OPINIONS Belt and Road projects aim to avoid new debt risks for developing countries


Belt and Road projects aim to avoid new debt risks for developing countries

Global Times

07:06, April 26, 2019


(Photo: Global Times)

According to media reports, encouragement of sustainable financing is one of the bright spots in the draft communiqué for the second Belt and Road Forum for International Cooperation, a gesture meant to respond to accusations by some Western countries about the so-called "debt trap." While the construction of the Belt and Road Initiative (BRI) has achieved remarkable results in recent years, some Westerners never tire of smearing it by accusing BRI projects of creating debt traps for developing countries, which is nothing but a groundless attack.

As I have noticed, none of the Western economic scholars, such as some renowned economics professors at US-based universities, have stood up to say that there are debt problems with countries and regions along the BRI route. And those who have raised the debt issues are not professionals in economic research.

From an economic perspective, the debt-to-GDP ratio is the ratio of debt (measured in monetary unit) to GDP (measured in monetary unit divided by time unit) during an absolute period of time (year). When you do the math, if the unit is used incorrectly, then the mistake will carry over into the final result. For a country or region along the BRI route, if they calculate their debt-to-GDP ratio based on a 10-year period of time, instead of one year, then the debt burden of the country or region will become one-tenth of the initial result. In view of the repayment capacity, such a time unit seems more appropriate because the country or region doesn't need to pay off all debts within one year (unless some crisis makes the country unable to refinance for the existing debt). Moreover, part of a country's debt is held by its people. In this sense, the debt burden of some countries could be overestimated.

When we apply for mortgage loans, banks need to review our financial conditions and social credit situations. Likewise, China's financial institutions have always attached great importance to the debt management of investment and financing projects in BRI-related countries and regions. Complying with international loan principles, China issues loans in accordance with the actual financial conditions, liability situations and repayment capacities of the borrowing countries, while at the same time trying its best to avoid creating new debt risks and financial burdens for the countries concerned. Specifically, when a country along the BRI route needs to implement an infrastructure project, such as building a power plant, the project first needs to go through the tendering and bidding process. If a Chinese company ends up winning the bid after fierce competition, the country then needs to raise funds through debt financing from various countries' financial institutions, including Chinese financial institutions, and the country's finance department usually needs to provide full guarantee for the funding.

After offering financing for the BRI projects, Chinese banks still need to monitor and track the financial risks and sovereign risks of the borrowers. For this purpose, the China Development Bank has established a national sovereign credit rating system and a risk limit management system. Other financial institutions, including Industrial and Commercial Bank of China and CITIC Insurance, have also developed a relevant assessment and monitoring management system. Moreover, the participation of insurance institutions can guarantee the interests of both parties.

Establishing a relevant system is a common practice not only in China, but also in the world. Borrowers must go through the necessary procedures whether they apply to Chinese financial institutions or Western ones.

In addition, regarding financing issues, exploring an innovative international financing model, deepening cooperation in the financial sector, building multi-level financial platforms, and establishing a long-term, stable, sustainable, and risk controllable financial guarantee system to serve BRI construction may all help solve the financing problem for BRI projects.

Since European countries such as Luxembourg and Italy have joined the BRI, it is also worth exploring whether the European financial market can provide some diversified financial support to infrastructure projects in developing countries. Conducting third-party market cooperation in the financial sector could be an option for guiding Western funds into BRI construction, especially to attract sovereign funds to participate in BRI projects. At present, more than 50 countries and regions around the world have set up sovereign funds, with the total amount exceeding $6 trillion. The size of these sovereign funds has exceeded the GDP of Japan, the world's third largest economy, which is close to about 10 percent of the global stock market capitalization. Large-scale sovereign funds are mainly based in Northern Europe, the Middle East and Asia. Thus, attracting these funds to make joint investments with China in BRI projects is advisable and may be a good way to address the financing problem.

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