The Silk Road – “the project of the century” according to Xi Jinping – falters in a sea of debt and corruption. The amount of emergency loans granted by China is enormous: 240 billion dollars given in the most recent years – in particular, from 2019 to 2021, China gave almost half of the International Monetary Fund. But at rates that are not at all favourable: 5% when the Monetary Fund is asking for 2%. Thus China creates even closer ties with many countries in difficulty today and increases the weight of the renminbi as an alternative to the dollar. The fact remains that badly crafted investments are behind the bailouts; often, then, the goal is to save the Chinese state banks that have granted the first loans. “Ultimately, Beijing is trying to bail out its banks. That’s why it got into the risky business of lending of last resort,” explains Carmen Reinhart, a professor at the Harvard Kennedy School and former chief economist of the World Bank. Reinhart is one of the leaders of the research that examined Chinese loans. study, together with Harvard and the World Bank, also AidData and the German think tank Kiel Institute.
Something seems to have gone wrong in Xi Jinping’s plans. While it is true that the large volume of loans reflects Beijing’s role as an economic superpower – China has, in some ways, replaced the United States in bailing out indebted middle- and low-income countries, writes the New York Times. On the other hand, however, too many countries are unable to pay their debts. Of course, it depends on the global economy slowing down and interest rates rising instead – an unfavorable situation, according to Beijing, triggered by the United States by raising Federal Reserve rates. But there is also a lack of general design of the Chinese scheme, say the authors of the research. Loans given too superficially, few feasibility studies and lack of transparency. According to Christoph Trebesch of the Kiel Institute, one of the authors of the report, Chinese lenders have carelessly entered into many countries “that have turned out to have particularly serious problems”. The bailout loans have reached 22 states, including Argentina, Belarus, Ecuador, Egypt, Laos, Mongolia, Pakistan, Suriname, Sri Lanka, Turkey, Ukraine and Venezuela. From 2019 to 2021, China provided $104 billion in emergency credit lines to developing countries.
Some projects have become world famous as examples of what not to do when making loans. In Montenegro, there is the “road to nowhere”, $1 billion pulverized in corruption, environmental problems and delays; In Ecuador, more than 7,000 cracks have been found in an Ecuadorian dam built near an active volcano. But China defends itself by claiming that it has financed strategic infrastructure for many countries, making money available that those governments otherwise would not have found. The “Belt and road initiative”, in Italian The Silk Roads, totaled 838 billion dollars from 2013 to 2021, and in Xi Jinping’s plans it should contribute to China’s global rise, undermining American hegemony.
But it is a project that seems to have lost momentum. Last year, the value of completed contracts was $85 billion, up from a peak of $98 in 2019. China has begun to scale back on costly infrastructure and move towards more focused projects, agreements for access to strategic resources, oil and gas in the Middle East, Africa and Latin America, and metals needed for clean energy. Then there is the lender of last resort role. Much of it serves, the study says, to protect China’s state-owned banks from losses by keeping troubled countries afloat so they continue to pay their debts.
However, not everyone receives emergency loans. Middle-income countries are favoured, says the study. This is because they hold 80% of China’s total foreign lending, so they pose major fiscal risks and Chinese banks have every interest in not letting them go bankrupt. A different fate would befall poor countries. They are less important to the banks, making only 20% of foreign loans, and are rarely bailed out.