Borrowing money under the aegis of China's Belt and Road Initiative carries some big risks for poorer countries but it is by no means the inevitable debt trap that some critics allege.
And it's not just Beijing saying it, which is partly why enthusiasm for the grand project isn't waning.
“The current narrative is that there’s a backlash within parts of the region. Actually, the initiative has been quite resilient,” Rush Doshi, a postdoctoral research fellow at the Brookings Institution, said in a report published by the US think tank last month.
Belt and Road is China’s vast blueprint to connect more effectively with other countries by upgrading and expanding the infrastructure along its ancient sea and land silk-trade routes.
More than $440 billion of funding for projects linked to this flagship plan has so been provided by Chinese financial institutions, People’s Bank of China governor Yi Gang disclosed last month. Cooperation agreements worth a further $64 billion were also signed.
But critics, particularly the US government, accuse Beijing of using it to create debt traps so that countries fall under its influence if they cannot repay these loans and are forced to cede land and facilities to China.
A Moody’s report on Wednesday warned of the risks for sovereigns with weaker economic fundamentals and limited policy effectiveness. “While [Belt and Road] investments can boost economic growth, in some cases they also exacerbate fiscal and external vulnerability risk which limits potential long-term economic gains,” it said.
The ratings agency singled out the Maldives, Pakistan and Sri Lanka as being at greatest risk from rising debt in part due to Belt and Road loans. It also looked at Mongolia, Malaysia, Tajikistan, Kyrgyz Republic, Cambodia, Vietnam, Thailand, Georgia and Kazakhstan.
Except for Mongolia, these countries are receiving project financing mainly in the form of loans from Chinese state-owned banks, Moody's said. “The resulting rise in debt, if not accompanied by commensurately faster economic growth, reduces debt sustainability,” it concluded.
Even so, the image of China as a loan-shark-in-waiting, ready to seize assets from countries unable to service their Belt and Road debt is one that has been exaggerated, some US think tanks say.
It has happened – China gained a 99-year lease to the Hambantota port in Sri Lanka in December 2017 after the Sri Lankan government failed to service a $1.2 billion loan from the Export Import Bank of China (Exim Bank) for the port – but it's so far proven rare.
“Much of the US government’s narrative on the Belt and Road Initiative has been built around debt-trap diplomacy. I worry we are making an argument that is more persuasive to ourselves than to others. Hambantota is a real case, but empirically it is the exception,” said Ryan Hass, another Brookings fellow.
Apart from Sri Lanka, Rhodium Group is also unaware of any Belt and Road asset seizures since 2013 when the Belt and Road concept was first launched by Chinese President Xi Jinping.
Instead, renegotiations of Belt and Road debt usually involve a more balanced outcome between China and recipient states, including repayment extensions, refinancings, and – most commonly –partial or total debt forgiveness, a Rhodium report outlined on Monday.
Rhodium examined 40 cases of debt renegotiation between China and 24 other countries. Some 40% of these resulted in debt write-offs with repayments deferred on a further 11 cases.
One pertinent example in 2014 involves the London Court of International Arbitration in 2014 and a $3 billion loan from Exim Bank to Ukraine for grain. Ukraine failed to provide the required volume of grain shipments to repay its loan, but Beijing was unable to seize grain shipments by force, Rhodium said.
“The Ukraine case shows that despite China’s size and growing international economic clout, its leverage in some cases remains quite limited,” Rhodium said.
To be sure, there are other concerns as well as debt sustainability that are linked to Belt and Road lending, like corruption, erosion of environmental and labour standards, and challenges to transparency, as Hass noted in the Brookings report.
And the voluntary Debt Sustainability Framework launched last month by Chinese Finance Minister Liu Kun to mollify some of the risks can only help if applied.
But, overall, it seems recipient countries are still finding Belt and Road packages persuasive, Doshi said. Even Sri Lanka, after it leased Hambantota port to China in December 2017, took out a further $1 billion loan to build a highway in 2018.