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It has always been epic in scale. At the heart of the Belt and Road Initiative are the ‘New Silk Road’ superhighways, 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 infrastructure projects.

Launched in a fanfare of rhetoric by President Xi Jinping in 2013, this grandiose program has become an extension of Beijing’s global ambitions and the centerpiece of its economic foreign policy.

Yet because of its monumental scope, there are “sovereign debt risks” lurking in the background of the planned “US$8 trillion network of transportation, energy and telecommunications infrastructure” joint ventures, the Center for Global Development has highlighted.

In a report entitled Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective, the Washington-based think tank underlined the problems ahead when it pointed out that 23 countries could be prone to “debt distress.”

Of the group, Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan were rated in the “high risk” category.

“Belt and Road provides something that countries desperately want – financing for infrastructure,” John Hurley, a visiting fellow at the Center for Global Development and co-author of the study along with Scott Morris and Gailyn Portelance, said in a statement.

“But when it comes to this type of lending, there can be too much of a good thing,” he added.

State-owned enterprise

To illustrate those concerns, Sri Lanka announced in December that it would hand over control of the Hambantota port, which was financed by loans, to China Merchants Port Holdings, a state-owned enterprise.

The country is in the “Group of 23” singled out in the report, while the 99-year lease deal with China enraged Sri Lankan government critics for threatening the nation’s sovereignty.

“The price being paid for reducing the China debt could prove more costly than the debt burden Sri Lanka seeks to reduce,” N. Sathiya Moorthy, a senior fellow specializing in Sri Lanka at the Observer Research Foundation in New Dehli, told the New York Times.

While the Center for Global Development study acknowledged that the Belt and Road Initiative was “unlikely to cause a systemic debt problem” throughout the ‘New Silk Road’, it still “significantly increased the risk of a sovereign debt default” in a number of countries.

Pakistan, the report claimed, was “by far the largest [nation] at high risk,” estimating that China is financing around $50 billion in infrastructure and energy projects.

These will include the Gwadar Port, which is one of several major developments in the region that make up the China-Pakistan Economic Corridor.

“Adding to Pakistan’s risk are the relatively high-interest rates being charged by China,” the nonprofit Center for Global Development stated.

In Djibouti, 82% of the country’s external debt was owned by China at the end of 2016, the study found, while in Kyrgyzstan it could reach 71% in the years ahead with Belt and Road projects in the pipeline.

Laos was also singled out. The Southeast Asian country has several major developments on the drawing board, including the $6.7 billion China-Laos railway, which represents nearly half of its GDP.

Indeed, this might threaten Laos’ ability to service its debts, the International Monetary Fund warned.

“Laos is among the poorest countries in Southeast Asia, though it has been expanding rapidly with GDP growth averaging 8% during the past decade,” the report stressed.

“Since 2013, the IMF has been raising doubts about the ability of Laos to service its debts if it moves ahead with plans to build the China-Laos railway, in addition to other major capital [programs].”

Part of the problem is the way China structures its loans on a case by case basis rather than following the “rules of the road” set out by the IMF or the World Bank.

Instead of boosting growth and increasing economic opportunities, Beijing could end up introducing “new debt vulnerabilities in developing countries,” the authors wrote.

Sustainable lending

They suggested that China should embrace more sustainable lending practices and avoid the dangers of acting as a “go-it-alone” creditor.

“China can claim success when it comes to a vision for the BRI [Belt and Road Initiative] that has gained widespread support,” Morris, who worked at the US Treasury Department during Barack Obama’s first term administration and was one of the authors of the study, wrote in an opinion piece for the Chinese media group Caixin.

“The way forward demands a clear policy framework aligned with global standards, something that has been absent from China’s lending practices to date. Whether Chinese officials have the will to pursue this approach will be critical in determining the ultimate success or failure of the BRI,” he added.

Still, other academics and economists have painted a more upbeat scenario.

David Dollar, a senior fellow at the Brookings Institution, came up with a different perspective in a conference paper, entitled Is China’s Development Finance a Challenge to the International Order?, in Tokyo last October.

He examined whether China’s role in development finance was challenging “global norms.”

“It is too early to make a definitive judgment on whether China’s finance is a challenge to the global economic order,” Dollar said. “There are certainly things to worry about such as growing indebtedness of some of China’s big clients, and environmental and social safeguards on the ground. But there are also signs of evolution.”

In the end, the devil will be in the detail.

Read: China’s frosty reaction to alternative Belt and Road project

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