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As China’s Communist Party paves the way for President Xi Jinping’s indefinite leadership, the international community should expect the Belt and Road Initiative (BRI)—President Xi’s signature global infrastructure plan spanning Asia, Europe, and Africa—to be further cemented as China’s primary strategy of global engagement for years to come. In a new CGD paper, we assess the likelihood of debt problems in the 68 countries we identify as potential BRI borrowers.
The big takeaway: BRI is unlikely to cause a systemic debt problem, yet the initiative will likely run into instances of debt problems among select participating countries—requiring better standards and improved debt practices from China.
Senior Fellow, Director of the US Development Policy Initiative
Here’s what we found:
BRI creates the potential for significantly increased debt sustainability problems in at least eight countries. In BRI countries vulnerable to debt distress, we incorporate an identified BRI pipeline of project lending to estimate changes in a country’s public debt and concentration of debt with China as a creditor. Along these two dimensions, we identify eight countries of particular concern where China, as the dominant creditor, will be in the key position to address problems that may arise:
Looking at the entire range of countries in the initiative, the risk of debt distress is not widespread. The majority of BRI countries will likely avoid problems of debt distress due to BRI projects:
China should demonstrate its commitment to a responsible role on the international stage by adopting and advancing multilateral standards for debt sustainability and improving debt management practices. China’s track record managing debt distress has been problematic, and unlike the world’s other leading government creditors, China has not signed on to well-established rules of the road when it comes to avoiding unsustainable lending and addressing debt problems when they arise. Given the likelihood of debt problems in select cases, we make the following recommendations for how China and major BRI partners can better align with existing disciplines and standards:
Multilateralize the Belt and Road Initiative: Currently, institutions like the World Bank and Asian Development Bank are lending their reputations to the initiative while only seeking to obtain operational standards that will apply to a very narrow slice of BRI projects: those financed by the MDBs themselves. Before going further, the MDBs should press the Chinese government when it comes to the lending standards that will apply to any BRI project, no matter the lender.
Consider additional mechanisms to agree to lending standards: We suggest a post-Paris Club approach to collective creditor action, the implementation of a China-led G-20 sustainable financing agenda, and the use of China’s aid dollars to mitigate risks of default.
In advance of adopting a new Policy on Public Information, the AIIB is inviting suggestions on how it could best align public disclosure with its guiding principles of “promoting transparency, enhancing accountability and protecting confidentiality.” The adoption of the new policy provides AIIB President Jin Liqun and the AIIB shareholders an opportunity to demonstrate that this newest of multilateral development banks (MDBs) is serious about its commitment to adopting international best practices. I identified a number of actions that the AIIB could take to improve its disclosure practices. Here are my top three recommendations:
As the World Bank makes a case to its shareholders for a capital increase this year, they are grappling with an uncomfortable truth: one of their biggest borrowers, China, happens to hold the world’s largest foreign exchange reserves, is one of the largest recipients of foreign direct investment, enjoys some of the best borrowing terms of any sovereign borrower, and is itself the world’s largest sovereign lender.