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Belt and Road forces China to confront its first debt crisis as a creditor

The surge in lending to fund China’s Belt and Road Initiative has left Beijing with a list of risky debtors around the world, including heavy exposure to Pakistan, Russia, Tajikistan, Kyrgyzstan and Iran. This had led to warnings that sovereign-debt distress might balloon across the BRI as nonperforming loans spike amid external pressures on the fragile governments, Radio Free Europe’s Reid Standish reports.

The struggles of BRI countries are embodied in Kyrgyzstan, a moderate borrower in absolute terms that has taken billions in loans from China’s Export-Import Bank for a series of infrastructure projects. These projects have failed to generate returns as the economy contracts, leaving Bishkek owing nearly $2 billion—around 7% of GDP—to China and raising fears that the country will be unable to meet even its interest payments.

In response, Beijing has issued billions in “rescue loans” to prevent defaults in Pakistan, Belarus, Egypt, Mongolia, Turkey, and Sri Lanka, to help service their loans and avoid default. At the same time, China is pulling back lending from riskier borrowers, with new investments in Russia and Pakistan falling 100% and 56%, respectively, for 2022.

So far, Beijing has avoided the type of debt write-downs that have characterized past crises for large bilateral lenders. However, a recent restructuring agreement in Zambiashows how the non-Paris Club lender’s approach to debt write-downs is maturing in the face of overwhelming need and a string of defaults.

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