New Delhi: China’s outreach for President Xi Jinping’s foreign policy crown jewel, the Belt and Road Initiative (BRI), may slow down as it faces a $23 trillion local debt crisis, experts have told ThePrint.
India has opposed joining the BRI — a grand project that aims to connect nations and continents through mega highways, road and rail connectivity projects, promoting trade and investment. At the November 2022 summit of the Shanghai Cooperation Organisation (SCO) Council of Heads of Government, External Affairs Minister S. Jaishankar had said that “connectivity projects should respect the sovereignty and territorial integrity of member states and respect international law”.
Over the last two decades, local provincial governments in China began to build mega projects, specifically infrastructure, like roads, airports and ports. These projects were debt-financed and as long as the Chinese real estate markets were growing, revenue was getting generated. However, a real estate crisis beginning in 2021 led to a decline in revenue, leading to the current situation of unsustainable debt in the local provincial governments.
The Goldman Sachs Group, a global financial institution, estimates that the total Chinese government debt stands at $23 trillion. This includes debt accrued by hidden financial institutions and companies that provincial governments and cities have set up to fund development over the last two decades.
According to a Bloomberg report, the city of Hegang, a remote coal town in northeastern China, was forced to undergo financial restructuring almost 18 months ago and has a debt of more than double its fiscal income. Hegang was the first city to officially undertake emergency steps to deal with debt risks after the State Council of the People’s Republic of China unveiled new rules in 2016.
Meanwhile, Guizhou, a province in the southwest of China, could become the first province to receive a bailout from the country’s central government due to its unsustainable debt burden, according to The Economist.
“The Chinese government has been involved in building mega infrastructure projects, such as the Three Gorges Dam. Now they are creating connectivity links through airports, ports and expressways via debt,” Ritu Agarwal, an associate professor at the Centre for East Asian Studies, Jawaharlal Nehru University, told ThePrint.
She went on to explain how various local governments in China have over the years focused on infrastructure corridors — such as the Coastal Development Strategy increasing foreign investment and free trade zones, or the Western Development Plan — and have always focused on infrastructure linkages between the provinces of China.
“The Belt and Road Initiative is a continuation of this trend, focusing on connecting China to South Asia and Southeast Asia,” added Agarwal.
A joint statement issued by Quad leaders of India, the US, Australia and Japan during the G7 summit in Japan last week had reiterated that the Quad would support access to infrastructure investment that does not impose “unsustainable debt burdens”.
India has been seeking to combat Chinese influence in the Indo-Pacific region as well, with its outreach to Pacific Island countries at the Forum for India-Pacific Islands Cooperation (FIPIC) summit earlier this week, and extension of a debt line of $1 billion to help Sri Lanka through its economic default.
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Policy for provinces to look outwards as ‘hubs of commerce’
The bedrock for China’s centre-local tax sharing system was laid in 1994, when the then premier Zhu Rongji initiated a complete overhaul of the national tax system, according to a note by independent research provider the Rhodium Group. Former leader of the People’s Republic of China Deng Xiaoping’s market reforms of 1978 led to the Chinese economy opening up.
As the economy grew post 1978, the share of tax revenues “captured by Beijing declined sharply”, the Rhodium Group note added. The note further explains how the ratio of central to total government revenue in China fell to 22 per cent in 1993 from 40.5 per cent in 1984.
These tax reforms ensured the growth of the ratio of central to total government revenue to 56 per cent by 1994. “The tax reforms of 1994 ensured that local governments had to focus on generating revenue to maintain local governance while also sharing a part of it with Beijing. This led to a clear policy for provinces to develop policies to look to the outside world as a hub for commercial activities,” explained Agarwal, quoted earlier.
Real estate troubles
Agarwal further explained that the local provincial economy is critical for the overall growth of China. “After the tax reforms, the property market became a key for revenue generation for the provincial governments. The collapse of the Chinese property market has led to the current domestic issues faced by the government.”
The provincial government of Guizhou had around $388 billion in outstanding debt at the end of 2022, about 1.3 times its gross domestic product, as reported by the Wall Street Journal (WSJ). In 2012, the State Council reportedly published a plan to boost the development of Guizhou. Building of transportation infrastructure, which would then enable rapid economic development, was a cornerstone of the plan.
In the following decade, Guizhou invested heavily in roadways and waterways, and constructing some bridges, including the Duge Bridge, which holds the Guinness world record for being the highest bridge in the world at over 1,800 feet. This push for economic development was backed heavily by debt, including through opaque debt arrangements owed by local-government financing vehicles (LGFVs), as reported by The Economist.
LGFVs are established with the primary purpose of financing local infrastructure, as noted by S&P Global, a global analytics firm. An LGFV functions as a private company but is guaranteed by the local provincial government.
The real estate downturn hit the province hard. According to a report in The Economist this month, the property developer of the Huaguoyuan residential complex — one of the world’s largest housing projects — has defaulted. The Chinese real estate sector declined for six consecutive quarters till January-March 2023, according to the National Bureau of Statistics of China.
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Slowdown of Belt and Road Initiative
The Associated Press last week analysed a dozen countries most indebted to China including Pakistan, Kenya, Laos, Mongolia and Zambia. The analysis found that paying back debt to China is consuming an increasing proportion of these countries’ local tax revenues that are needed to keep government schools, healthcare and social services running smoothly.
Zambia and Sri Lanka defaulted on their debt obligations, unable to pay loans that were used to finance ports, mines and power plants. The Associated Press reported that a $3.5 billion loan to construct a railway system in Laos would take nearly a quarter of the country’s annual output to pay off.
Experts told ThePrint that these mega infrastructure projects, as a part of the Belt and Road Initiative, were undertaken not keeping revenue generation in mind, and this has led to the local populace not accepting China’s outreach efforts.
“China will wait for things to unfold economically domestically before pushing the Belt and Road Initiative again,” said Ritu Agarwal.
(Edited by Gitanjali Das)
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