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The Potential Belt and Road Debt Bubble: Are We Asking the Right Questions?
by John Hurley
2 November 2017

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 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 19th 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 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.


John Hurley