In order to prevent the defaults, Beijing is granting bailout loans on a large scale, the authors of the current IfW study explained. 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 defaulting on loans they received under Beijing’s New Loans program silk road awarded to emerging and developing countries. Last year, this affected around 60 percent of all Chinese foreign loans, as the Kiel Institute for the World Economy (IfW) announced on Tuesday. In 2010, the share was only five percent.
“To prevent the defaults, Beijing is granting bailout loans on a large scale,” explained the researchers, who created their 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 $240 billion (€223 billion), especially in the form of term extensions and new loans. Debts are rarely forgiven.
Bailout loans to rescue China’s banks
The leadership in China apparently wants to save their banks. This is also shown by the different treatment of the debtor countries: According to the study, middle-income countries account for the largest share of foreign loans, at over 500 billion dollars. “Therefore, China’s leadership has great incentives to prevent these countries from defaulting at all costs. In the event of payment difficulties, they usually offer them new loans to pay off the old debts.”
Low-income countries, on the other hand, account for only around a fifth of the 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 the debt trap with unaffordable loans.
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Risky business
Now China has “entered into the risky business of international bailout loans,” explained former World Bank chief economist Carmen Reinhart, who now does research at the Harvard Kennedy School. The authors of the study see parallels in this with European bailout loans to Greece and other southern European countries during the euro crisis. “Back then, too, the rescue of local banks played an important role in the granting of rescue loans.”
According to the study, China has so far granted bailout loans to 22 countries, including Egypt, Argentina, Laos, Pakistan, Sri Lanka, Turkey and Belarus. The bailout loans also represent the future of the newcomers silk road in question, because 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.” usually requires a degree of coordination between creditors.
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