Chinese overseas loans went sour at a far worse rate in recent years as the COVID-19 pandemic and inflation took a toll on emerging economies involved in Beijing’s Belt and Road infrastructure initiative.

A total of $76.8 billion in debt was renegotiated — in some cases written off — from 2020 to 2022, data from the Rhodium Group shows. This figure is more than four times the $17 billion in problem debt for the preceding three years.

The first year of the pandemic, 2020, was the worst with $48.7 billion, but the $9 billion in 2022 was still nearly triple the 2019 figure.

Beijing has backed the construction of ports, roads, railways and other infrastructure from Asia to Africa and Europe for 10 years under President Xi Jinping’s Belt and Road Initiative.

But this vast undertaking has slowed as the problem debts have piled up. Investment came to around $100 billion a year until 2019, but declined amid the pandemic, falling to roughly $60 billion to $70 billion a year from 2020 on, data from the American Enterprise Institute shows.

The loan renegotiations come alongside financial assistance. Of the $240 billion in aid China provided to over 20 emerging markets between 2008 and 2021, about 30% was given in 2020 and 2021 alone, according to research by the World Bank, AidData and elsewhere.

Around 70% of the aid came through currency swap lines, giving countries with low foreign exchange reserves access to yuan to repay debts.

Countries receiving such support include Sri Lanka, which was driven into default by swelling external debt. When Sri Lankan creditors met recently to discuss debt restructuring, China participated as an observer. Whether it will get involved in negotiations remains to be seen.

The financial risks are not just for borrowers, but also for China.

Though Beijing has the world’s largest foreign exchange reserves, topping $3.2 trillion at the end of April, much of this is tied up in lending to developing countries.

Chinese corporate and retail bank accounts saw net outflows from overseas transactions for a second straight quarter in the three months through March, amid a slump in exports. If the trend continues, China could have less capital to lend overseas.

Beijing’s push to develop industries such as semiconductors to compete with the U.S. also could pull resources away from Belt and Road lending.

This year marks a decade since Xi proposed the Belt and Road concept. China plans to host its first Belt and Road Forum since 2019 later this year. With bad debts rising, observers will be watching for what messages Beijing sends on future investment and how it will deal with borrowers.

“China will continue to use the Belt and Road to expand its influence in developing countries and secure resources, while being mindful of debt problems,” said Yoshino Tamai of Itochu Research Institute. “Its investment is expected to gradually increase, but it’s hard to see it returning to its pre-COVID peak.”

Italy, the only Group of Seven country involved in the initiative, is distancing itself. A senior official told Reuters this month that Rome is unlikely to renew the agreement with China when it expires in early 2024, but added that more time was needed for talks with Beijing.

Critics say the deal has failed to bring the anticipated boost to economic growth for Italy, with exports to China seeing sluggish growth compared with imports. (Courtesy: Nikkei)

—by Iori Kawate, staff writer, in Nikkei, June 1, 2023

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