lankan government leased Sri Lanka’s Hambantota port to a Chinese state-owned company, China Merchants Port Holdings, for 99 years, as part of the cash-strapped government’s efforts to repay Chinese debt. This transaction has sparked accusations in international media that BRI was a debt trap for countries.
The Chinese government is unlikely to seize other countries’ assets, but neither is it likely to allow other nations to renege on Chinese debt.
African debt to China can be resolved through bilateral negotiations, Song Wei, an official in China’s Ministry of Commerce, wrote in the Global Times, a Chinese state-owned newspaper, on April 16.
“China, as a creditor of some African countries, has been called upon to offer debt relief which actually is not simple nor effective. What China could do to help is bring projects funded by loans back to life and realize sustainable profits, instead of measures as simple as offering write-offs,” said Song’s column.
“China has never and will not force repayments…. Any debt problem could be discussed by both sides and dealt with by tailored plans, which is the same as current circumstances under the pandemic, China is not asking any debtor to pay right away,” Song wrote.
Rhodium warned, “In light of the COVID shock Chinese lenders will likely face an avalanche of renegotiation in the near future, which may limit their appetite to expand outbound lending substantially.”
As of mid-April, US$63 billion in BRI loans have been renegotiated, and as much as 16 percent of China’s overseas lending has been subject to renegotiation, Rhodium estimated.
Nonetheless, if Beijing wants to continue lending abroad at the previous pace, it can, as the Chinese government can recapitalize Chinese lenders out of foreign exchange reserves and extend loans using policy bank balance sheets, Rhodium said. Even though asset quality at China’s two policy banks, China Development Bank and the Export-Import Bank of China, is suspect, both state-owned banks enjoy full state support, Rhodium noted. The estimated annual Chinese BRI loans of US$50 billion to US$60 billion at the 2015-2016 peak were trivial compared to RMB18.1 trillion (US$2.6 trillion) in total 2019 Chinese bank lending, Rhodium pointed out.
Wheeler said, “I don’t think the BRI is going away soon, it is likely to contract its scope in the short term. New projects will have closer scrutiny in terms of its commercial terms and viability – largely driven by reduced funds.”
Toh Han Shih is a Singaporean writer in Hong Kong.