Obor $1.8tr debt pile raises bad debt fears in China
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Asia

Obor $1.8tr debt pile raises bad debt fears in China

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Bankers in China have warned Emerging Markets that much of the debts taken on to fund China’s giant $1.8tr One Belt One Road programme could go bad, threatening another financial crisis

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Bankers in Beijing are fretting about the sheer quantity of bad loans they may have to absorb as China pushes ahead with its mammoth ‘One Belt, One Road’ (Obor) policy, which is set to stretch overland from the Pacific Ocean to Europe, taking in Pakistan, Iran, the Middle East, Russia, the Gulf states and Central Asia. 

One senior official at a Beijing based state-run commercial bank said the big question was how much of the lender’s loans to projects in regions such as Central and South Asia would go sour. “Look at Pakistan,” the banker said in an off-the-record interview with Emerging Markets.

“[Beijing] is investing $46bn there” as part of the China-Pakistan Economic Corridor (CPEC), which includes building a slew of new power plants, ports, coal mines and airports, as well as highways stretching from the Indian Ocean overland to western China. “Our big question is simple: should we book all of our loans to Pakistan as non-performing now, or just wait a few years until they do go bad — which they will.” 

Many in Beijing fear China’s desire to economically dominate and de-dollarise Central Asia and many of the economies that border the country, from Pakistan to Myanmar to Mongolia, cloud its ability to think rationally about the value of the capital that domestic policy and commercial banks are putting to work. 

The Obor project is set to cost China up to $1.8tr, including $46bn pumped into CPEC and $40bn being injected in tranches into the private equity-style Silk Road Fund. China has asked its biggest commercial banks, including Industrial and Commercial Bank of China and China Construction Bank, to channel $1tr into Obor-related projects in the years to come, with the remaining $800bn sluiced into the system from development lenders. 

RERUN OF VENEZUELA?

Bankers point to the headaches the country has endured over Venezuela. Since 2007, two policy lenders, China Development Bank and Export-Import Bank of China, have lent $65bn to the failing Latin American state. CDB, insiders say, is now faced with the challenge of booking more than 90% of its entire lending to Venezuela as “failed” or “special mention” loans, and bankers in Beijing fear the same will happen with Pakistan. “All it takes is a military takeover in Pakistan, a return to the unrest we saw in past years, more problems in Balochistan, and all of our loans to Pakistan could fail.”

Kevin Gallagher, co-director of the Global Economic Governance Initiative at Boston University, said China had underestimated the complexity and cost of Obor. “They are stretching themselves too thin,” he said. “China is realising it is going to have to bear a lot if not all of the risks on its own, as it is finding it all but impossible to convince other governments to help to finance these projects.” 

The Asian Infrastructure Investment Bank, the new Beijing-based multilateral, will help spread and reduce some of the overall financial risk and stress. But Gallagher said China’s investment plans were 7predicated on the assumption that the world’s second largest economy would not suffer a fresh banking crisis or economic hard landing. “If there’s another crisis, the central bank would be forced to clean up banks’ balance sheets again. And if that happens, you’re going to see a lot of this [Obor-related project] financing being repurposed to rescue the homeland.”

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