Outside In

Tillerson’s final warning on Belt and Road financing only proves China’s influence on the rise

Tillerson’s warning that countries taking on too much debt to finance infrastructure projects as part of the Belt and Road Initiative could endanger their economies can only be seen as a distraction from the debt overhang that still haunts the global economy 10 years on from the financial crisis

PUBLISHED : Friday, 23 March, 2018, 10:46am
UPDATED : Friday, 23 March, 2018, 10:28pm

One of Rex Tillerson’s final acts, as he emerged from his long Africa tour only to be tweet-sacked from Washington by his boss, was to warn the world, and his African hosts, about the dangers of being seduced by the siren call of Chinese loans supporting big infrastructure Belt and Road projects.

In emerging markets around the world “China offers the appearance of an attractive path to development, but in reality [is] trading short-term gains for long-term dependency”, Tillerson said. He called on borrowers to “carefully consider the terms” of agreements with Chinese lenders, and to take care “not to forfeit sovereignty”.

In a tour through Latin America less than a month earlier he gave a similar set of warnings. “Latin America does not need a new imperial power,” he noted. Clearly the one existing “imperial power” is quite enough.

In certain ways, Tillerson’s comments should be well-taken. Economies across Asia paid a very high price during the Asian Financial Crisis in 1998 for having gorged on too much corporate and government debt – much of it in foreign currencies. The painful lessons learned at that time have been heeded. Today, governments and companies alike rely more heavily on local currency debt. Bond markets have been developed to help companies rely less heavily on potentially volatile bank lending. Overall levels of debt have been kept more carefully in check.

The numbers underpinning Tillerson’s warnings seem to emerge from a single common source – a report lead-authored by John Hurley at the Washington-based Center for Global Development on “The Debt Implications of the Belt and Road Initiative”.

The Belt and Road provides something that most countries desperately want – financing for infrastructure. But when it comes to this kind of lending, there can be too much of a good thing
John Hurley, Center for Global Development

The study is well researched, and concludes that 23 of the economies embraced by the Belt and Road Initiative are “at risk of debt distress”, and that for eight of these (Pakistan, Laos, the Maldives, Mongolia, Djibouti, Montenegro, Tajikistan and Kyrgyzstan) “future Belt and Road Initiative-related financing will significantly add to the risk of debt distress”.

“The Belt and Road provides something that most countries desperately want – financing for infrastructure. But when it comes to this kind of lending, there can be too much of a good thing,” Hurley comments.

That is about as far as Tillerson took the issue. But if you turn to the full report, there are other findings worthy of attention. Noting that the Belt and Road Initiative is forecast to drive infrastructure projects worth US$8 trillion over the coming two decades, Hurley says: “An US$8 trillion initiative will leave countries with debt overhangs that will impede sound public investment and economic growth.”

He then concludes: “Our analysis finds that the Belt and Road Initiative is unlikely to cause a systemic debt problem in the regions of the initiative’s focus”, but that there would be “significantly increased risk if projects are implemented in an expeditious manner and financed with sovereign loans or guarantees”. I presume “in an expeditious manner” he means “too fast”.

So are these Belt and Road Initiative projects putting impoverished economies in peril? For sure, any government seeking infrastructure financing should be cautious about the risks linked with projects that will be paid for over 30 or 40 years. Indeed, one might make a case that Pakistan, gorging on US$62 billion worth of projects that are being 80 per cent funded by Chinese lenders, needs to tread with great caution.

So too Sri Lanka may be wringing its hands over the need to give control over its ambitious Hambantota Port to China Merchants Port Holdings in a debt-for-equity swap because it could not afford interest repayments.

Indeed, one might make a case that Pakistan, gorging on US$62 billion worth of projects that are being 80 per cent funded by Chinese lenders, needs to tread with great caution

But where we know the details of China’s financing terms for Belt and Road Initiative projects (and often we don’t), there is no evidence of extortion. For example, the US$6 billion China-Laos railway has been supported by a $465 million 25-year loan at 2.3 per cent interest, with an initial five-year grace period. The Hurley report itself notes: “China has demonstrated a willingness to provide additional credit so a borrower can avoid default,” as with a 15 billion yuan (US$2.3 billion) loan to Mongolia last year.

In short, there is urgent need for infrastructure investment worldwide amounting to at least US$26 trillion, and if the Belt and Road Initiative is putting money where its mouth is for US$8 trillion of this, then this must in net terms be for the good. And we should be working on where the other US$18 trillion may be coming from, how we can channel it into the most beneficial projects, and how we can ensure appropriate financing is available.

For my money, a much bigger issue than Belt and Road Initiative debts – and one for which the US rather than China bears the greatest responsibility – is the awful debt overhang that has been accumulated worldwide over the decade since the 2008 financial markets crash in the US. To pre-empt a total meltdown in 2008, governments’ “quantitative easing” policies have slashed interest costs close to zero, and huge amounts of debt have been flushed into the global economy. Total global debt – government, corporate and household debt combined – has more than doubled over the decade, to reach US$233 trillion at the end of last year. Put baldly, that amounts to US$30,000 for every man, woman and child on the planet.

The US Federal Reserve is predicting that the 1 percentage point increase in interest rates since early last year will add US$15 billion to US corporate interest rates this year, and US$39 billion in 2019. The Congressional Budget Office says interest costs in the US will triple over the coming decade, from US$269 billion last year to US$818 billion in 2027.

As the International Monetary Fund warned in January: “Sheer size of debt could set the stage for an unprecedented private deleveraging process.”

In short, the policies of the Fed, and the still-unfolding costs of the 2008 US crash, are likely to cause immeasurably more “debt distress” than China’s Belt and Road Initiative spread over the next two decades. Was Tillerson trying to distract us from this grim reality?

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view