China offers Belt and Road debt-trap antidote

China hopes a new framework might help countries avoid unsustainable levels of Belt and Road-related debt. But, as Malaysia has shown, some hard bargaining may also be in order.
Chinese President Xi Jinping hosts the Belt and Road Forum for International Cooperation in Beijing from April 25 to 27.
Chinese President Xi Jinping hosts the Belt and Road Forum for International Cooperation in Beijing from April 25 to 27.

China hopes a new framework will help stop countries piling up unsustainable levels of debt if they accept projects under its Belt and Road Initiative as it looks to head off accusations of “debt-trap diplomacy”.

Chinese Finance Minister Liu Kun announced the launch on Thursday of the Debt Sustainability Framework for Participating Countries of the Belt and Road Initiative and encouraged financial institutions and participatory countries to adopt the framework.

“We are creating a debt sustainability framework to neutralise credit risks,” Liu said at the Second Belt and Road Forum for International Cooperation held in Beijing from April 25 to 27.

The move comes amid criticisms that Beijing is pushing countries to take on costly infrastructure projects funded by Chinese state-owned banks in order to bring them under its control if unable to repay the debt.

“The Chinese government is changing its Belt and Road strategy because it realises Belt and Road is facing pushback from some of the international community,” Andrew Leung, a Hong Kong-based China strategist, told FinanceAsia.

The Belt and Road Initiative encompasses more than 60 countries and aims to connect China with other regions through infrastructure projects like roads and ports.

Nearly 40 state leaders were in attendance at the Belt and Road forum, the second of its kind since 2017. They included Malaysian Prime Minister Mahathir Mohamad, a previous vocal critic but now apparent fan of the scheme. Shortly after Mahathir defeated the former Malaysian Prime Minister Najib Razak in a shock election victory in May 2018, there were fears that several expensive Chinese-funded projects might be shelved.

The US, another critic, sent only junior officials.

China’s debt sustainability framework is a non-mandatory policy tool. Chinese financial institutions and Belt and Road countries can use this framework to conduct debt sustainability analyses, assess the risks attached to individual Belt and Road projects, manage debt risks, and as a reference for lending decisions. The framework includes stress tests and risk ratings.

China’s framework is adapted from the IMF and World Bank’s debt sustainability framework to help low-income countries avoid excessive debt, China’s finance ministry said.

"The new debt sustainability framework that will be utilised to evaluate BRI projects is a significant move in the right direction," IMF managing director Christine Lagarde said in Beijing on Friday. 


The launch of China’s debt sustainability framework comes shortly after concerns were raised by professional services firm Deloitte and rating agency Moody’s.

“The backlash to high-profile debt-prompted crises in Sri Lanka, Pakistan and the Maldives has sent a clear signal to China to modify its approach to lending,” Deloitte said in a report on Wednesday. 

There is “clearly awareness of what went wrong” with those projects, such as the $4 billion railway linking Addis Ababa, the Ethiopian capital, with neighboring Djibouti, where the loan repayment had to be extended by 20 years, Deloitte said.

Deloitte cited several countries affected by Belt and Road debt including Pakistan and Montenegro, whose debt-to-GDP ratio has risen to nearly 50% from below 12% in 2016.

A Moody’s report in January 2019 warned that heavy reliance on Chinese funding could worsen some Belt and Road host countries’ debt affordability, leading to weaker sovereign creditworthiness. It said 47% of China’s Belt and Road direct investments had flowed to non-investment grade countries, while 74% of Chinese lending for Belt and Road contracts was in non-investment grade countries.


The large funding provided by Chinese policy banks to Belt and Road countries with relatively high risks could result in some asset-quality erosion at these banks, Moody’s also warned. For example, the Export-Import Bank of China (Exim Bank, rated A1 by Moody’s) has extended $120 billion of outstanding loans to Belt and Road projects, accounting for 27% of the state-owned bank’s total loans in 2017.

That includes in Malaysia where Exim Bank is financing the East Coast Rail Link (ECRL).

Mahathir had criticised the project’s price tag of M$65.5 billion ($15.8 billion) as too expensive for his country. Under the previous contract, Exim Bank was supposed to provide a loan accounting for 85% of the project’s M$65.5 billion budget at 3.25% interest over a 30-year repayment period.

But on April 15, the Malaysian prime minister announced the project’s cost would fall by one-third to M$44 billion. The financing from Exim Bank to ECRL is still under negotiation but is also likely to be lower.

The new ECRL contract will be more sustainable and should therefore not evolve into a debt trap, Lina Guatama, Southeast Asia director of Argo Associates, a Hong Kong risk consultancy, told FinanceAsia. In this way, China can gradually shed the negative global perception that it is executing Belt and Road policies and upgrading the regional infrastructure at the expense of putting unsustainable levels of debt on underdeveloped countries.

Contracts for ECRL were signed in 2016 and 2017, when Najib Razak was Malaysian Prime Minister. Najib is on trial in Malaysia on corruption charges unrelated to ECRL.

The biggest problems with Belt and Road projects are contracts granted without bidding, which conceal details and involve national leaders accused of corruption like Najib, Dane Chamorro, a Singapore-based senior partner at Control Risks, an international risk consultancy, told FinanceAsia.

Chinese President Xi Jinping, in his speech at the Belt and Road forum on Friday called for transparency and zero tolerance for corruption in Belt and Road projects.

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