Sri Lanka unrest raises questions for China
The chaos and failure in Sri Lanka signals problems throughout the developing world that will cause problems for China. Loan losses in Sri Lanka and elsewhere will of course add to China’s deepening debt overhang. Moreover, events in Sri Lanka will raise questions about, among other things, participation in Beijing’s vaunted Belt and Road Initiative (BRI) and in doing so will interfere with Beijing’s global plans.
Sri Lanka is, of course, an extreme case. It seems to have suffered a perfect storm. Yet while the problems are less severe elsewhere, all the elements of the Sri Lanka disaster exist throughout the developing world.
The problems started with the COVID-19 pandemic. Sri Lanka relied heavily on tourism. Of course, that stopped with the COVID-19 emergency. Tourism is less important elsewhere, but the pandemic has universally interfered with important economic ties around the world. The loss of essential support for the economy has caused the Sri Lankan government and its companies to use external debt more heavily than before, which has led to other problems, as elsewhere.
The debt imposed by China’s BIS immediately took center stage. As Sri Lanka’s debt burden grew, the nation and its businesses found it increasingly difficult to honor the arrangements. Things have gotten so intense that the Sri Lankan government has sold around 70% of Hambantota International Port, its second largest port, to China to pay what it owes on this BRI development project. .
More than China was involved. The greater reliance on debt in general – in Sri Lanka and much of the developing world – has made all countries more vulnerable to the new restrictions prevailing in global financial markets. The West’s emphasis on so-called ESG (environment, social and governance) has weighed particularly heavily. To increase its ESG score and thus attract lenders, the Sri Lankan government decided to ban the use of synthetic fertilizers, an act that severely limited the island’s production of tea, a key export, and to rice, a staple food. With limited export earnings, Sri Lanka had to rely even more on debt. Meanwhile, rice production has fallen by about 20 percent. The island has ceased to be autonomous in this essential. Reflecting all this, inflation has taken off, increasing by 50% last year and 80% for food.
If Sri Lanka were alone, its problems would mean little to China or to the rest of the world. However, similar, albeit less extreme, difficulties in repaying excessive debt have emerged in the developing world, including many BRI clients. Pakistan stands out, not only because it is bigger than many BRI participants, but because it is something of a gem of this Beijing initiative.
Of the 144 countries that participate in the BRI, Pakistan alone accounts for 10% of all BRI debt. At last count, Pakistan owed some $25 billion to Chinese state-owned banks: about 30% of all Pakistani debt to the outside world and 40% of the $60 billion in capital China has committed to the BRI in general. Pakistan’s problems are less severe than Sri Lanka’s, but the difference is in degree, not in kind. And the country is struggling to service its debt, to China and others. The burden on the economy is also clear. Inflation in Pakistan has reached 20% over the past year and fuel prices are 90% above levels a year ago.
This reality, as it is repeated in the developing world, confronts Beijing with two problems.
The first is purely financial. The numbers for Sri Lanka, Pakistan and the whole of the BIS may look small next to the $300 billion failure of Chinese property developer Evergrande, but Chinese finance can’t bear the extra burden either. more of this disaster – as well as the failures of other Chinese developers that have also become apparent.
Even before much talk of failures in the developing world, China’s overall debt burden had risen to over 270% of its gross domestic product (GDP) by the end of 2020, one of highest percentages in the world. Since then, this burden has arguably increased and become even less likely to be paid in full. China’s highly centralized and controlled system may well be hiding the damage, but debt pressure, especially defaulting debt, can only weigh on China’s economic outlook.
And then there is the fate of the BIS. In financial terms, the sums at stake are small compared to China’s domestic over-indebtedness, but the initiative is nonetheless critically important to Beijing’s global ambitions. In the program, China gains global influence by lending participating countries the funds needed to pay for Chinese-led infrastructure projects. As a result, the proliferation of failures in the developing world naturally creates reluctance among the smaller and poorer nations to participate in the BRI. At the very least, recent events will slow the program’s expansion and potentially shrink it, leaving Beijing with little of the leverage it sought from the BRI. It will also leave Beijing with a pile of bad debts.
As difficult as all of this is for the Chinese economy, finance and diplomacy, none of this portends a collapse in China. To paraphrase the great Adam Smith, there are many ruins in a country. But without presaging disaster, the picture nevertheless suggests a major setback for Beijing. At the very least, it will now take much longer for Chinese leaders to reach the financial, economic and geopolitical heights they hoped to achieve.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.