Time to Calculate and Reposition – BRINK – Talks and Insights into Global Business

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China’s Belt and Road Initiative (BRI) is now nine years old. The BRI is a transnational infrastructure program funded primarily through bilateral loans from China’s state-owned banks and other entities achieved total funding of nearly $1 trillion ($932 billion).) between 2013 and the first half of 2022. 70 percent of this went to the hard infrastructure sectors such as roads, railways, ports, airports, power plants and transmission lines.

Chinese President Xi Jinping calls the BRI the “Project of the Century” – it is a central platform for China’s global engagement and foreign policy leadership, and China’s second opening to the world after Deng Xiaoping’s famous 1978 “Reform and Open Up”. low-income and emerging economies in need of infrastructure development. for some, BRI is China’s attempt to connect with the world and a way to showcase China’s development experience in low-income countries. But others see BRI as a form of the new colonialism; However, China has been accused of engaging in “debt trap diplomacy”. careful research finds that such claims have no credible basis.

What is the future of BRI?

Two thematic areas will reposition the initiative for the coming years. The first is technical in nature and relates to recent experience in project implementation. The second is macroeconomic in nature and concerns the risk and impact of China’s official lending to debtor countries and sovereign debt restructuring.

Regarding the implementation of BRI projects, questions have been raised about all phases of BRI-funded projects. There were fears that projects were selected under political influence and that the costs were inflated in relation to the expected benefits.

There are suggestions that low-carbon green financing options should be prioritized, project preparation should allow sufficient time for local community consultation to assess and mitigate the environmental and social impacts of the project, and foreign contractors (mainly Chinese) must local contractors in fully involve and employ local workers during construction.

Open, green and clean?

The BRI has offered some practical measures address some of the concerns about project design and implementation. The project-level concerns were raised before the COVID-19 pandemic. The open, green and clean policy is included in the updated BRI policies. The BRI program focuses on quality and demands zero tolerance for corruption. The Treasury (jointly with 28 other nations) introduced BRI Green Finance policies and a BRI Debt Sustainability Framework. In September 2021, President Xi pledged that China would stop financing coal projects in its overseas investments.

China has also been working with others on multilateral processes for BRI implementation. The State Department chairs an international advisory board to oversee the implementation of the BRI. The Department of Ecology and Environment convenes the BRI International Green Coalition Council of global experts from developing and developed countries to advise on green infrastructure financing.

The Treasury supports the multilateral collaborating center for development finance, which is tasked with funding project preparation, capacity building and knowledge sharing in BRI participating countries. However, further efforts are needed to strengthen the institutional effectiveness of multilateral processes.

Macro challenges rush in

At the macro level, however, the confluence of factors such as the pandemic, the Russia-Ukraine conflict, the deteriorating global economic scenario and the economic downturn in China are compounding the challenge of repositioning the future of the BRI. Two major issues are the exposure of China’s foreign loan portfolio to debtor countries and China’s participation in the multilateral sovereign debt restructuring platform.

The extent of China’s lending has increased. Funding surged when the BRI was announced in 2013, but the volume of BRI lending appears to have declined since 2017. The BRI is now increasingly emphasizing “quality investments”, including through greater use of project finance, risk mitigation tools and green finance. And that seems to be the case a change of destination.

An estimate indicates that the share of China’s total loan portfolio to distressed borrower countries has increased from around 5% in 2010 to 60% now.

Given these changes, the exact extent of China’s foreign credits remains unclear. China does not deliver Details of direct lending activities its “Belt and Road” initiatives, and China’s lending and lending relationships are opaque.

China’s lending remains opaque

Research estimates suggest so about half of China’s lending to developing countries goes unrecorded in the most important international databases.

The Debt Sustainability Assessment (DSA) that the IMF and World Bank conduct for low-income countries is based on the accuracy of the countries’ external debt profile. The DSA evaluates the determination of debt restructuring scenarios. The mispricing of foreign debt therefore has potentially significant implications for developing countries that have borrowed large amounts from official Chinese creditors.

With the risk of a systemic debt crisis looming, the willingness of authorities to report their data is crucial for a coordinated debt restructuring.

The Russia-Ukraine conflict significantly increases China’s foreign loan portfolio exposure to debtor countries with increasing risk profiles. It is estimated that Russia, Ukraine and Belarus have accounted for almost 20% of China’s foreign loans over the past two decades.

Large amount of non-performing debt

In addition, nearly 60% of low-income countries are now in distress or at high risk. Chinese official creditors now hold a large amount of potentially distressed debt. An estimate indicates that the share of China’s total loan portfolio to distressed borrower countries has increased from around 5% in 2010 to 60% now.

China has become the key player in international sovereign debt renegotiations. Recent research has found that Chinese debt restructurings are surprisingly common. Chinese lenders provide only limited debt relief. And China’s approach today follows the practice of Western creditors in the 1980s and 1990s: rescheduling the same debt repeatedly, which has caused the ongoing debt overhang problem.

China adjusted its debt restructuring practices. It contributed to the G-20 debt service suspension initiative. Now China is participating in the G-20 Common Framework for Debt Treatment for low-income countries.

The sovereign debt restructuring process is likely to be lengthy

Zambia is the first instance where China and France co-chaired the official creditors’ committee, resulting in Zambia receiving the IMF’s bailout package. On the premise that subsequent debt renegotiations proceed effectively, Zambia is seen as a template for China and other creditors to work together for other low-income countries seeking debt relief.

It will be similar for emerging markets as Sri Lanka’s debt restructuring can be taken over by other countries.

China will most likely participate in the process, given that Zambia’s and other model cases provide the necessary space for China to assert its influence as an official major creditor, but not as a member of the Paris Club.

It is almost certain that the BRI will remain as a brand name for China to further support infrastructure finance in low-income and emerging economies. Its geopolitical value is unique to China. But the technical and macroeconomic issues discussed above will lead to a repositioning of the scope and functioning of the BRI.

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