You can’t help but notice the latest scheme China has hatched in its efforts to take over much of the world’s trade and economy. It’s “Belt and Road” initiative, also called the “One Belt, One Road” project, is all over the news lately.

China offers this pan-Eurasian infrastructure endeavor as its contribution to fostering economic prosperity and diplomatic relations on a truly worldwide scale. The planned venture has a goal of nothing less than developing both physical and digital connections among over 60 nations of the world (that is more than a quarter of the countries on earth).

This has an especially appealing ring to it these days as both the United Kingdom and the United States have pulled back from traditional trade and economic ties. As protectionism is generally on the march, such an open-trade policy is winning applause across the globe. Yet you should not think such a multinational venture is without tremendous risks.

Graphic Courtesy of Breakbulk Events & Media

The main concern surrounds what this project will do to the already heavily laden balance sheets of the banking sector in China. It is sure to boost the national debt as well as state-backed funding heavily figures into the financing of the project.

It has led a number of analysts to wonder how safe such a gamble is right now. After all, serious problems for the Chinese banking sector would equate to a major problem for the international economy and financial order.

Just this past Tuesday, reports emerged that the largest state-owned commercial banks in China will start to raise significant levels of capital in order to begin funding investments into the One Belt, One Road initiative to connect Asia, Europe, and Africa with both digital and physical infrastructure.

The second biggest bank (by assets) in China is the China Construction Bank. It has been on the road in an effort to shore up 100 billion yuan (or $15 billion) out of offshore and onshore investors alike, per Reuters. The Bank of China, Agricultural Bank of China, and Industrial and Commercial Bank of China are also working to come up with tens of billions of dollars apiece.

The four largest national banks in China are all committing what looks like it will amount to hundreds in billions of dollars in potentially nonperforming loans should the projects not become wild successes. Vice President Bjorn Conrad of the Mercator Institute for China Studies warned:

“A risk to China’s banking system is, by default, a risk to the global banking system.”

Similarly, Professor of Economics Xu Chenggang of the Cheung Kong Graduate School of Business in Beijing cautioned:

“The impact could be damaging not just for China, but for the global financial system. These loans are being extended to governments in risky countries to fund risky infrastructure projects. If the projects were launched by private firms we wouldn’t have to worry because they would know they had to bear the consequences. But here we are talking about  government to government lending and, ultimately, intergovernmental relations.”

The problems is that soft budget constraints mean that important state-owned companies will not be allowed to financially fail should they become insolvent. The reason is that the country has vested interests in them continuing to operate. A nation like China with higher soft budget constraints and significant quantities of insolvent companies will likely struggle to obtain financing going forward. This would lead to massive financial implications globally.

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China is especially vulnerable to this threat. As it stands now, China’s government is already overburdened by countless “zombie firms” and a huge overcapacity issue. This is particularly grim in the materials and construction and metals segments of the Chinese economy. China going down economically threatens the whole world which depends on it for much of its global growth.

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