The COVID-19 pandemic threatens to cause a wave of economic crises along China’s Belt and Road Initiative (BRI). With several BRI countries already facing high external debt and likely to be hit hard by the pandemic, Beijing is poised to confront multiple, simultaneous debt crises in countries where it is heavily invested. As a report by the International Institute for Strategic Studies (IISS) highlights, China would have faced constraints on its future lending and debt renegotiations even if the pandemic had not occurred. But now, China faces a serious test to preserve the BRI, to maintain its own domestic financial stability, and to cooperate in an unprecedented way with other creditors.
Economic Dangers Along the Belt and Road
The COVID-19 pandemic is precipitating economic crises across the developing world, and the BRI countries are among those most exposed. Many have high levels of external debt and are reliant on steady flows of export revenues, foreign direct investment and foreign lending to maintain financial balance and the value of their currencies. They face escalating debt-servicing costs and growing external debt just as they need to borrow more to fund the public health response and emergency economic measures.
With the disruption of the supply of inputs needed for manufacturing, and severe contraction in the travel and transport sectors, the pandemic threatens a dramatic drop in export revenues. This could precipitate currency crises and debt crisis in numerous BRI countries. Among those most vulnerable are Angola, Belarus, Djibouti, Malaysia, the Maldives, Mongolia, Mozambique, Oman, the Republic of Congo, Vietnam and Zambia.
China will be forced to respond to this debt crisis. The effect on Chinese lenders aside, any defaults on BRI loans could be accompanied by the suspension or cancellation of BRI projects, with knock-on effects for the Chinese implementers, many of which are state-owned enterprises. Moreover, many of China’s partners along the Belt and Road expect China to come to their aid, both in fighting the public health impact of the pandemic and to alleviate the inevitable economic crises that will follow. In promoting itself as the leading partner to the countries of the Belt and Road, China has inflated other countries’ sense of China’s responsibility to them.
How Will Beijing Handle a BRI Debt Crisis?
Although this is not the first time that China has needed to renegotiate debts with BRI members, it has never before had to deal with simultaneous debt crises among many partner states. It played no role, for example, in the developing country debt cancellations of the 2000s. But because of the scale of its financing of the BRI, China will be the most exposed creditor by far in the debt crises in the wake of the COVID-19 pandemic.
Renegotiating debts on this larger scale will generate considerable financial and political pressure on Beijing. In its renegotiation of Malaysia’s largest BRI project in 2019, Beijing was able to demonstrate financial flexibility and lighten Kuala Lumpur’s debt burden. However, replicating this approach with numerous countries at once will be financially demanding, and will clash with its goal of domestic financial sustainability. As the IISS report highlights, several domestic economic factors will hamper Beijing’s response to the crisis, including persistent risks in its own financial system, an economic slowdown (which began well before the outbreak of COVID-19), and a growing deficit of dollars. What is more, widespread debt cancellation or rescheduling will only increase domestic skepticism about the BRI, and may constrain China’s ability to give more to its partners in return for less.
A widespread debt crisis will test Beijing’s ability to work with other major creditors – both multilateral development banks and traditional bilateral donors. China is not a member of the Paris Club or London Club groupings of creditor countries and has shown little appetite to date for engaging with other creditors. But, just as in previous large-scale debt relief efforts, a degree of multilateral cooperation will be necessary to resolve debt crises in the wake of the pandemic. After all, China is not the only creditor to BRI countries and the other lenders will want to ensure that the burden of debt relief is shared fairly among them. They will demand more transparency on BRI members’ debts to China, and could require that the terms of China’s loans be brought into line with other states’ if they are to enjoy the same preferential status. If China refuses to cooperate, other creditors will move to ensure that countries will not utilize the benefits of restructuring to repay BRI loans to China. In this circumstance, BRI countries will be much more likely to default on their Chinese loans.
However, China’s geopolitical messaging during the crisis suggests that Beijing retains a strong preference for bilateral rather than multilateral cooperation efforts. Its public diplomacy during the pandemic has aggressively promoted the image of China as the generous provider of medical equipment and expertise to the rest of the world and has contrasted its response with Europe’s and the United States’. Likewise, in the debt arena, Beijing will seek to engage in bilateral restructurings with BRI countries and present itself as a uniquely benevolent partner. This will not endear China to other creditors and will present debtors with a difficult choice. On the one hand, if BRI countries pursue multilateral debt renegotiations, creditors will impose strict limits on their payments to Beijing and this will make independent, bilateral restructuring of debts with China impossible. On the other hand, if BRI countries pursue bilateral negotiations with China, they will struggle to renegotiate their debts with other creditors, leaving the debt crises unresolved both for themselves and for Beijing.
More constructive for China’s longer-term goals would be an alternative approach. The crisis could offer an opportunity for Beijing to accelerate its attempts to secure co-financing of BRI projects, in return for coordination on debt restructuring with other lenders. As the IISS report sets out, Beijing sees co-financing as an answer to the risks of debt unsustainability in BRI projects – a solution that could also be used to shore up projects that, post-pandemic, might otherwise hit the rocks. Whether other creditors will entertain this idea will depend in part on China’s openness to wider cooperation.
Without that cooperation, debt distress along the Belt and Road will be a serious threat to China’s own financial sustainability and to the operations of Chinese companies overseas. The impending crisis may yet reshape the way in which China engages both with its debtors and with other creditors.
Nick Crawford is a research associate on the Geo-economics, Geopolitics and Strategy program at the Institute for International Strategic Studies (IISS). David Gordon is a senior adviser for Geo-Economics and Strategy at IISS