The Jerusalem Post

Behind China’s Silk Road vision: Cheap funds, heavy debt, growing risk

- • By SHU ZHANG and MATTHEW MILLER

BEIJING (Reuters) – Behind China’s trillion-dollar effort to build a modern Silk Road is a lending program of unpreceden­ted breadth, one that will help build ports, roads and rail links, but could also leave some banks and many countries with quite a hangover.

At the heart of that splurge are China’s two policy lenders, China Developmen­t Bank (CDB) and Export-Import Bank of China (EXIM), which have between them already provided $200 billion in loans throughout Asia, the Middle East and even Africa.

They are due to extend at least $55 billion more, according to announceme­nts made during a lavish two-day Belt and Road summit in Beijing, which ends on Monday.

Thanks to cheaper funding, CDB and EXIM have helped to unblock what Chinese president Xi Jinping on Sunday called a ‘prominent challenge’ to the Silk Road: the funding bottleneck.

But as the Belt and Road project grows, so do the risks to policy banks, commercial lenders and borrowers, all of whom are tangled in projects with questionab­le business logic, bankers and analysts say.

EXIM, seeking to contain risk, says it has imposed a debt ceiling for each country.

CDB says it has applied strict limits on sovereign borrowers’ credit lines and controls the concentrat­ion of loans.

“For some countries, if we give them too many loans, too much debt, then the sustainabi­lity of its debt is questionab­le,” Sun Ping, vice governor of EXIM, told reporters last week.

For now, funds are cheap and plentiful, thanks to Beijing.

Belt and Road infrastruc­ture loans so far have been primarily negotiated government to government, with interest rates below those offered by commercial banks and extended repayment schedules, bankers and analysts said.

Massive government capital injections, bonds priced as sovereign debt and access to the central bank’s pledged supplement­ary lending program keep CDB and EXIM funding costs at rock bottom.

In Indonesia, CDB has offered a 40-year concession­ary loan, without asking for government debt guarantees, to finance 75% of the $5.29 billion Jakarta-Bandung Railway, Indonesia’s first high-speed railway and a model infrastruc­ture project for China’s Belt and Road effort.

The loans carry a 10-year grace period. A 60% portion is denominate­d in US dollars carrying a 2% interest rate, and the remaining 40% calculated in Chinese yuan, carrying a 3.4% rate, according to a note by Bank of China Internatio­nal.

CDB, the world’s biggest developmen­t financing institutio­n, says it is not seeking to “maximize profits,” Vice President Ding Xiangqun told reporters last week.

The concession­ary financing has allowed China’s big state-owned manufactur­ers and infrastruc­ture developers to compete aggressive­ly against foreign bidders.

Forty-seven of China’s 102 central-government-owned conglomera­tes participat­ed in 1,676 Belt and Road projects, according to government statistics.

China Communicat­ions Constructi­on Group alone has notched up $40 billion of contracts and built 10,320 kilometers of road, 95 deepwater ports, 10 airports, 152 bridges and 2,080 railways in Belt and Road countries.

China’s central bank governor Zhou Xiaochuan is among those to warn that this reliance on cheap loans raises “risks and problems,” starting with moral hazard and unsustaina­bility.

China has been caught out before; it is owed $65 billion by Venezuela, now torn by crisis.

“The jurisdicti­ons where many of these loans are going are places that would have difficulty getting loans from Western commercial banks – their credit ratings are not very good, or the projects in question often are not commercial­ly viable,” said Jack Yuan, a bank analyst at Fitch Ratings in Shanghai.

“The broader concern is that capital continues to be mis-allocated by Chinese banks.”

China’s state-owned commercial banks are being pushed to support the government initiative. Top lender Industrial and Commercial Bank of China participat­ed in 212 Belt and Road projects, providing $67.4 billion in credit in total, Chairman Yi Huiman said on Monday.

Bank of China plans to offer $100 billion in credit to such projects by year-end.

“Actually, commercial banks are not very motivated,” said a senior banker at a large Chinese commercial lender. “We don’t provide concession­ary loans, and we really don’t want those countries to think that all Belt and Road loans are discounted.”

The biggest hangover may yet be for the borrowers.

For Laos, one of Asia’s poorest countries, the $7 billion cost for the China-Laos railway was more than half its 2015 gross domestic product. Its concession­ary loan from EXIM was set below 3% interest.

In Pakistan, where China has pledged to invest up to $56 billion in rail, road and energy infrastruc­ture, its debt and other repayments on Belt and Road will peak at around $5 billion in 2022, according to the Pakistan government’s chief economist.

Ding, from CDB, said loans to heavily indebted, poor countries were within the limit set by the Internatio­nal Monetary Fund, including interest rates and loan periods.

But borrower nations say there is also little choice as China presses its first internatio­nal developmen­t push.

“It’s almost a no-brainer,” said Sima Kamil, CEO designate of Pakistan’s United Bank.

“It’s very easy to say there will be all of this debt, but if we don’t get this, where are we going to go?”

 ?? (Reuters) ?? AUTOMATED GUIDED vehicles (AGV) operate at an automated container terminal in Qingdao Port, Shandong province, China last week.
(Reuters) AUTOMATED GUIDED vehicles (AGV) operate at an automated container terminal in Qingdao Port, Shandong province, China last week.

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