Behind the Chinese vision of the Silk Road: cheap funds, heavy debt, growing risk
BEIJING (Reuters) – Behind China’s trillion dollar effort to build a modern Silk Road lies a loan program of unprecedented scale, which will help build ports, roads and links railways, but could also leave some banks and many countries with a hangover.
At the heart of this madness are China’s two political lenders, the China Development Bank (CDB) and the Export-Import Bank of China (EXIM), which have already granted $ 200 billion in loans across Asia. , the Middle East and even Africa.
They are expected to rise by at least another $ 55 billion, according to announcements made at a two-day lavish Belt and Road summit in Beijing, which ends Monday.
With cheaper funding, CBD and EXIM helped unlock what Chinese President Xi Jinping called a “major challenge” for the Silk Road on Sunday: the funding bottleneck.
But as the Belt and Road Project grows, the risks to political banks, commercial lenders and borrowers also increase, all of them entangled in projects with questionable business logic, bankers and analysts say.
EXIM, seeking to contain the risk, claims to have imposed a debt ceiling for each country.
The CBD claims to have applied strict limits to sovereign credit lines and to control lending concentration.
“For some countries, if we give them too much loans, too much debt, then the sustainability of their debt is questionable,” Sun Ping, vice-governor of EXIM, told reporters last week.
So far, funds are cheap and plentiful, thanks to Beijing.
So far, Belt and Road infrastructure loans have been mostly negotiated government-to-government, with interest rates lower than those offered by commercial banks and extended repayment schedules, said officials. bankers and analysts.
Massive injections of public capital, bonds assessed as sovereign debt, and access to the additional lending program pledged by the central bank are keeping CDB and EXIM funding costs low.
In Indonesia, the CBD offered a 40-year concessional loan, without asking for public debt guarantees, to finance 75% of the $ 5.29 billion Jakarta-Bandung Railway, the world’s first high-speed railroad. Indonesia and a model infrastructure project for the Chinese Belt and Road effort. .
The loans have a 10-year grace period. A portion of 60% is denominated in US dollars with an interest rate of 2%, and the remaining 40% is calculated in Chinese yuan, with a rate of 3.4%, according to a note from Bank of China International.
The CBD, the world’s largest development finance institution, said it was not looking to “maximize profits,” Vice President Ding Xiangqun told reporters last week.
RISKS AND REWARDS
Concessional financing has allowed large Chinese state-owned infrastructure manufacturers and developers to aggressively compete with foreign bidders.
Forty-seven of China’s 102 central government-owned conglomerates have participated in 1,676 Belt and Road projects, according to government statistics.
The China Communications Construction Group alone has landed 40 billion dollars in contracts and built 10,320 kilometers of roads, 95 deep-water ports, 10 airports, 152 bridges and 2,080 railroads in Belt and Road countries. .
China’s central bank governor Zhou Xiaochuan is among those who warn that this reliance on cheap loans raises “risks and problems,” starting with moral hazard and unsustainability.
China has already been caught off guard; he is owed 65 billion dollars by Venezuela, now torn apart by the crisis.
“The jurisdictions where many of these loans go are places that would have difficulty obtaining loans from Western commercial banks – their credit ratings are not very good, or the projects in question are often not commercially viable,” he said. said Jack Yuan, banking analyst. at Fitch Ratings in Shanghai.
“The larger concern is that capital continues to be misallocated by Chinese banks.”
Chinese state-owned commercial banks urged to support the government’s initiative. The main lender of the Industrial and Commercial Bank of China has participated in 212 Belt and Road projects, providing a total of $ 67.4 billion in credit, President Yi Huiman said on Monday.
The Bank of China plans to provide $ 100 billion in credit for such projects by the end of the year.
“In fact, commercial banks are not very motivated,” said a senior banker at a major Chinese commercial lender. “We don’t give concessional loans, and we really don’t want these countries to think that all Belt and Road loans are discounted.”
The biggest hangover can still be for borrowers.
For Laos, one of the poorest countries in Asia, the $ 7 billion cost of the China-Laos railway was more than half of its gross domestic product in 2015. Its concessional loan from EXIM has been set at less than 3% interest.
In Pakistan, where China has pledged to invest up to $ 56 billion in rail, road and energy infrastructure, its Belt and Road debt and other repayments will peak at around $ 5 billion in 2022, according to the report. the chief economist of the Pakistani government.
Ding, of the CBD, said loans to heavily indebted poor countries were within limits set by the International Monetary Fund, including interest rates and loan periods.
But borrowing countries say there is also little choice as China supports its first international development push.
“It’s almost a given,” said Sima Kamil, CEO-designate of United Bank of Pakistan.
“It’s very easy to say that there will be all this debt, but if we don’t get it, where are we going to go? “
Graphic on the New Silk Road in China: tmsnrt.rs/2q4UEs2
Reporting by Shu Zhang and Matthew Miller; Editing by Clara Ferreira Marques and Will Waterman