The “Silk Road” of this century, the belt and road initiative (BRI), inaugurated in 2013, was and remains to be one of the most ambitious development strategies to date. It aims to boost Chinese foreign investment and overall trade through a collection of development and infrastructure initiatives. Unlike under the Han dynasty, this new “silk road” will pan from East Asia to Europe including a rough estimate of about 130 countries. The vision of creating a mammoth network of roads, railways, energy pipelines, and other such channels to expand the use of the Chinese currency did and still sparks conflicting views and controversy on global domination. However, in a time of economic slowdowns, the focus has shifted from problems in increasing Chinese power to the mere issue of debt relief.
With the advantage of a global flow of goods, capital, and technology, the countries involved in the scheme wouldn’t be so badly burdened by the pandemic in the economic sense. Unfortunately for many countries, undertaken projects were either incomplete or hadn’t begun construction yet. This left several of these countries in overflowing debts that they could not payback. It definitely did not help that stimulus packages had to be procured for the same countries in order to lighten the affliction the lockdowns had on respective economies. Between 2000 and 2017, the world’s debt to China grew 10 fold, with the share by just developing countries as high as $380 billion. For the BRI program alone, the country has invested about half a trillion dollars ($416 billion to be precise) in the development of these projects so far. However, as the worst of the virus came into light, export revenues dropped. Complimented with increased domestic spending as a result of the outbreak, countries saw a noteworthy depreciation in their currencies which therefore adversely affected their abilities to meet forex denominated debts owed to Chinese banks. Pakistan and Sri Lanka are among the worst off, and will not be able to service their overall debt obligations for 2020-21.
Earlier this year, before it was announced that China would be suspending debt repayment for 77 developing nations, financial ministers and officials of the country debated as to whether complete forgiveness of debt would be as beneficial to all parties involved as debt rescheduling, debt to equity swaps, or bringing in Chinese firms to assist operation, would be. While this predicament can no longer hold true for the low-income countries whose debts have been waived, developed nations may face the aforementioned alternatives. There are several issues that come along with complete debt forgiveness, and while they can be overlooked when it comes to already struggling nations, it can be rather unnecessarily troublesome to do the same for developed economies. Widespread debt write-offs could generate a negative feedback cycle that can discourage future Chinese lending for the remainder of 2020 as well as 2021. This would be especially bad for the BRI scheme, but also for countries looking to increase foreign investments made in their countries, specifically from China. Being aware of the fact that the half a trillion dollars of debt the world owes China is not in the form of foreign/overseas aid but rather as a business and trade investment, China must recoup the principal amount as well as a moderate interest. However, It would still be in the country’s interest to come around to waiving debts for some of these countries as well, especially those that have development projects that are strategically important. Given the high stakes, the country has in transnational projects and economic interests in ensuring the long term success of the program they may have to encounter some hefty losses in the short run.
Of course, if China were to fail to come to an agreement with other G20 nations in the scheme, for forgiveness or rescheduling, the lenders can still be forced into a broader debt write off, owing to force-majeure clauses or other arrangements that will absolve the debtors from penalties with the justification of unforeseeable circumstances- in this case, a pandemic.
We cannot disregard the fact that the country has also actively assumed its global responsibility by providing $2 billion, over the course of two years to help other countries respond to the impact of the virus, as the economies of many developing countries have been battered by the fallout of the pandemic. This fund will be a mix of both bilateral aid and multilateral donations and aims to provide not only medical supplies but also to aid in restarting respective economies. Ma Zhaoxu, Vice Minister of Foreign Affairs said that “China is negotiating bilateral aid with recipient countries in need in an equal manner to identify assisting projects to help developing nations improve public health standards, improve their livelihoods and resume their economies” Additionally, the country has also donated $50 million to the world health organization, and has also begun the process of setting up 30 new hospitals in Africa. With such a large amount owed back to China (including BRI debt, foreign aid, as well as any other such loans) debt forgiveness would bring to the country a massive loss which wouldn’t go well with its own economy affected by the pandemic. However, burdening the crippling global economy, focusing on developed nations, could be a mistake in the longer term as it could have not only serious political implications, but also be worse off for China’s priority development program, and vision of expanding their sphere of influence.
Debt problems will be highly idiosyncratic, which would be greatly favorable to China when making decisions and coming to a satisfactory middle ground with not only BRI countries, but others too. China, being at the front line of the global situation we are in, will have to make calculated decisions as to whether they can handle more losses for the benefit of the long term, or whether they need to practice self-preservation in the short term, to protect their future, and figure how they will achieve both to the best of their abilities.
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