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Belt and Road Initiative
Opinion
Anthony Rowley
Anthony Rowley

Macroscope | With the coronavirus imperilling belt and road borrowers, China must not simply write off debt

  • Forgiving the debt will not only send the wrong message, and it will discourage China from making further infrastructure loans
  • Debt-to-equity conversion could allow China to change the nature of the Belt and Road Initiative by turning it into super-sovereign wealth fund

Reading Time:4 minutes
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A visitor views an artwork at the second Belt and Road Afro-Sino Art Exchange Exhibition at the National Gallery of Zimbabwe in Harare, Zimbabwe, on April 29, 2019. African nations have borrowed heavily from China in recent years. Photo: Xinhua
Anthony Rowley
The economic slump resulting from Covid-19 is causing debt distress among developing economies and has prompted calls on China to ease repayment terms or even write off debt linked to its Belt and Road Initiative. This is not a practical suggestion, but converting more debt associated with the Belt and Road Initiative into equity could be.
China has been vilified for adopting what is in fact common international practice of converting debt owed by Sri Lanka in connection with a port project into equity. But this misplaced opprobrium should not deter Beijing from offering similar equity conversion options to other belt and road borrowers.

Conversion immediately eases or eliminates the debt servicing burden on struggling borrowers and replaces the lender’s loan asset with a claim on physical assets. In the case of belt and road projects, it is also a way of making China an active rather than “sleeping” partner.

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To simply write off belt and road debt would be manifestly unfair to those borrowers who have already repaid, in part or in full, loans used not only for harbour development but also for infrastructure projects linked to road and rail transport, and energy. It might even encourage others to default.

Worse, debt forgiveness could discourage China from making further infrastructure loans – a prospect which only its most unthinking detractors might welcome. Infrastructure creates trade within and between nations at a time when less visionary nations prefer trade barriers or even trade wars.

02:35

The principle of converting debt to equity might need to be applied much more widely than to the Belt and Road Initiative if the fallout from the coronavirus pandemic continues to bring myriad small and large businesses to their knees. Governments, financed by central banks, are bailing out companies with loans that may never be repay.
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