As China’s Belt and Road initiative continues to provide a trillion dollars of lending to large infrastructure projects in 150 countries, the issue of mounting repayment crises has become more prevalent. According to Bradley Parks of AidData, the figure of overseas lending portfolios that support borrowers struggling to meet debt payments has risen from 5% in 2010 to 60% at present. This phenomenon has led to emergency rescue lending, which provides interest rates of around 5%. China has made such rescues to countries, including Pakistan, Sri Lanka and Turkey. However, there are growing concerns over the long-term sustainability of the initiative.
Critics have voiced their fears about China ensnaring borrowers with debt that they may never be able to repay. They suggest the country does so to exert political influence. Furthermore, the potential for US-China conflict has become one of the most pressing geopolitical issues. Ray Dalio, billionaire founder of Bridgewater Associates, voiced his concern, stating that the US and China are “on the brink of war,” with both powers making it increasingly necessary for countries around the world to choose sides. Meanwhile, Atlas Organization founder Gordon Chang also suggested war could “very well” break out before 2025.
However, James Cooper, Chairman of consultancy JCA Group, believes that the conflict between the US and China is not currently a risk. Cooper suggests that the real concern is the possible impact of US restrictions on investors’ ability to invest in China, especially in areas that have dual-use implications.
Dalio recommends several steps to de-escalate tensions, such as having Biden host Xi in San Francisco at the November Asia-Pacific Economic Cooperation meeting and sending key US policymakers and congressional leaders to visit China.
FRC in Need of a Cash Injection
The First Republic Bank (FRC) is in desperate need of a cash injection to keep it afloat after experiencing deposit outflows of over $100bn in Q1 2022. Its pledge to hold half of its deposits uninsured and above the FDIC-protected limit of $250,000 is believed to have angered regulators. The move has placed its clients at risk should FRC fail through over-extension in the lending market. In intraday trading, FRC’s market capitalization fell below $1bn, which is just a fraction compared to its $40bn peak recorded in November 2021. Reports suggest that the federal government and large banks are reluctant to negotiate a rescue package with FRC. FRC has been advised that its last viable option would be to convince other banks to provide a financial lifeline or engage in transferring troubled assets into a “bad bank.”
World Bank’s New Relationship with China
The World Bank and China have established a joint partnership to develop projects that highlight climate change and create joint flagship studies for policies and bank programs. The China 2030 report, developed alongside the Development Research Center of China’s State Council, outlines the six strategic directions for China’s future development. These directions are:
– Completing the transition to becoming a market economy
– Accelerating the pace of open innovation
– Promoting green growth
– Expanding opportunities and services for all people
– Modernizing and strengthening the fiscal system
– Seeking beneficial relations with the world
The report combines innovation, green growth, and improvement of citizens’ living standards with a move towards economic openness. Among the projects is the Yellow River Basin Ecological Protection and Environmental Pollution Control Program, which aims to contribute to the country’s ecological and environmental protection and promote water conservation.
PacWest Bancorp’s Troubles
PacWest Bancorp, based in Los Angeles, has “received offers from potential investors as well as the sale of a $2.7bn loan portfolio,” according to recent reports. The company is exploring all options as it attempts to remain afloat. This news comes after the collapse of First Republic Bank, which raised concerns about a potential run on deposits from worried customers. PacWest’s shares have fallen over 85% this year, dropped over 50% in early trading. These recent failures have destabilized the industry, placing doubts on the future of other large players in the market.
Critics have long doubted the long-term viability and sustainability of China’s Belt and Road Initiative, and current reports and data suggest that it is beginning to face significant challenges. The repayment crisis has raised concerns among experts and market observers, and many are now questioning the true intent and motive behind China’s infrastructure lending program in an increasing number of countries.
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