Chinese banks' reluctance towards CPEC hint towards their funding gap

A few weeks back, Saudi Arabia forced Pakistan to repay one billion dollars. However, since Pakistan did not have the cash, the South Asian country turned towards its ally China and China bailed out Pakistan.

However, now, the Pakistan media has reported that several Chinese banks and financial institutions do not want to fund the China-Pakistan economic corridor anymore.

Reports say they are not happy with the “current state of affairs“. Chinese banks and institutions are showing no or limited interest in financing the much-criticised CPEC.

Pakistan's Foreign Minister Shah Mehmood Qureshi is said to have raised this issue during his recent visit to China.

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China uses its banks routinely to bankroll the Belt and Road projects. 

The country's biggest and most powerful banks are state-run and so money is usually not a problem for China. This raises the question of why, then, are Chinese financiers looking away from CPEC.

The reason behind this is simple: it’s a loss-making enterprise.

The reports about this started coming last year. The first one was published in Wall Street Journal which stated that the Chinese projects for CPEC will run up to $62 billion and less than half of these are in progress. That's because Pakistan faces massive debt and Chinese stakeholders want Islamabad to guarantee repayments.

As the facts are laid out, the fears of these Chinese lenders are legitimate. You only extend a loan to those who can repay and Pakistan is in no condition to repay.

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In July this year, Pakistan received $1.8 billion in gross foreign loans. This is a jump of 263 per cent compared to the same month the last year.

In the last fiscal year, Pakistan received $13 billion dollars in foreign loans and a little more than $10 billion was utilized to repay maturing loans.

Pakistan is a country that’s surviving on loans as it borrows from one source to repay another lender. By now, any bank would have declared pakistan a non-performing asset. However, China seems to be holding on to its friendship.

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Now Chinese banks want nothing to do with Pakistan and it only hints towards the fact that they, too, are running short of cash.

A Bloomberg report claimed that China’s biggest banks will face a capital shortage of well over $900 billion by 2024.

China’s four largest lenders are facing a funding gap, namely The Industrial and Commercial bank of China, The Bank of China, The China Construction Bank, and The Agricultural Bank of China. All of these banks are important, not just for CHina but also for the global economy because if they fail, it could trigger a financial crisis.

According to a report, these four banks had a total shortage of $323 billion last year and this shortage can grow up to $940 billion by 2024.

It is not the just the lenders who are suffering. The combined earnings of more than 1,000 commercial Chinese banks has slumped by 24 per cent, according to one claim, and the reason is the same - bad loans.

China’s big state-owned banks are the hardest hit. Beijing has used these banks to salvage the economy and write cheques to buy heft. However, the Chinese banks and lenders can’t afford any more bad debts.