China’s Belt and Road Initiative evolves but concerns remain

Moody´s warns about the lack of transparency and the possible impact of a debt burden on member countries.

Last October, China’s grand “Belt and Road Initiative” turned five years old. The project, that has seen Beijing financing an array of infrastructure projects across the world, has evolved significantly since its inception.

While detractors argue that the project includes “debt traps” for participants, others counter that, if the project succeeds, it can accelerate the transformation of the global supply chain and bring development to emerging regions like Southeast Asia.

Here are three charts illustrating how China’s Belt and Road Initiative has evolved to date.

High concentration

The number of countries that are part of the BRI has jumped to 115 from 64 in 2013, according to data from Moody’s. Despite this, about 40 percent of BRI contracts are concentrated in eight countries, including Pakistan, Nigeria, Indonesia, Malaysia, Russia, and Bangladesh. As for sectors, the highest value of contracts in 2017 were in energy (39.4 percent), transportation (37.3 percent) and real estate (13.2 percent).

As Chinese leaders have grown wary of high levels of leverage, investment in BRI countries is slowing down, after peaking in 2016. “It seems that the view from China´s senior leadership is that they need to follow more closely the [lending] standards of multilateral institutions, in part to mitigate the risks of BRI lending,” Michael Taylor, a managing director and chief credit officer, Asia Pacific, credit strategy and standards at Moody’s, told Infrastructure Investor.

Pricey loans

The major funding channel for BRI projects has been lending, led by Chinese state-owned enterprise contractors, according to Moody’s. “Project finance was 67 percent of total Chinese funding in BRI from 2014 through June 2018, while direct investments (greenfield and M&A) was 33 percent,” the ratings agency said in its report BRI report card: deeper linkages, greater caution.

The loans tend to have much higher interest rates than those offered by multilateral institutions. Only 20 percent of Chinese funding to BR countries has a specified interest rate Moody’s notes, citing statistics from AidData, a research lab at William & Mary’s Global Research Institute in Washington DC, which focuses on increasing transparency in development finance. Of these loans, around 40 percent have an interest rate higher than 5 percent, and a quarter are between 2 and 5 percent.

According to Moody’s, cases have also been reported were interest rates of more than 6 percent have been charged on Chinese funding to some BR countries, including Pakistan, Sri Lanka, Angola, Ghana, Mongolia and Nigeria.

“Some of these projects are choosing Chinese lending because financing may not be as readily available elsewhere, and there might be a few reasons for that, including other lenders’ particular risk appetite for exposures in those countries,” said Christian De Guzman, senior credit officer, Sovereign Risk Group, Moody´s.

Worrying debt exposure

Moody’s expects reliance on Chinese financing to keep growing among BRI countries, a fact that can “exacerbate already high debt costs.”

Ultimately, the results of the Belt and Road Initiative will depend on the success of the projects being developed.

“If Belt and Road investment is used wisely, we should see the productive capacity of BRI countries increasing,” Taylor said. “But if the countries take on the initial debt, and that doesn’t result in an improvement in growth potential, then the debt will be difficult to service, and that’s where the problems will come from,” he added.