The BRI, according to the report, “was always something of a mafia-like enterprise.” Beijing would offer loans to poor countries to develop major infrastructure projects. State-owned Chinese banks would arrange the financing, and Chinese contractors would develop the projects and manage them when completed, the article said.
In the event that the host country defaulted, the projects would go into Chinese hands, Forbes reported. China has lent millions of dollars to the public and private sectors in some 150 countries, making it the world’s largest lender. More than half of the countries with BRI loans face economic difficulties.
However, after two years of pandemic confinement, high inflation, interest rate hikes in the United States, the impact of the Russian invasion of Ukraine, and rising energy and food costs, many of these countries are unable to repay their loans, U.K.-based energy news site Oil Price reported in late November.
As such, the BRI has become China’s first overseas debt crisis, British newspaper Financial Times reported in July. According to the daily, China must recognize that flaws in the design of the initiative, such as lack of transparency and choosing risky debtor countries, also further complicate matters.
Among the debtor nations are Argentina, Angola, Ecuador, Iran, Pakistan, Russia, Sri Lanka, Venezuela, and Zambia, the British newspaper said. Beijing gave billions of dollars as bailout loans to BRI countries to avert defaults.
Chinese state-owned banks face massive defaults not only from domestic property developers such as Evergrande Group, but from their BRI loans. The pressure is too great for China to stand alone, Forbes reported, leading Chinese authorities to team up with international groups to deal with the loans.
In addition, “a certain type of Chinese investments in the [Latin American] region and those linked to the interests of the Asian country itself have a very close relationship with the Chinese Communist Party,” Ariel Slipak, an economist and academic at the University of Buenos Aires, told Diálogo on December 20.
Disadvantageous situation
In Latin America, many countries have financing arrangements to develop their infrastructure with the China Development Bank, the Exim Bank of China, or with the BRI fund, Slipak said. Venezuela and Ecuador have received Chinese resource-backed loans, especially with oil as a collateral.
Ecuador has five confidential loans tied to oil shipments to Chinese state-owned companies. The only way to make these loans transparent is for China to agree to modify the reservation clause, Ecuadorian newspaper Primicias reported.
China, as Ecuador’s largest creditor, faces the possibility that the country will not be able to cover debt servicing costs in the coming years, the Simón Bolívar Andean University in Ecuador indicates in a report.
“When some Latin American countries negotiate with Beijing, they are in a disadvantageous situation because of the asymmetric economic relationship they have,” Slipak said. “China, when defending its interests, focuses on securing extractive commodities. Faced with risks of non-compliance it will exert greater pressure to intensify extractive primary projects.”
Projects
Currently, 22 countries in Latin America and the Caribbean are part of the BRI, including Argentina, as of February 2022. There are some 20 projects that will be carried out as part of the BRI in Argentina, Argentine news platform ArgenChina reported.
“The problem of Latin America is not being able to determine in a sovereign manner against […] China what kind of investment projects it wants to carry out,” Slipak said.
From the beginning, projects in BRI countries were chosen for political rather than economic reasons. Many of these plans were always commercially dubious, Forbes reported. Public protests, chronic delays, and accusations of corruption haunt many BRI projects, the Financial Times said.
A case in point is the hydroelectric project in Santa Cruz, Argentina. “The dams on the Santa Cruz River create very serious environmental impacts. It is rejected by the communities and puts biodiversity and glaciers at risk,” Slipak said. “China’s need to finance this project is so that its suppliers can place inputs.”
Major setback
In this context, the BRI “has lost much of its strength.” China also suffered a setback in prestige and financially. The Chinese government is beginning to describe the BRI as “increasingly complex” and in need of risk controls as well as cooperation, Forbes reported.
China should also review the way it lends for development through the BRI and adopt a more multilateralist approach, cooperating with development banks and conducting sufficient risk management studies prior to financing, reported the Financial Times.
What Latin America should be concerned about is the “green economy of these big capitals that affect these infrastructure projects in popular sectors with a great environmental impact all over the world,” Slipak concluded. “We need more rigorous standards to evaluate [Chinese] projects and more participation of civil society.”