China Falls Into Its Debt Trap “One Belt One Road”

China’s Belt and Road Initiative (BRI) – “One Belt One Road” project is in deep trouble after big losses. The Wall Street Journal reported that after the first version of the “Belt and Road” was blocked, Beijing is working on a 2.0 version. China has been accused of using the BRI to dig debt traps for other countries, only to fall into it.

Over the past decade, under the Belt and Road Initiative, China has issued about $1 trillion in loans and other funds for development projects in nearly 150 countries, becoming the world’s largest official creditor for the first time. Notwithstanding, many of the policy projects aimed at expanding its influence in Asia, Africa and Latin America have stalled and even led to debt crises in countries such as Sri Lanka and Zambia, with devastating consequences for developing economies, which Western countries often criticise as “Debt Trap Diplomacy“.

China’s new plan?

The Wall Street Journal reported on September 26 that China is now overhauling the troubled initiative and shifting to a more conservative plan, according to people involved in the Communist Party’s decision-making in internal discussions, they said, claims the article. The Belt and Road version 2.0 will more rigorously evaluate new financing projects. They are also open to accepting some loan losses and renegotiating debt, something Beijing has been reluctant to do before.

“Chinese President Xi Jinping once called the initiative the ‘Project of the Century,’ but this reform exposes the limits of his vision to reshape the global order,” the report said, diminishing Beijing’s global ambitions.

Chinese banks are understood to have sharply reduced lending to new projects in low-income countries, focusing instead on cleaning up their existing loan portfolios.

According to a study, nearly 60 per cent of Chinese foreign borrowers are in financial distress, up from 5 per cent in 2010. The research shows that for low and middle-income countries, China attaches nine dollars in debt and one dollar in aid, while the United States is the opposite, offering nine dollars in aid and one dollar in debt. Most of the US’s overseas development projects are financed by aid to other countries.

But Beijing denies the criticism while refusing to admit its loan losses. Beijing has been accused of digging holes for others with the “One Belt, One Road” initiative, only to fall into it.

The article states that the biggest irony of the Belt and Road Initiative is that Beijing has found itself compelled to accept international norms and abandon its longstanding boycott of cooperation with international institutions such as the Paris Club. The Paris Club is a significant association of sovereign creditors, including the United States, Japan, and France.

The future of BRI

In the past, Chinese banks have insisted on a commitment from borrowers to keep Chinese loans out of Paris Club-style restructuring to ensure China gets its first payment from lenders in the event of any default. According to AidData, a US-based research lab, three-quarters of Chinese loan contracts contain a “no Paris club” clause.

That all changed in 2020. Beijing agreed in November to sign the Common Framework, an international debt relief clause endorsed by the G20 that helps coordinate debt negotiations among creditors. The common framework is built on principles like those used by the Paris Club to find solutions when countries struggle to repay their debts.

The process could force Chinese banks to accept losses, something they have long opposed. Over the years, the Chinese government has tended to extend the repayment period of those troubled loans, a practice known in the financial industry as “deferral and pretence“. The risk of this strategy is to prolong countries’ debt woes, not solve them.

Regarding the future of the Belt and Road Initiative, the article predicts that the project is unlikely to retreat fully despite various financial problems. “As China is increasingly isolated from the international community, the ‘Belt and Road’ has become increasingly important to Xi Jinping’s strategy. Beijing hopes that the 2.0 version of the ‘Belt and Road’ will become more sustainable”, the report concluded.