China In Eurasia

Welcome back to the China In Eurasia briefing, an RFE/RL newsletter tracking China’s resurgent influence from Eastern Europe to Central Asia.

I’m RFE/RL correspondent Reid Standish and here’s what I’m following right now.

U.S. House Speaker Nancy Pelosi’s visit to Taiwan has already sparked a strong response from Beijing, with Chinese live-fire military exercises near the self-governing island under way, and a slew of sanctions targeting Taipei.

But the visit has also been a boon for Chinese propagandists, whose aggressive rhetoric accusing Pelosi of reckless behavior and warnings of a tough Chinese response are also being echoed by their Russian counterparts.

Finding Perspective: Even before Pelosi touched down in Taipei, an intensified Chinese campaign was under way -- the latest phase of a long-standing information war waged against Taiwan.

Rumors and false stories have spread quickly around Chinese language online spaces, with claims of Chinese fighter jets crossing into Taiwanese airspace (that were quickly dismissed by Taipei). Online attacks dominated Taiwanese websites, while Taipei’s government sites were hit by a series of cyberattacks.

While Chinese disinformation and propaganda campaigns are meant to target a domestic audience and Taiwan itself in hopes of paving the way for reunification between Beijing and Taipei, Russia has been targeting a different audience.

Perhaps unsurprisingly, the Kremlin -- which is engaged in a deepening partnership with Beijing and is increasingly reliant on it after its invasion of Ukraine -- has been outspoken against the visit, with Russian Foreign Ministry spokeswoman Maria Zakharova calling it a “provocation” aimed at pressuring Beijing and expressing full solidarity with China.

Russian media, meanwhile, have copied these Chinese narratives, with state TV’s Yevgeny Popov saying that Pelosi intended to use the visit to “turn the planet into dust.”

Why It Matters: While Ukraine war coverage is still the big-ticket item for Russian propaganda, the Taiwan visit highlights how state-run outlets in both countries are increasingly laundering each other’s talking points.

A new phase of this was observed in the early days of Russia’s invasion, when Chinese media echoed the Kremlin's justification for the war and often parroted false claims about events while ignoring commentary from Kyiv.

In the case of Pelosi's trip, the development is noteworthy due to the broad reach to other countries in the former Soviet Union where Russian is still widely spoken, but where Chinese state outlets have minimal reach.

Even despite concerns from local governments set off by the invasion of Ukraine, Russian propaganda outlets still have a broad following in many areas, with my colleagues from RFE/RL’s Central Asian services telling me that Russian state-run media have been eagerly spreading alarm about Pelosi in their broadcasts and amplifying Beijing’s narrative to regional audiences.

Read More

● Why did Pelosi decide to go to Taiwan? As Politico’s Andrew Desiderio writes in this profile, it’s the latest move in the speaker’s long career of challenging Beijing.

● As Beijing reacts loudly to Pelosi’s visit, Bonny Lin and Jude Blanchette argue in Foreign Affairs that Chinese foreign policy in the coming years “will increasingly be defined by a more bellicose assertion of its interests and the exploration of new pathways to global power that circumvent chokepoints controlled by the West.”

● For more on Taipei’s precarious place in the world, read my interview with Taiwanese Foreign Minister Joseph Wu from October where we discussed the island’s outreach to Europe and rising pressure against it from Beijing.

Expert Corner: Theorizing On BRI 2.0

Here are excerpts from a conversation I had with Bradley Parks, executive director of the AidData Lab at the College of William and Mary in Virginia, which has extensively researched China’s lending practices abroad, about what’s next for the Belt and Road Initiative (BRI) and how Beijing could look to streamline it in the future.

“As originally conceived, BRI cannot sustain itself according to its original vision, but we shouldn’t underestimate the Chinese. They are quite strong at learning and adapting to their past mistakes and we’ve heard from our contacts in Beijing that they have used the COVID lockdown period as an opportunity to do some introspection about what BRI 2.0 is going to look like.

“They currently face a big problem in their risk profile. They don’t have strong safeguards for dealing with debt, governance, and environmental concerns, so one of the ideas is to start co-financing with multilateral institutions and outsource some of the due diligence to those that can better follow best practices and international standards.

“The next [idea] is Public-Private Partnerships (PPP). The era of BRI projects via sovereign debt is very quickly coming to an end. Governments can only take on so much debt before it becomes unsustainable. So one thing that is being considered is what if instead of lending to the sovereign [government], they set up project companies and then lend to those Special Purpose Vehicles and use them to repay the loans.… There are certainly questions about whether this all could work and nothing appears to be decided yet, but these are some of the discussions happening.”

Do you have a question about China’s growing footprint in Eurasia? Send it to me at StandishR@rferl.org or reply directly to this e-mail and I’ll get it answered by leading experts and policymakers.

Three More Stories From Eurasia

1. Welcome To The New BRI

China is currently navigating the country’s first overseas debt crisis sparked by a mountain of nonperforming loans handed out over the last 10 years that risks sparking a series of defaults that could test the future of Beijing’s signature foreign policy project, I reported here.

What It Means: Launched in 2013, the BRI paved the way for China to become the world’s largest source of development credit and saw a rapid expansion of loans issued from Chinese institutions for large-scale infrastructure projects.

Now, the BRI faces new headwinds. According to data collected by Rhodium Group, a New York-based research consultancy, the total value of loans from Chinese institutions that required renegotiation in 2020 and 2021 surged to $52 billion -- a threefold increase from the previous two years.

The debt crisis continues to spread, with the World Bank warning it could trigger a series of defaults not seen since the 1980s. Currently along the BRI, 60 percent of Chinese loans are to countries that are now in financial distress, compared to only 5 percent of Chinese lending back in 2010.

The current debt pressure is accelerating a rethink in Beijing that was already under way about how China should lend in the future and avoid similar blowback.

A new report from the Green Finance and Development Center at Fudan University in Shanghai found that China is increasingly investing in oil and gas, making up about 80 percent of Chinese overseas energy investments for the first half of 2022 and 66 percent of Chinese construction contracts.

Christoph Nedopil Wang, the center’s director, told me that this is because energy investments are far less risky than other big infrastructure projects that have tended to make up the majority of BRI spending.

“There is a more straightforward way for you to get your money back, which is not the case with other big infrastructure projects that have much longer payback periods with much higher uncertainty,” he said.

2. What's On Georgia's Mind

Georgian Prime Minister Irakli Garibashvili met with President Qasym-Zhomart Toqaev in Kazakhstan where the two discussed boosting trade and how to expand the “Middle Corridor” of the BRI that bypasses Russia as it moves goods between Europe and China, RFE/RL’s Kazakh Service reported.

What You Need To Know: Georgia, along with other countries, is looking to capitalize on the fallout from Moscow’s invasion of Ukraine that has seen freight traffic dwindle through Russia, which was previously the main route bringing goods by rail between China and Europe.

The rising alternative has been the roughly 6,500-kilometer network of roads, railroads, and ports stretching across Kazakhstan, the Caspian Sea, Azerbaijan, Georgia, Turkey, and into Europe known as the Trans-Caspian International Transport Route or Middle Corridor.

The trade route is expected to see a sixfold increase in traffic in 2022 due to freight diversions from the war. Governments along the path, with Georgia leading the charge, are searching for new opportunities to attract investments as global transport companies turn away from Russia.

3. How Hungary Sees China

A July poll shows that support for China in Hungary is growing, with a majority of voters saying they approve of rising Chinese influence in the country, RFE/RL’s Hungarian Service’s Balint Szalai and I reported.

The Details: The survey by the Budapest-based Central and Eastern European Center for Asian Studies (CEECAS) found that China generally has a positive image among the Hungarian public and that most voters in the country share views on important political issues that are “favorable to Chinese standpoints.”

Among some notable findings, 51 percent of Hungarian voters said they felt optimistic about China’s expanding footprint in the country and a majority of respondents said they saw Beijing as having a high degree of influence in the country.

The favorable views of China skewed further toward voters of Prime Minister Viktor Orban’s Fidesz party in Hungary’s polarized political system, but interestingly, when it came to views of Beijing and Moscow’s deepening partnership, 48 percent of voters had an unfavorable view of it.

According to the survey, “This was the only question in which a majority did not [hold] a positive perception [toward] China’s role.”

Across The Supercontinent

Regional Tour: Chinese Foreign Minister Wang Yi recently wrapped up a regional tour of Central Asia where he reaffirmed Chinese support amid economic and political problems, RFE/RL’s Kazakh Service reports.

Bishkek To Beijing: In interesting comments that point to how the region is viewing China these days, Kyrgyz President Sadyr Japarov said he sees Beijing as his country's main economic partner in the world, not Moscow, Kyrgyzstan’s traditional patron.

A Kyrgyz Wish List: Despite the warm words, Bishkek had a growing wish list of issues that it wants to resolve with Beijing and were discussed during Wang’s visit. Chief among them, as Yrysbek Ulukbek from RFE/RL’s Kyrgyz Service reported, was trying to revive cross-border trade to pre-pandemic levels.

Russian Rail Looks East: Getting the China-Kyrgyzstan-Uzbekistan railway fully off the ground is another wish list item, a project that the Russian-led Eurasion Union recently endorsed.

Having Moscow’s blessing gives the Chinese-backed project more momentum and also lines up with Russian Ministry of Transportation plans to potentially invest $30 billion in rail construction across Central Asia and Mongolia between now and 2030.

One Thing To Watch

Pakistan is facing an economic default and could be the next Sri Lanka as the world faces a wave of debt crises, but Islamabad says that it sees a solution.

Pakistani Finance Minister Miftah Ismail told Bloomberg recently that progress had been made on a stalled International Monetary Fund (IMF) loan to Islamabad, which could stave off a worst-case scenario.

Pakistan’s economic problems have worsened in recent months, and a consortium of Chinese state banks lent $2.3 billion to Pakistan to help the country stave off a foreign payments crisis in late June. But while China gave the loan, its chief concern was to avoid a Pakistani bankruptcy, and Beijing has urged Islamabad to repair ties with the IMF and revive a $6 billion loan program.

How this gets solved will have implications for other struggling economies with large debts to China and will also impact Beijing and Islamabad’s close but increasingly frayed relationship.

That’s all from me for now. Don’t forget to send me any questions, comments, or tips that you might have.

Until next time,

Reid Standish

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A few weeks before the Sri Lankan president fled the country amid growing protests triggered by its debt-laden economy's default and financial crisis, a top Kyrgyz official issued a warning about the Central Asian nation's own dire forecast as the turmoil unfolded.

"We must always remember the need to pay [our] public debt," Akylbek Japarov, the chairman of Kyrgyzstan's cabinet of ministers, said at a parliamentary session in late June.

Like Sri Lanka, Kyrgyzstan also has a swelling state debt and took on billions worth of loans over the last decade from China's Export-Import Bank for a series of infrastructure plans under the Belt and Road Initiative (BRI), Chinese leader Xi Jinping's signature policy, which he once dubbed "the project of the century."

SEE ALSO:

How Will Kyrgyzstan Repay Its Huge Debts To China?

Kyrgyzstan's debt currently sits north of $5.1 billion, according to the Foreign Ministry, 42 percent of which is owed to Beijing. But Bishkek is struggling to cope with a contracting economy and has so far failed to yield a commercial return on the projects backed by its huge Chinese loans. This has prompted fears the country will be unable to pay off its loans or even meet interest payments. The mounting financial pressure has also raised concerns that the country may have to hand over lucrative assets if it fails to meet its repayment obligations.

"I'm not scaremongering, but if we do not pay this debt, [China's] Export-Import Bank can take over [projects]. This has already been [discussed] in cases in Pakistan, Sri Lanka, and other countries," Japarov said. "We cannot sit back and rely only on [God]. We all need to unite in order to maintain our independence."

That warning comes as sovereign-debt distress spreads in several countries along the BRI, prompting China's first overseas debt crisis as it grapples with a mounting pile of nonperforming loans and increased scrutiny of how Chinese lending has exacerbated economic pressures on vulnerable governments.

"There's no doubt that the Chinese Ministry of Finance and central bank are looking at their dashboards and their red lights are going off right now," Bradley Parks, executive director of the AidData Lab at the College of William and Mary in Virginia, told RFE/RL.

The globe-spanning scale of BRI, which was launched in 2013 by Beijing as the largest infrastructure program undertaken by a single country, has left it with a list of risky debtors around the world -- including Argentina, Pakistan, Russia, Tajikistan, Venezuela, Zambia, and Iran -- that hoped to take advantage of the surge in Chinese overseas lending but now find themselves struggling with a debt crisis the World Bank has warned could trigger a series of defaults not seen since the 1980s.

For China, this marks what analysts describe as a crucial inflection point after nearly 10 years of runaway lending under the guise of the BRI that has been exacerbated recently by rising inflation, soaring energy costs, and tightening global financial conditions due to the war in Ukraine and the aftermath of the COVID-19 pandemic. In such an environment, Beijing could be looking to streamline and scale back its hallmark initiative.

"China is growing more concerned about it not being able to get paid back, so we have seen a pullback in lending that is set to accelerate," Alicia Garcia-Herrero, the chief economist for Asia-Pacific at the investment bank Natixis, told RFE/RL. "China is also under growing economic pressure at home now and is becoming more hesitant to lend to risky countries. [This] has [opened] a new phase of the BRI."

Growing Debt Pressure

The BRI has helped make China the world's largest bilateral lender and seen it give out loans totaling $932 billion since it was established eight years ago, according to data collected by the Green Finance and Development Center at Fudan University in Shanghai.

But even before the current debt crisis, the headwinds against the BRI were mounting.

Loans issued in recent years are turning bad at an unprecedented rate, with research by Rhodium Group, a New York-based research consultancy, showing that the value of Chinese loans that required negotiation soared to $52 billion in 2020 and 2021, a threefold increase from the previous two years.

One study of Chinese lending published in April by a team of leading economists also shows the current scale of the debt crisis, with its research indicating 60 percent of Chinese loans are given to countries in financial distress, compared to only 5 percent in 2010 before the BRI was launched.

Other research done by William and Mary’s AidData Lab, which maintains one of the most comprehensive datasets on Chinese development finance, shows that 35 percent of BRI infrastructure projects currently face major implementation problems.

In the face of such pressures, Beijing has begun to issue so-called "rescue loans" to starve off defaults, with AidData showing that tens of billions of dollars have been issued by Chinese state institutions to countries such as Pakistan, Belarus, Egypt, Mongolia, Turkey, and Sri Lanka, to help service their loans and avoid default.

"We are at a major pivot point right now. The scale of this widespread debt pressure is something that China has never faced before and it is having to reinvent BRI on the fly," Matthew Mingey, senior research analyst at Rhodium Group, told RFE/RL.

A July report from the Green Finance and Development Center showed how the BRI is becoming more risk-averse, with new investment in Russia, once a mainstay of the initiative, falling to zero in the first half of 2022, while engagement in Pakistan dropped by 56 percent during the same period.

China is increasingly investing in oil and gas, making up about 80 percent of Chinese overseas energy investments for the first half of 2022 and 66 percent of Chinese construction contracts, with Saudi Arabia being the top recipient.

Christoph Nedopil Wang, the director of the center behind the report, told RFE/RL that Beijing is increasingly targeting resource-backed investments as they present a "more straightforward way" for Chinese institutions to be repaid compared to large-scale infrastructure projects.

According to Mingey, the spreading debt distress coupled with slowing global growth and a more cautious approach from Beijing means that China will need to search for new ways to solve the problem at hand. Rescue loans are a time-buying measure and in the case of Sri Lanka, they still failed to offset a default. The big question, he says, is to what extent Beijing will participate with multilateral institutions in debt resolution programs in BRI countries.

"Previously, the playbook was simple: It was to defer, restructure, and give space and time for borrowers to sort things out," Mingey says. "But China has an aversion to refinancing, and Chinese creditors have not always played well with multilateral institutions, private creditors, or public bilateral ones. So, it's a question of what tools China can use now."

The Road Ahead For Bishkek, Islamabad

Chinese loans are not the sole cause of debt distress or defaults. Sri Lanka has international debts of more than $50 billion, with only about $5 billion owed to China.

But Beijing's lending to the South Asian country has been controversial, with critics arguing that credit for projects has been extended at high rates and money from the glut of foreign borrowing is being misused, amid accusations of corruption.

Similar allegations have dogged BRI-backed projects in Kyrgyzstan and Pakistan.

In the case of Pakistan, the country of 220 million people is the biggest single recipient of BRI financing worldwide and hosts the $62 billion collection of infrastructure projects known as the China-Pakistan Economic Corridor (CPEC).

Similar to Sri Lanka, the viability of some projects have been brought into question in Pakistan, including a port project in Gwadar along the strategically important mouth to the Strait of Hormuz, which has often been trumpeted as a BRI priority.

But tensions over the implementation of BRI projects has strained relations for both Beijing and Islamabad. Still, Beijing has issued a string of loans aimed at averting a default, with a consortium of Chinese state banks lending $2.3 billion to Pakistan in late June.

Beijing has reportedly urged Islamabad to repair ties with the IMF and resurrect a loan program agreed in 2019, of which the fund has so far given only about half of the agreed $6 billion sum.

Pakistani Finance Minister Miftah Ismail told Bloomberg on August 1 that progress had been made on the loan, which could stave off a default, but analysts say Islamabad's finances remain strained, and Mingey said that Pakistan is still a leading "domino to fall" after Sri Lanka amid the debt crisis and possibility of further defaults.

Kyrgyz officials have spoken about the urgency of making their payments to China and say they are capable of meeting their obligations to foreign creditors, with President Sadyr Japarov promising not to delay foreign debt repayment even for "one hour."

Japarov warned about the consequences of not meeting its debt payments to China in 2021, with discussion around the handing over of the rights of the Jetim-Too iron ore mine to Chinese firms as one avenue to resolve a dispute. Japarov has since said that the mine will be developed locally, but the possibility of a Chinese takeover still hangs over the project, as does other Chinese-financed projects such as the Bishkek thermal power plant, which could be placed under external management if Kyrgyzstan does not pay off its debts on time.

Navigating A New Crisis

One of the unique dimensions to the current debt crisis that analysts say raises the stakes is China's relative inexperience and the lack of precedence in dealing with such issues.

For more than 60 years, sovereign-debt restructurings have been coordinated by the Paris Club, an informal association of 22 mostly Western major creditor countries. Created in 1956, the group has signed hundreds of agreements across the world, often working with the IMF.

China is not a member of the Paris Club and only became a major creditor nation in the last two decades, as the BRI helped catapult its status as a leading lender.

AidData's Parks says that little is known about how Beijing will approach its role as an important creditor in a time of growing distress, but that China has frustrated restructuring efforts in the past, which often involve compromises and pain for both borrowers and lenders -- and will also require them to work other international creditors who are owed outstanding debts from the same countries.

"Every successful sovereign-debt restructuring has happened when all creditors have taken a haircut and structured agreements so that no one creditor bears a disproportionate burden," Parks said. "We're waiting for the precedent to be set here with China and its restructuring."

A hint of how China could approach this issue will be seen in how Beijing resolves this in Sri Lanka, Zambia, Laos, Cambodia, and Ethiopia, which are now restructuring their debts with China and creditors like the World Bank and IMF.

On July 30, China announced that it had agreed to provide debt relief to Zambia, which paves the way for a future IMF bailout in a potentially precedent-setting move for how Beijing will work with other lenders under the so-called Common Framework for debt treatments agreed by the G20 in late 2020.

"As originally conceived, BRI cannot sustain itself according to that original vision, but we shouldn't underestimate the Chinese," said Parks. "They are quite strong at learning and adapting to their past mistakes."

Correction: An earlier version of the article misattributed research about the percentage of BRI countries in debt distress. The study was done by economists Sebastian Horn, Carmen Reinhart, and Christoph Trebesch, not AidData Lab.