Fitch Report Questions Creditworthiness of China’s “One Belt, One Road” Initiative

Amidst all of the praise for China’s highly ambitious, trillion-dollar “One Belt, One Road” (OBOR) initiative, hard-headed reality is now beginning to assert itself.  The simple proposition underpinning a recent report issued by the Fitch credit rating agency is this: as Chinese publicly-traded banks are being pressed by the Communist Party to create a vast trade highway across several regions of the world, they are being forced to sign on to multi-billion-dollar infrastructure deals and/or lending arrangements in many countries that fundamentally lack creditworthiness or investment-grade status, likely to result in debilitating bank losses when the bills come due.

The “poster child” for China’s penchant to place strategic influence and nation-capturing over sound commercial and lending practices is Venezuela.  Here, China has recently been compelled to reschedule some $65 billion in petroleum-backed loans extended over just the past decade because of the destitute, chaotic nature of the country’s finances under the bizarre, failed authoritarian leadership of Nicolas Maduro.

Given that OBOR is President Xi Jinping’s signature foreign policy initiative, it is unlikely that the momentum of this “China Dream” will be slowed, much less cut back or abandoned.  Poor regions of Africa, Latin America and Asia are on the OBOR path and have little prospect of shouldering the repayment burdens or consumer demand structures that would be required for successful infrastructure ventures.  Fitch, in effect, calls out Chinese leadership for having allowed its grand strategic designs to supersede prudent lending and investment fundamentals—an argument long made by RWR Advisory Group.

The Financial Times cites the case of Laos, which will be the recipient of a Chinese high-speed rail project costing some $7 billion – an amount that represents more than half of the country’s GDP.  Worse still, Laos is not only well below an investment grade rating — by any measure — it is not rated at all.  Accordingly, this Fitch report likely spells bad news for Chinese bank balance sheets that are exposed to projects of this kind.