Navigating the Complex Web of China’s Belt and Road Initiative

By Michael Megarit 

Belt and Road Initiative, launched by China’s President Xi Jinping a century ago, is a massive infrastructure development project, with loans exceeding $1 trillion to more than 100 countries. Global concerns have been raised about China’s increasing influence and the potential for “debt-trap diplomacy” where China could leverage debt to control other nations’ assets. China secured a 99-year rental on Sri Lanka’s Hambantota Port after Sri Lanka defaulted. 

Recent developments, however, paint a very different picture. The BRI has not been a success. Many of the Chinese-funded projects failed to deliver the returns expected, leaving the borrower countries with heavy debts and dependent on Western-backed institutions such as the IMF. This is a similar situation to past situations where Western creditors pursued aggressive debt repayment. 

China’s strategy, which mirrors traditional Western practices and aims to attract nations through the BRI, could backfire, alienating those countries. This could cause a debt crisis similar to the “lost decade,” which occurred in Latin America in the 1980s. 

It is recommended that the United States, and other countries, advocate reforms of international financial institutions to mitigate these risks. Reforms should be aimed at preventing the exploitation of financial institutions like the IMF and to enforce stricter bailout requirements. They should also ensure greater transparency of lending practices including those of China. 

Debt Dilemmas for Developing Nations – The Troubled Legacy of China’s Belt and Road Initiative

In the 1970s Western investors with their capital and expertise often negotiated favorable deals in developing nations, transferring significant risks to these countries. Once projects were complete, power dynamics changed, allowing the poorer countries to renegotiate. This led to defaults and nationalizations. 

Similar issues are now being raised by China’s Belt and Road Initiative. Many Chinese-financed project in countries such as Argentina, Ethiopia, Pakistan, and Pakistan did not meet economic expectations. They faced challenges like environmental damage and poor construction quality. Over-reliance on Chinese subcontractors and labor has also led to disputes. 

However, the primary problem is mounting debt. Many BRI countries face high debt-to GDP ratios and balance of payments crises due to expensive Chinese projects. Many governments have promised to cover revenue shortages, resulting in hidden contingent liabilities. These liabilities are not limited to BRI-financed projects. They can also impact privately financed ventures. 

BRI debt crisis differs from other debt crises in that it involves debts owed to Chinese policy banks, rather than private companies. China’s firm stance on debt renegotiations led many BRI countries, who face stringent conditions from the IMF, to seek bailouts. In recent years, IMF has provided significant support to countries like Sri Lanka and Argentina. 

Some countries resumed servicing BRI debts after securing IMF aid. Kenya, for example, paid a large amount of debt service after receiving a $2.3 billion IMF loan. The project was funded by the Chinese. This is a reflection of the larger challenge that the developing world faces: a new debt crisis, possibly more severe than previous ones, could have repercussions on vulnerable economies. 

The problem goes beyond the immediate financial burden. This situation is complicated by the fact that the primary lender is the largest bilateral lender in the world and a major trading partners. Private creditors are becoming more wary about lending to BRI nations. These countries find themselves in a difficult situation, as they struggle to gain access to vital capital and have to deal with conflicting creditors. 

BRI’s Mixed Impact 

Beijing’s Belt and Road Initiative had many goals, including assisting Chinese companies (both state-owned and privately owned) to make money overseas, maintaining China’s massive construction sector, and providing employment for millions Chinese workers. There were also foreign policy and security goals, such as increasing political influence and gaining access to strategic facilities. The funding of high-risk project in countries such as the Democratic Republic of the Congo or Venezuela suggests this. 

But claims of “debt-trap diplomacy” have been exaggerated. Chinese lenders are more likely to have conducted insufficient due diligence than to intentionally burden borrowers with debt as a geopolitical tool. BRI loans are made by Chinese state banks or enterprises to state-owned enterprises in the borrower nation. These contracts are negotiated directly, without public bidding and lack the transparency and viability check inherent in open procurement and private financing. 

Montenegro was put under financial stress when, in 2009, the China Export-Import Bank funded Montenegro’s highway project, after it failed to secure private funding. IMF estimated that Montenegro’s debt-to GDP ratio would be 59% by 2019 without this project; it was expected to increase to 89% with the project. 

Not all BRI initiatives have been a failure. Some initiatives, such as the Piraeus Port project in Greece, have been successful. Many projects, however, have left many countries with significant debts and hesitation to engage with China. Deals benefited elites and leaders, but not the general population. 

BRI presents challenges for Western nations, but they are more about destabilizing the developing countries who then seek assistance from international organizations like the IMF and European Bank for Reconstruction and Development. Western creditors established mechanisms such as the Paris Club to manage sovereign defaults and payments crises in a cooperative manner. China has not joined these groups and its opaque lending makes it difficult for international institutions to assess accurately a country’s current financial situation. 

Rethinking IMF’s approach to BRI debt

Some experts believe that China is still learning to manage its role in the global creditor community, pointing out the fragmented nature its lending institutions as well as the time required to develop effective solutions to sovereign debt crisis. According to this perspective, Western creditors must be patient while Beijing adjusts. The IMF will continue financial support during the interim. 

But, even if you are patient, the situation will not improve, because China’s motives may be different from those of the IMF and creditors who want a rapid debt restructuring. The IMF should enforce strict transparency of debt obligations. 

Even with the fragmented Chinese loan system, IMF members and Paris Club should consider the Chinese government capable of coordinating the state enterprises involved in debt restructuring. Zambia’s decision to reverse its 2018 restructuring of debt with China following discussions with China’s ambassador shows Beijing’s capability to coordinate a coordinated response. If China is able to manage this bilaterally then it should also be able to do so multilaterally. 

A significant trade-off would be if the IMF shifted its stance on BRI debt crisis. This could slow down their response to crises that emerge. The IMF has to balance its role as a lender of last resort with the enforcement of norms for transparency and comparability. The IMF must withhold assistance when standards are not met. This will ensure that IMF funds contributed by non-Chinese tax payers are not used to offset bad Chinese lending decisions. 

G-7 and Paris Club Role

G-7 and Paris Club Members have several strategies for addressing the debt crisis resulting from China’s Belt and Road Initiative. The United States and other creditors can help BRI borrowers to negotiate collectively, increasing transparency, and countering China’s preference for bilateral, secretive renegotiations. This approach would equalize the playing field between borrowers and creditors, such as the IMF and World Bank. 

The IMF must also establish criteria that are specific to distressed BRI borrowers who seek new credit. The guidelines, which were agreed to by several IMF board members would protect fund staff from conflict, especially with China, an important IMF member. The criteria must distinguish between commercial and official credits when defining BRI loans. It is important to do this because China labels loans from state-owned institutions as commercial. This complicates debt classification and negotiation. Standardized IMF policies on BRI loan classification would help prevent situations like Zambia, where debt classes shifted suddenly, and discourage manipulative practices during future restructuring. 

The IMF should also mandate that all debts of state-owned enterprises with sovereign guarantees are included in the restructuring process. This would ensure a comprehensive debt resolution, and prevent BRI lenders from selectively restructuring. 

Implementing these criteria would reduce IMF’s ability to respond quickly to crises, but provide the clarity and consistency needed in restructuring sovereign debt. This would shield IMF staffers from repeated conflicts with China when debt negotiations are underway. 

These reforms may be perceived as anti China, but are necessary to maintain transparency and fairness when restructuring sovereign debt. These reforms are essential for the maintenance of the principles of the international rules-based order and allow cooperation with China, which is a key participant. 

These reforms will ultimately protect the IMF against the negative effects of the BRI Debt Crisis. Conflicts over BRI debt continue to impede relief efforts and harm the economies of indebted countries as well as the effectiveness of the IMF. To mitigate these effects and help developing countries recover, a reformed IMF will be needed.