China Belt And Road Projects Value Now Exceeds US$4 Trillion
- Slow down of BRI project financing to be expected
- China corporate debt now 165% of GDP
- US$94 billion of BRI loans being renegotiated
There are no official figures on the total amount of loans to and investment in Belt and Road Initiative projects, but according to data provider Refinitiv, in the first quarter of 2020, the value of belt and road projects exceeded US$4 trillion for the first time. Among these, 1,590 projects – valued at US$1.9 trillion – were BRI projects, while 1,574 other projects with a combined value of US$2.1 trillion were classified as “Projects with Chinese involvement”.
The World Bank estimated last year that around US$500 billion was invested in belt and road projects in 50 developing countries between 2013 and 2018. Of that amount, about US$300 billion was estimated to have been financed via public and publicly guaranteed debt.
Rising China Debt
Non-financial corporate debt in China rose to over 165 per cent of its gross domestic product (GDP) in the third quarter of 2020, from 150 per cent of GDP in the same quarter last year, according to a report released by the Institute of International Finance (IIF) last week.
The growth of debt is not only the highest among emerging economies, but has outpaced all developed markets as well.
Total Chinese debt across household, government and non-financial corporate sectors rose to nearly 290 per cent of GDP – excluding financial debt to avoid the potential for double counting – in the third quarter, up from 255 per cent a year earlier, according to IIF. Chinese debt has been rising at 20% per annum since 2016 – faster than its GDP growth rate.
Changing China Loan Policies
In a report published this month, French insurance-credit group Euler Hermes estimated that the ten African and Latin American countries that have benefited from strong Chinese engagement since 2010 – Argentina, Brazil, Ecuador, Angola, Egypt, Ethiopia, Ghana, Kenya, South Africa and Zambia – will face an external financing gap of US$47 billion by 2025 as a result of any gradual disengagement from financing by China. However, of these, neither Argentina nor Brazil are BRI members states, although it is perhaps telling that Argentina has recently joined the Asian Infrastructure Investment Bank.
This means that China will need to be more selective in the projects it can finance, especially in emerging economies.
Nearly half of cross-border flows related to China’s Belt and Road Initiative are directed to regions that are exposed to a significant level of climate change risk, which can be seen in context of China’s recent commitment to reduce net carbon emissions to zero by 2060. This decision will also impact on China’s lending policies.
BRI Project Contracts Down
According to data from China’s Ministry of Commerce, the number of new contracts signed by Chinese firms in the first nine months of 2020 in 61 countries along the belt and road dropped by 29 per cent compared to the same period in 2019, according to . It did not provide an update for the number of contracts signed in October, but the data showed the value of contracts from January to October shrank by 17.5 per cent year on year.
The two primary Chinese policy banks financing belt and road projects – the China Development Bank and the Export Import Bank – have already started to reduce new loans before the pandemic, after lending peaked in 2016. This is partially because the massive original infrastructure spend is now coming to project conclusion, and the funding and build is now complete, or nearly so – one reason that Silk Road Briefing now highlights projects that are coming to fruition and may now be exploited for commercial use. Often the Chinese partner has taken a minority stake as future dividend.
Loans In Exchange For Importing Chinese Goods
However, many of China’s Belt and Road loans have a different source of funding than for domestic loans. A large number of Belt and Road Initiative loans are immediately converted into Chinese goods and/or services upon disbursement and the loan proceeds never exit China.
While there is a strong push to the RMB yuan on BRI financing, historically BRI loans tend to be denominated in US dollars or euros which, under China’s foreign exchange regulations, cannot be freely converted into RMB yuan. As a result, the true loan calculus is quite different.
In November 2008, Beijing announced a two-year 4 trillion yuan (US$586 billion) stimulus plan to counter the impact of the global financial crisis. That stimulus quickly revived Chinese growth, but also prompted an explosion of domestic credit.
The Rhodium Group, said that BRI loans are just a small part of China’s overall lending portfolio, and both the China Development Bank and the Export Import Bank have enough political backing to bear the cost, however the China Development Bank may have less of an appetite to continue strong foreign lending as it is struggling between its conflicting objectives of supporting China’s global commercial diplomacy and the Chinese economy with new domestic loans.
Belt & Road Loan Re-Negotiations
Rhodium Group also found that in October this year, requests for the renegotiation of repayments have been increasing after the onset of the Covid19 pandemic. Twelve countries are in talks with Beijing as at the end of September, covering US$28 billion in Chinese loans.
As many as one in four dollars extended by China through overseas lending to date has come under renegotiation, amounting to US$94 billion. Faced with the reality of unsustainable past lending, Beijing is recalibrating to limit and rationalize future flows, at least in the medium term. This will only be amplified by Covid-19. However the completion of BRI projects also means that the lending rate will naturally slow down, and Beijing can pick and choose with more deliberation about the projects it wishes to pursue. The onus of lending will now be more about returns on investment opportunities rather than securing additional supply chains and clients.
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Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at email@example.com or visit www.dezshira.com