China's 'Belt and Road' grew out of a lending spree. Now those loans may be its problem

At its peak, China's Belt and Road Initiative was seen as the centerpiece of Beijing's engagement with the world.

Now, a decade after its rollout, observers say the ambitious strategy to build infrastructure trade links across Eurasia and beyond is losing steam, with some questioning the ongoing viability of Beijing's mega-project.

"Beijing went on a lending spree and issued thousands of loans worth nearly a trillion [dollars] for big-ticket infrastructure projects spread across 150 countries" over the decade, said Bradley Parks, executive director of AidData, a research group at the College of William and Mary in Virginia.

"Now, many borrowers are having difficulty repaying their infrastructure project debts to Beijing," according to Parks. "In 2010, only 5% of China's overseas lending portfolio supported borrowers in financial distress. Today, that figure stands at 60%," he told CNBC.

Chinese President Xi Jinping announced his signature foreign policy idea in 2013 — which he once called the "project of the century."

Xue Gong, a nonresident scholar at Carnegie China, in March noted the momentum behind the project "appears to be slowing thanks to the repercussions of debt sustainability, the coronavirus pandemic fallout, and China's own economic slowdown."

Since it started, China's cumulative Belt and Road projects have totaled $962 billion — including $573 billion in construction contracts and $389 billion in non-financial investments, according to a report by Fudan University in Shanghai.

"Beijing faces a major loan repayment challenge, and it's responding with a strategic pivot," said Parks. "It's ramping down infrastructure project lending and ramping up emergency rescue lending."

China's embassy in Singapore told CNBC that "it is true that the debt risks facing developing countries have recently risen significantly, but there are various external factors."

"We never force others to borrow from us. We never attach any political strings to loan agreements, or seek any selfish political interests," spokesperson Meng Shuai said. "We have always done our utmost to help developing countries ease their debt burden."

Parks of William and Mary was one of the authors of a report published in March by researchers at AidData, the World Bank, Harvard Kennedy School, and the Kiel Institute for the World Economy.

According to the report, China issued 128 emergency rescue loans worth $240 billion to 22 countries  — including Pakistan, Sri Lanka and Turkey, among others. Nearly 80% of the loans were made between 2016 and 2021, the report said.

But China's emergency bailouts don't come cheap, the study pointed out.

"The typical rescue loan by Chinese banks requires interest rates of 5 percent," the report said. Those rates are "considerably higher than the average IMF interest rate, which has been around 2 percent for non-concessional lending operations over the past 10 years."

The report raises questions about "the long-term sustainability" of China's whole initiative, said Parks. "I think this is only a sign of things to come."

Chinese efforts to revamp Belt and Road have been underway since 2020, according to one observer.

"The expansion strategy before that was not working well," said Weifeng Zhong, senior research fellow at the Mercatus Center at George Mason University in Virginia, who claimed Xi is "trying to salvage Belt and Road with the post-2020 overhaul."

Zhong said he did an analysis late last year about how the People's Daily, the state-controlled newspaper for the ruling Chinese Communist Party, had discussed the initiative over the past decade.

"When it covered the initiative, the People's Daily used to emphasize ambitious economic outlook for the infrastructure projects and the destination countries," he said.

According to Zhong, since 2020, the focus has shifted to the importance of the so-called "high-quality development."

"A nod to the concern that many Belt and Road projects were not economically viable to begin with. The initiative at the minimum hasn't been cost-effective."

A slowing global economy, rising interest rates and high inflation have left many countries struggling to repay their debts to China.

In South Asia, debt to China has risen from $4.7 billion in 2011 to $36.3 billion in 2020 — and Beijing is now the largest bilateral creditor to Maldives, Pakistan, and Sri Lanka, according to a World Bank report on international debt statistics for 2022.

Sri Lanka defaulted on its debt payment for the first time last year. In 2017, the country signed over the rights to a strategic port to China, in a high-profile case that sparked alarm over Beijing's lending practices.

"The increased indebtedness in many Belt and Road countries is a direct consequence of Beijing's overshooting in the pre-2020 phase," said Zhong.

"China not only tried to lend to many infrastructure projects that couldn't find other lenders otherwise, it also aimed for commercial, or at least not so concessional terms, making the repayment even less likely," he added.

For countries grappling with financial distress and "don't want to face up to economic adjustment immediately, China is the easy first option," said to Gabriel Sterne, head of emerging markets macro at Oxford Economics.

"China may sometimes be inclined to grant the loan. I don't see that changing any time soon," he said.

But the former IMF economist added the "ongoing wave of debt crisis will teach China a lesson."

"That debt sustainability should be part of the lending criteria and that there are big economic and political costs of holding out against providing debt relief on par with other creditors," said Sterne, adding Beijing should have placed "more emphasis on grants rather than loans for countries with high debt burdens."

The Chinese embassy in Singapore told CNBC "China attaches importance to debt sustainability," and has issued guiding principles to deal with the issue in collaboration with developing countries "to improve their debt management capacity."

China's loans have long drawn criticism from Western nations, and some have cast the project as "debt-trap diplomacy."

The debt-trap argument alleges Beijing strategically ensnares borrowers with loans they cannot repay, in order to exert political influence over them later.

If China wants to "put to rest the narrative that it is engaging in predation and entrapment," it needs to be transparent about its overseas lending practices, said Parks.

Beijing has "aroused suspicion and fueled speculation about its actions and motivations by refusing to disclose comprehensive and detailed information about the individual projects that it funds," he added.

"To date, none of the partner countries have accepted the claim" that the initiative "has created 'debt traps,'" said the Chinese embassy in Singapore.

China has always carried out its financing practices with "openness and transparency," the embassy insisted, noting that most of the projects were commercially contracted and the Chinese government wasn't a stakeholder.

"Whether the details or loan agreements of the projects could be shared to the public is not the business of the Chinese government," the spokesperson said.

But analysts generally agree that for all its lending issues, China will not abandon the mega-project, since it's closely intertwined with Xi's legacy.

The Chinese leader, who visited Russia last month, has reportedly invited President Vladimir Putin to travel to China for the third Belt and Road Forum this year, which is aimed to inject new momentum into the massive endeavor.

In March, Xi formally clinched an unprecedented third term as president for another five years, further consolidating his power.

"Now that the government transition is over, it remains to be seen whether a pragmatic faction, perhaps, led by the new premier Li Qiang, will emerge," said Zhong from George Mason.

"If so, whether it will meaningfully take part in improving Belt and Road's lending quality," he added. "So far, Xi's tighter-than-ever grip on power doesn't exactly inspire optimism — on the initiative or otherwise."