Wait, what’s this BRI?

In 2013, President Xi announced a multi-billion dollar global project called the Belt and Road Initiative—a wildly ambitious plan to connect Asia, Africa and Europe with overland corridors and maritime sea lanes. The yi dai yi lu is a “21st century silk road” that initially involved 71 countries—which account for half the world’s population and a quarter of global GDP. 

The latest version looks like this (tap to zoom or see it in far greater detail here)

How this works: Most of these corridors run through low and middle income countries. Beijing lends vast amounts of money to them to finance big-ticket infrastructure projects (think ports, highways, railway lines etc). Chinese construction companies then come in to actually execute the projects. The problems start when the nations can’t repay the loans. 

Ok, so how much do they owe China?

That’s where the new research comes in. AidData analysed more than 13,000 aid- and debt-financed projects worth more than $843 billion across 165 countries—over a period of 18 years upto the end of 2017. And it found that the amount owed to China is “substantially larger” than what global credit agencies and financial institutions estimate.

The real numbers: At least 165 countries owe $385 billion to China. More worryingly, debt owed to China in 42 low-to-middle income countries exceeded 10% of their GDP—which includes Laos, Papua New Guinea, the Maldives, Brunei, Cambodia and Myanmar. 

The hidden debt: Until now, the true size of the debt trap remained unknown. The reason: 

• Initially, China used to lend directly to governments—which had to publicly declare these loans. 
• However, Beijing pivoted to lending money to private entities: “Many poor governments could not take on any more loans. So [China] got creative.” 
• Now, almost 70% of its loans go to state-owned companies and banks, joint ventures and private institutions. 
• Their reporting requirements are not as strict—and therefore the loans don’t appear on a government’s balance sheets. 
• And the discrepancy is staggering. One example: The $5.9 billion China-Laos railway project is funded entirely with unofficial debt equivalent to about a third of the country’s GDP.

Point to note: Until now, there was no official figure on how much these countries owed on BRI projects—or even China’s own BRI investment. One reason is that the definition of a ‘belt and road’ project has been kept deliberately fuzzy. Another reason: China does not disclose details of its overseas lending—which is often made through state-owned banks and companies in US dollars. So until now we’ve mostly relied on guesstimates.

Why does any of this matter?

There are several reasons to worry about a world in such serious debt to China. 

One: Let’s start with the problem that owing hidden debt poses for the governments in these low- and middle-income countries. AidData’s lead researcher says it is like a “phantom menace”:

“If you’re in a finance ministry in a developing country the challenge of managing hidden Chinese debt is less about knowing that you will need to service undisclosed debts with known monetary values to China. It is more about not knowing the monetary value of debts to China that you may or may not have to service in the future.”

Two: China happily lends vast amounts of money to countries that are considered high risk. But it is a tough money lender—and the terms are not easy. For example: Pakistan has Chinese loans with average interest rates of 3.76%—compared with a typical rate of 1.1% that it might have to pay on loans from other international financial institutions. But here’s the catch: “A lot of banks wouldn’t even lend to Pakistan. If you’re able to secure a loan you have to pay the higher risk premium.”

Three: The biggest worry is that China is using debt to ‘trap’ countries. All these loans require collateral—typically physical assets when they are given to governments. When they struggle with payments, Beijing can seize their key infrastructure assets—or use its investment to extend its global power. So in Sri Lanka, Beijing used BRI financing to secure 85% equity and a 99-year lease on the strategically important Hambantota Port (explained here). A 2018 study noted:

“Once Sri Lanka made the initial commitment, the sunk cost and need to generate profit to pay off the original loans drove it to take out additional loans, a cycle that repeated itself until it was finally cornered into giving up the port in a debt-for-equity swap… This has sparked fears that Hambantota could one day become a Chinese naval hub, and sent a worrying signal to other debt-strapped developing nations.”

There are similar worries about the Maldives which owes $1.4 billion—that amounts to 78% of its total external debt. Montenegro borrowed $1.5 billion to build a highway. If it defaults then it has to give up vast tracts of land—giving Beijing a much desired footprint in Europe.

Point to note: There are many experts who disagree with this dark reading of BRI investments—pointing to Africa where China has often forgiven or refinanced $18.4 billion in unpaid loans. AidData notes that at least with private entities, repayments are taken from revenue generated by the funded projects—not by seizing assets.

And why should China be worried?

Because a lot of these debts may never be repaid—and a number of the projects have started to sputter out: 

• 35% of Belt and Road projects are struggling with problems such as corruption, labour violations, environmental pollution and public protests.
• A number of projects have been cancelled by governments: “A growing number of policymakers in low- and middle-income countries are mothballing high profile BRI projects because of overpricing, corruption and debt sustainability concerns.” Example: Malaysia canceled projects worth $11.58 billion between 2013-2021.
• Other countries are worried about China’s growing influence. Example: Australia which backed out of its BRI agreement in May.
• And some countries are just getting smarter about staying out of China’s embrace. Bangladesh nixed the Sonadia deep-sea project in October 2020—which denied Beijing a strategic presence in India’s neighbourhood. And it instead signed a deal with Japan for another deep sea port next door.
• And other developed countries have smartened up—and decided to beat China at its own game. In June, the richest seven countries G7 rolled out the Build Back Better World (B3W) initiative to “catalyze hundreds of billions of dollars of infrastructure investment for low- and middle-income countries in the coming years.”

The bottomline: Borrowing from China is a bit like living off your credit cards. Those bills always come due—at a high interest and with a vengeance.

Reading List

The Guardian has a good overview of the new research and of the BRI initiative, while Reuters looks at the slowing momentum of the global project. South China Morning Post has the best big-picture analysis of BRI debt. ORF analyses the effect of the pandemic on BRI investment and projects, while News18 reports on recent setbacks. The Wire makes a strong argument for BRI as a form of debt-trap diplomacy. The Diplomat offers research that contradicts that view—for a deeper and more detailed take check out Chatham House.