The four (and counting) problems with the Xi Jinping Turn

I have blogged several times arguing that President XI Jinping may be the latest version of China's Bad Emperor problem. 

I can think of at least four critical wrong policy turns driven by him, and will almost indelibly become his legacy. The first three are the roll-back of economic liberalisation and capitalism with Chinese characteristics, peaceful co-existence in its near-abroad giving way to needless aggression by the PLA and its wolf-warrior diplomats, and replacement of the supremacy of the Communist Party with that of the President. I have blogged about it here, here, here, here and here.

This post flags the fourth major wrong-turn, the nature and scale of the Belt and Road Initiative (BRI). The FT has a long read that summarises the challenge,

Since the programme was first proposed in 2013 the value of China-led infrastructure projects and other transactions classified as “Belt and Road” in scores of developing countries had reached $838bn by the end of 2021, according to data collected by the American Enterprise Institute, a Washington-based think-tank. But the loans that finance those projects are now turning bad in record numbers. According to data collected by Rhodium Group, a New York-based research group, the total value of loans from Chinese institutions that had to be renegotiated in 2020 and 2021 surged to $52bn. This was more than three times the $16bn of the previous two years. This sharp deterioration brings the total of Chinese overseas loans to have come under renegotiation since 2001 to $118bn — or about 16 per cent of the total extended, Rhodium estimates. China has had to manage a number of defaults on sensitive overseas loans in recent years but the cumulative impact of the multiple renegotiations that Beijing currently faces amount to the country’s first overseas debt crisis... Many of these loan renegotiations involve write offs, deferred payment schedules or a reduction of interest rates. But as increasing numbers of Belt and Road loans blow up, China has also found itself sucked in to providing “rescue” loans to some governments to prevent their debt distress from morphing into full-blown balance of payments crises.

It's rapidly becoming evident that many of these loans face an insolvency problem.

Bradley Parks, executive director of AidData at the College of William and Mary in the US, says that while the drip feed of rescue loans helps to avert defaults, it does little to resolve underlying financial problems. “I think Beijing is now learning that in some cases the fundamental problem is not liquidity but solvency,” says Parks. Parks says that for almost five years, China’s state financial institutions tried to keep the government of Sri Lanka liquid enough to service its old project debts and to avoid sovereign credit rating downgrades. However, he adds: “Their effort was a spectacular failure. So, the big question that Beijing needs to answer is whether it wants to be in the rescue lending business in the long run.” The transition that Parks alludes to is a critical one. As China has financed roads, railways, ports, airports and a gamut of other infrastructure over the past decade, it has found itself in competition with international development lenders — most notably the World Bank. Now, as its lending shifts to focus more on preventing defaults, it is starting to mirror the role usually fulfilled by the IMF — which provides emergency loans to get countries through economic crises.

The result is also declining interest and falling BRI loans.

The sheer scale of insolvency likely and associated restructuring with haircuts means that China would not only lose financially but also politically. As the example of Sri Lanka shows, the restructuring negotiations process can easily get out of hand. The opaque and bespoke nature of the BRI loans means that any restructuring negotiations will be controversial and acrimonious. Given that countries forced into restructuring will most likely also be facing political instability (as in Sri Lanka), Beijing will dissipate the political capital accumulated in the first place from these loans. Going forward, it's hard to see anything other than downside.

The history of China over the last forty years highlights two central principles - experimentation with economic policies and peaceful co-existence with the rest of the world. They are respectively encapsulated in Deng's maxims of "crossing the river by feeling the stones" and "hide your strength, bide your time" (tao guang yang hui).

In case of the former, President Xi has sought to concentrate powers and centralise the economy by feeling the stones, whereas with the latter he has decided that biding is over and it's now time to demonstrate China's strength. Both have come at prohibitive costs to China, and these costs will only increase.