Southeast Asian borrowers could 'feel pressure' over belt and road debts to China amid IMF scrutiny

China's more cautious approach towards its infrastructure projects under the Belt and Road Initiative in Southeast Asia could dissuade borrowers from taking in excessive loans over fears of the difficulty of securing international help in the event of default, analysts have said.

The growing conservatism around such projects - which are now evolving towards greater economic and environmental sustainability - follows new transparency demands from global financial institutions aimed at preventing sovereign debt distress.

Organisations such as the International Monetary Fund (IMF) and World Bank have been pushing for tougher debt monitoring and more sustainability due to rising global interest rates and growing concerns about debt risk in developing countries, which has become more pressing following the economic shock of the Covid-19 pandemic.

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Lucio Blanco Pitlo III, a research fellow at the Asia-Pacific Pathways to Progress Foundation, said the increased IMF scrutiny could aid disclosure requirements and "give IMF deep insights into how Chinese lending operates".

This could help in devising countermeasures or needed reforms, especially with China's rise as a global credit powerhouse, he added.

According to a World Bank report last year, China has emerged as the largest to low- and middle-income countries where their combined debt to China stood at US$170 billion at the end of 2020, more than triple the level in 2011. Much of the funding is used for large infrastructure development projects.

"China compensated its late entry into the credit market by taking in more risk, funding projects that most established lenders will not," Pitlo said, adding that economic contraction due to the pandemic, inflation and energy and food crises linked to the war in Ukraine "exposed the perils of aggressive lending".

Given China's economic slowdown, coupled with "domestic rumblings over the excessive spending on some [belt and road] projects", authorities had little choice but to exercise caution, said Benjamin Barton, associate professor at the University of Nottingham's Malaysia campus, adding that there would be "more emphasis on caution in Asia and elsewhere".

The prospect of "vast promises of financing" coupled with the regulatory grey area sometimes led those in charge of implementing the belt and road plan - policy banks, Chinese state-owned enterprises and governments of participating countries - to overlook financial, political, and environmental risks, Barton added.

"Such risk-free reasoning is what undergirded some of its most controversial projects" including the Hambantota project in Sri Lanka, Barton said, where the 99-year lease had been handed to Beijing due to the inability of Colombo to service US$8 billion of Chinese loans and investments.

The project has also been widely cited as evidence of China practising "debt-trap diplomacy", a charge it has denied, although former central bank governor Zhou Xiaochuan in April acknowledged that some Chinese lending might not have always been "carefully designed" and poor communication created problems.

The call for greater transparency was a positive step towards ensuring healthy loans, said Chanrith Ngin, honorary academic at The University of Auckland in New Zealand, but noted that countries such as Laos, Malaysia and Indonesia "will feel pressured" to reveal the details of their debts and other loans as the revelation could attract criticism of the amount spent and lead to a delay in projects.

An ISEAS-Yusof Ishak Institute paper published in May revealed that despite a steep decline in China's overall belt and road investments worldwide, Southeast Asia rose to become the project's top investment destination in 2020.

By the end of 2021, China's non-financial investments in 57 belt and road countries reached US$20.3 billion, and seven of 10 major recipients were Southeast Asia nations: Singapore, Indonesia, Malaysia, Vietnam, Laos, Thailand and Cambodia.

Phan An Khang and Nguyen Ngo Phuong Thao from the New Delhi-based Tillotoma Foundation said IMF pressure was unlikely to have much impact on Vietnam as the country had already turned down some belt and road projects due to domestic opposition.

"Local people are demanding more transparency within the belt and road projects in Vietnam," they said, pointing out that confidentiality clauses in the agreements meant most of the information was hidden.

Hanoi was very cautious due to the leadership's recognition that the belt and road project "is a grand strategy tactic of China to exercise influence on Vietnam".

"(China can) later use the leverage gained to coerce Vietnam on the controversial issue of the dispute of the South China Sea," they said.

Gone are the days where Southeast Asian countries such as Malaysia under former prime minister Najib Razak "were signing up to projects willy-nilly", according to Barton.

When Malaysia agreed to participate in the belt and road plan in 2016 under Najib, it signed on to major projects involving Chinese investment including two major railway projects, the Trans Sabah Gas Pipeline and a coastal property development.

Many of the projects have either been suspended, cancelled, or delayed.

When former Malaysian prime minister Mahathir Mohamad forced the renegotiation of one of the projects, the East Coast Rail Link (ECRL), the country had "sort of paved the way for inviting greater scrutiny" of the belt and road strategy, Barton noted.

After the renegotiation, Malaysia slashed the ECRL cost by about a third from US$16 billion to US$11 billion, and obtained a larger share of jobs for Malaysians who would be working on the project.

So while there would be continued calls for belt and road projects in the region due to the gap between demand for infrastructure and actual financing available, Barton said Southeast Asian countries were likely to approach future such projects with "a greater deal of caution that some may have shown in the past".

"Governments in the region would be wary of racking up too many projects without undertaking sufficient due diligence on the financial risks involved," Barton said, adding that "growing conservatism and risk mitigation" now characterised the roll-out of belt and road projects.

"The IMF's recent measures would only further vindicate this need for caution," Barton said.

Given the "austere" regional economic forecast in the short term, supply chain disruptions and increase in energy prices, belt and road contracts in Asia were likely to decline, he added.

Last month, the Asian Development Bank cut its economic growth forecast for developing Asian economies to 4.3 per cent this year from a previous projection of 5.2 per cent amid the continued rise in inflation in the region.

To rein in bad debts, China is taking steps to strengthen due diligence, fight corruption and impose higher interest rates to take into account bigger risk associated with belt and road projects in developing countries, Pitlo noted.

China's own ballooning debt and pressure from other creditors could also compel it to become a more "mature and circumspect lender", Pitlo said.

To that effect, Ngin said China was using debt sustainability and "green" belt and road frameworks to be more cautious in providing loans and improving its reputation.

"However, how they do it is little known, especially concerning debt sustainability analysis," Ngin said.

The number of "green" belt and road projects was on the rise, Ngin said, with the bulk of Chinese overseas energy investments in renewable energy including solar, wind, and hydropower.

The share of renewable energy in the overall energy investments rose from 38 per cent in 2019 to 57 per cent, according to Christoph Nedopil Wang, founding director of the Green Belt and Road Initiative Center, in January last year.

While the IMF's transparency measures were promising, Ngin said they could "make some countries shy away from its loans and become closer to China, economically and politically".

Andreea Brinza, vice-president of the Romanian Institute for the Study of the Asia-Pacific whose research focuses on the geopolitics and geoeconomics of China, said more rigorous and transparent financing would help China "erase the 'debt trap' label".

"I see a more cautious China in offering loans after the wave of criticism that started in 2017 to 2018, but I also see a China that wants to work to reshape the image of the [belt and road plan], making it more transparent, greener and open," she said.

Describing the initial problems as "a teething symptom rather than an inherent structural flaw" Khairy Tourk, professor of economics at the Illinois Institute of Technology's Stuart School of Business, said the Chinese initiative had also provided loans to some very poor countries.

"By the standards of Western credit agencies (these countries) are not creditworthy, yet denying them the funds to build modern infrastructure would have meant preventing them from achieving better life quality for their people," Tourk said.

Beijing now emphasised the use of clean energy and prohibiting the use of coal-fired plants on its belt and road projects, he added.

Jon Yuan Jiang, a PhD candidate at the Queensland University of Technology, said it made sense for Beijing to adopt caution and end its previous "immature capital squandering".

"What is the point of Beijing loaning money to a country and then this country cannot repay China and also public opinion towards China declines?" Jiang asked.

This article originally appeared on the South China Morning Post (SCMP).

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