To avoid default, Beijing is issuing bailout loans on a massive scale, explained the authors of the current IfW study. The government’s move puts the future of the New Silk Road in question.
According to a study, many Chinese banks are at risk of default on loans granted to emerging and developing countries as part of Beijing’s New Silk Road program. Last year, this affected around 60% of all Chinese foreign loans, as the Kiel Institute for the World Economy (IfW) announced on Tuesday. In 2010, the share was just five percent.
“To avoid default, Beijing is granting bailout loans on a large scale”, explain the researchers, who prepared the study together with researchers from the US organization AidData, the Harvard Kennedy School and the World Bank. By the end of 2021, they identified 128 bailout loans to 22 debtor countries with a total value of US$240 billion (€223 billion), mostly in the form of term extensions and new loans. Debts are rarely forgiven.
Rescue Loans to Rescue China’s Banks
China’s leadership apparently wants to save its banks. This is also demonstrated by the differential treatment of debtor countries: according to the study, middle-income countries account for the largest share of foreign loans, with more than 500 billion dollars. “Therefore, China’s leadership has strong incentives to avoid defaults in these countries at all costs. In case of payment difficulties, they often offer new loans to pay off old debts.”
Low-income countries, on the other hand, account for only about a fifth of lending, the researchers explain. They are therefore less important to the stability of the Chinese banking sector and rarely receive new funds. Critics have long accused China of luring low-income countries into the debt trap with unaffordable loans.
APA
risky business
Now China has “entered the risky business of international bailout lending,” explained former World Bank chief economist Carmen Reinhart, who now does research at the Harvard Kennedy School. The study’s authors see parallels in this with European bailout loans to Greece and other southern European countries during the euro crisis. “At that time, too, the rescue of local banks played an important role in granting bailout loans.”
According to the study, China has so far extended bailout loans to 22 countries, including Egypt, Argentina, Laos, Pakistan, Sri Lanka, Turkey and Belarus. The bailout loans also call into 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 system for cross-border bailout loans “in an opaque and uncoordinated manner”.
(APA)