Many Chinese banks are at risk of default on loans they have made to emerging and developing countries as part of Beijing’s New Silk Road program, according to a study. Last year, this related to about 60 percent of all Chinese foreign loans, the Kieler Institute for the World Economy (IfW) announced on Tuesday. In 2010, the share was only five percent.
“To prevent the defaults, Beijing is providing bailout loans on a large scale,” said the researchers, who set up their study together with researchers from the American organization AidData, the Harvard Kennedy School and the World Bank. At the end of 2021, they identified 128 rescue loans to 22 debtor countries with a total value of 240 billion dollars (223 billion euros), mainly in the form of term extensions and new loans. Debts are rarely forgiven.
China wants to avoid default
China’s leaders apparently want to bail out their banks. This is also apparent from the different treatment of debtor countries: according to the study, middle-income countries account for the largest share of foreign loans with more than USD 500 billion. “Therefore, the Chinese leadership has great incentives to prevent these countries from defaulting at all costs. In case of payment difficulties, it usually offers them new loans to pay off the old debts.”
Low-income countries, on the other hand, account for only about a fifth of loans, the researchers explain. They are therefore less important for the stability of the Chinese banking sector and rarely receive new funds. Critics have long accused China of luring low-income countries into debt traps with unpayable loans.
“Risk” business for lenders
Now China has “entered the risky business of international bailout lending,” explained former World Bank chief economist Carmen Reinhart, who now conducts research at the Harvard Kennedy School. The authors of the study see parallels in this with European rescue loans to Greece and other southern European countries during the euro crisis. “Even then, the rescue of local banks played an important role in the provision of rescue loans.”
The future of the project is up for debate
According to the study, China has so far provided bailout loans to 22 countries, including Egypt, Argentina, Laos, Pakistan, Sri Lanka, Turkey and Belarus. The bailout loans also question the future of the New Silk Road as Chinese banks have “drastically reduced” regular lending for new infrastructure and energy projects.
AidData’s Brad Parks criticized China for creating a new global cross-border rescue lending system “in an opaque and uncoordinated manner”. “Its strictly bilateral approach has made it difficult to coordinate the activities of all major lenders, which is a concern as resolving sovereign debt crises usually requires some degree of coordination between creditors.
Source: Krone
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
