International Monetary Fund (IMF) Managing Director Christine Lagarde says rising indebtedness across Asia and Africa – in the wake of the China-led Belt and Road Initiative – poses risks to the global economy, as smaller countries might be borrowing more than they can pay back.
Kristian Rouz — The International Monetary Fund (IMF) is warning several nations — primarily, Mainland China — against excessive leveraging of unprofitable enterprises and costly infrastructure projects. The Fund has said that in the current global economic reality, which bears the hazards of trade disruptions and political instability, the accumulation of debt in not the most prudent macroeconomic strategy.
IMF Managing Director Christine Lagarde said the China-led ‘Belt and Road’ project might threaten a rapid debt accumulation across many regional economies. This, she noted, might stir concerns about the fiscal sustainability of less-diversified economies in Central and South East Asia.
Lagarde made her remarks at a joint conference in Beijing, where she met with People’s Bank of China’s (PBOC) recently-appointed Governor Yi Gang — who previously pledged to undertake a set of sweeping macroeconomic reforms in his country to make it more sustainable by decreasing its exposure to foreign trade.
“The first challenge is ensuring that Belt and Road only travels where it is needed,” Lagarde warned. “With any large-scale spending, there is sometimes the temptation to take advantage of the project selection and bidding process. Experiences from across the globe show that there is always a risk of potentially failed projects and the misuse of funds.”
The Belt and Road project is a China-led trade and infrastructure investment project aimed at boosting economic cooperation across Asia. Many US and European scholars have criticised Belt and Road for China’s alleged attempts to advance its political influence as well, including in the form of so-called ‘yuan diplomacy’.
Lagarde said one of the main risks is that China’s attempts to establish and bolster its trade ties with Europe, Africa, and the rest of Asia could drive impoverished countries deeper into debt. This as the IMF’s mandate is to ensure fiscal sustainability across the globe; smaller third-world countries are the Fund’s main concern.
The IMF Chief’s remarks somewhat echoed the concerns of US officials, who said in case certain countries collapse under the burden of their debt to China, the IMF — funded mainly by the US and other advanced economies — would have to provide bailout money, which Washington policymakers don’t necessarily want to do.
“We’re concerned about China’s growing lending on the One Belt, One Road around the world,” US Treasury Secretary Steven Mnuchin. “We’re concerned in certain areas where countries can’t necessarily afford the loans.”
Lagarde also called on Beijing to carefully manage the bidding process, allocating its development funds towards the projects deemed as profitable and sustainable in the future. This, the IMF chief said, is crucial to ensuing that investment does not go to waste at the expense of the financial sustainability of smaller countries.
This comes as China is facing elevated leverage risks of its own. According to the data from the Bank for International Settlements (BIS), the total debt of China’s nonfinancial sector hit 256.8 percent of GDP in Q3 2017. This, coupled with ‘shadow lending’ practices, and leverage in the financial sector, is stirring concern among investors, who say insolvencies in smaller countries that borrow from China could kick-start a domino effect and capsize the Chinese economy as well.
Additionally, there is a growing concern of trade disruptions that might undermine the ability of smaller countries to service their obligations, Lagarde warned. Many of China’s investment destinations in Asia and Africa are dependent on their exports of a narrow selection of commodities, and a plunge in global raw material prices, or a full-scale trade war could cripple growth prospects, budget revenues, and the debt solvency of such countries.
“In countries where public debt is already high, the careful management of financing terms is critical,” Lagarde said. “This will protect both China and partner governments from entering into agreements that will cause financial difficulties in the future.”
In other words, the IMF chief urged China to impose what in terms of personal and corporate finance is called stricter underwriting rules — meaning Beijing should invest only in certain projects in certain countries knowing its investment has high chances to pay off, if all risks are priced in.
Lagarde also said the IMF is ready and willing to provide guidance to Chinese officials aimed at improving public finance and asset management, and minimise the risks of corruption and wasteful spending. She also called on China to boost the transparency of its foreign investment to rule out corruption.
Chinese President XI Jinping has previously dismissed the concerns over Belt and Road’s lending practices.
“The Belt and Road initiative is neither the Marshall Plan after World War II nor an intrigue of China. It is, if anything, a plan in the sunshine,” XI said at the Boao Forum for Asia, a regional analogue of the Davos Forum.
IMF critics say the Fund’s chief might be seeking to interfere with China’s sovereign lending practices across the globe to contain its rising presence across the world.
However, although this might be part of the broader picture, the issues of debt and insolvency are rarely good for third-party countries (like the US) or the global economy as a whole, as demonstrated by the recent debt meltdown in Greece.
In this light, Lagarde’s recommendations of transparency and accountability — including calls on China to operate as a ‘one-stop shop’ for stakeholders and other private parties — are deemed as macroprudential rather than political.