The Potential Belt and Road Debt Bubble: Are We Asking the Right Questions?

2 November 2017 by John Hurley

The dilemma -CC

During the recent IMF and World Bank meetings, all eyes were on China. As the US administration contemplates scaling back its global economic engagement, China is doing the exact opposite. A new report from AidData detailed how “China has gone from aid recipient to net aid donor and one of the most important foreign policy players in the world.” At the UN General Assembly and the IMF/World Bank meetings, China was reaching out to world leaders and promoting its Belt and Road Initiative, which provides much-needed infrastructure financing options to developing nations. But there is increasing attention being paid to risks associated with Chinese financing on two fronts.

Firstly, there is the long-lasting concern over a potential debt bubble within China, with overleveraging possibly leading to a “Minsky moment,” as referenced by the outgoing central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx Governor Zhou. An unorderly unravelling of credit markets within China would, of course, have significant negative spillover effects on the global economy.

A second story pertains to China’s external credit activities, particularly in the context of the Belt and Road Initiative (BRI). In his address to the 19^th Communist Party Congress last week, President Xi Jinping stressed the importance of the BRI for his global economic agenda. Various estimates have been bandied about on the amount of money China intends to allocate to BRI-related activities, with President Xi himself pledging an “additional US$113 billion” at the Belt and Road Forum in May.

The BRI’s potential to add to growing debt burdens in a number of developing countries has sparked concern by, among others, the United States Government. Secretary of State Tillerson was the latest US official to express concern over the mounting debt in prepared remarks on the US-India relationship.

In his remarks, Secretary Tillerson stressed the need for India and the United States to work together to “expand transparent, high-standard regional lending mechanisms” as a counterweight to China’s activities. Given that the Trump Administration and the House of Representatives appear to be more interested in reducing US financial support for multilateral development banks than expanding it, it will be interesting to see if BRI will have an impact on the US Treasury’s circumspect position on a World Bank World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

capital increase, as conveyed by my colleague Scott Morris in a recent blog post.

As China considers the way forward with BRI, there are some important questions that need to be asked:

Is the China putting developing countries in a debt crunch? To what extent?
In the case that the developing nations are unable to pay back the loans, what should China do?
Will China’s lending be transparent?
China has endorsed a set of G20 guidelines on sustainable financing. Will it live up to them?
We’ll be looking at these questions and more in a forthcoming paper. Stay tuned.