Saturday, April 14, 2018

China Warned Of Risk From Loaning To Fund OBOR!

China's OBOR May Cost 8 Trillion Dollars
The future of China is intricately interwoven with its far-reaching and encompassing One Belt One Road (OBOR) initiative. The program of monumental scope was launched in a fanfare of state-media publicity by Xi in 2013, this colossal program has become an extension of Beijing’s global ambitions and the centerpiece of its economic foreign policy. Recently while in China International Monetary Fund Managing Director, Christine Lagarde warned of the potential risks involved in Xi’s grand global vision. The key issue or risk has to do with increasing China's debt by agreeing to loans which could prove economically explosive.

The many people enthusiastic about China's bright future should not forget the country faces several huge challenges. It was recently announced that President Xi Jinping has somewhat unexpectedly picked PBOC deputy governor Yi Gang to run China's central bank. Yi has a formable task before him as he shapes a response to the three or more rate hikes expected from America's Federal Reserve while moving forward on Xi’s financial cleanup and deleveraging campaign. This will have to be done at the same time China attempts to keep inflation from rising and resolve trade issues with President Trump. One thing is certain that all this will be interesting to watch as it unfolds and so will the issue of whether Xi and his global partners can avoid falling into the age-old debt trap.

Will OBOR Become A Bridge To Nowhere?
It is important to think that in some ways the whole concept of OBOR could be described as an extension of the "If We Build It They Will Come" theory. Many times in the past governments have used the idea that building out infrastructure will create growth and prosperity to move their economy forward. The thought is these projects will pay for themselves many times over and constitute a win-win scenario leaving those promoting them as heroes, however, history is littered with failed government projects. These so-called, "bridges to nowhere" and boondoggles tend to be forgotten and brushed aside each time public servants and their cronies get together. In America they are now often known as "Public-Private Partnerships" in a country like China they could be viewed as just another form of corruption.

Lagarde told a conference organized by the IMF and the People’s Bank of China, the country’s de facto central bank “The Belt and Road Initiative can provide much-needed infrastructure financing to partner countries,” She continued, “However, these ventures can also lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payment challenges.” OBOR to move forward has to provide the financing for infrastructure that many countries desperately want and need but will they be able to repay the loans in coming years? Lagarde reminded the Beijing conference that, “In countries where public debt is already high, careful management of financing terms is critical.”

China's Debt/GDP Ratio Is Well Above 300%
China is faced with pushing forward and financing OBOR with its economy having a huge debt/GDP ratio already well above 300% according to the Institute of International Finance. While Lagarde touched on these concerns when highlighting the broader issues, she also made it clear that Beijing was fully “aware” of the potential potholes dotted around such a massive undertaking as OBOR and underwriting its funding. The cost of the planned network connecting China with 68 countries and 4.4 billion people across Asia, Africa, the Middle East and Europe in a labyrinth of multi-trillion-dollar transportation, energy, and telecommunications infrastructure projects may total as much as 8 trillion U.S. dollars.

The Center for Global Development, a Washington-based think tank, has highlighted in a report entitled Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective, the underlined the problems of extending credit to poor or unstable countries. It has pointed out that as many as 23 countries could be prone to “debt distress.” This group includes Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan which were rated in the “high risk” category. Past high-profile horror stories associated with China’s overseas ventures add to overall concern and the fact Pakistan was flagged in the report as “by far the largest country at high risk” is sobering. The real question is whether OBOR will become a massive expensive bridge to nowhere?

Footnote; Links below are to articles related to this topic.


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