Typical China Loan Deals To Belt & Road Countries Revealed

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Building the Debt on the RoI rather than the cost of the raw Asset

Op/Ed by Chris Devonshire-Ellis

A new book, titled China’s Belt and Road Initiative: Potential Transformation of Central Asia and the South Caucasus written by Evgeny Vinokurov, Chief Economist at the Eurasian Fund for Stabilization and Development provides a qualitative assessment of infrastructure investment made as part of the BRI, as well as of volumes and disbursements. In doing so it answers the issue over loans that China has been making to low-income and lower-middle income countries are often concessional. For example in the case of Kyrgyzstan and Tajikistan, a typical repayment period of around 20 years is effected, with an interest rate of 2% per annum, and a grace period for repayment of 5-12 years. The latter step is important as it provides time for the project financing and development to provide a return, and allow repayment from the financially beneficial utilization of the asset such as a port, road or other facility.

Western media has often attacked China, accusing it of creating debt in countries that cannot afford to repay loans. However, poorer nations are subject to higher interest rates from borrowings elsewhere, depending upon their credit rating and political risk – often based upon analysis by the same Western institutions that have been critical of Beijing.

However, China’s Asian Infrastructure Investment Bank, and China as a nation itself have Triple A credit ratings, thus allowing them to borrow money at lower rates of interest. Tajikistan for example has a credit rating of B-.

This means that Beijing has, in many cases acted as a low commission broker – passing on those low rates to smaller client states who find they can gain access to much needed development funds at rates lower than the international institutional norm.

It is this disparity between some of the Western influenced lenders, often colored by political and higher profit, less risk considerations, and China, that is spurring some of the worlds emerging economies to consider developing their own credit ratings based upon different criteria, and looking to the infrastructure build itself as the machinery to generate loan repayments. The BRICS nations have been discussing this issue. However it seems apparent that writing off the cost of the infrastructure built, and basing repayment terms on the exploitation of that build is opening up a new era of infrastructure development among poorer nations – with the risk being seen as low when global interest rates tend to be low anyway.

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Silk Road Briefing is written by Dezan Shira & Associates. The firm provides strategic analysis, legal, tax and operational advisory services across Eurasia and has done since 1992. We maintain 28 offices throughout the region and assist foreign governments and MNC’s develop regional strategies in addition to foreign investment advice for investors throughout Asia. Please contact us at asia@dezshira.com or visit us at www.dezshira.com