The Real Threat of China’s ‘Debt Trap’

Faced with an economic slowdown and unpaid debts earlier this year, the Republic of Suriname turned to the International Monetary Fund (IMF) for a bailout. In return for a loan of $ 690 million, the South American country agreed to economic reforms and debt restructuring. But since the loan was announced, according to officials I spoke with, no money has been disbursed because the Import-Export Bank of China (Exim Bank) has not restructured about $ 1 billion. of Suriname’s debt.

The nearly eight-month delay is part of a worsening debt crisis affecting countries that have borrowed hundreds of billions of dollars from China for infrastructure development. While other lenders, especially Western banks and bondholders, are also creditors of many of these countries, China’s large loan portfolio means that Beijing’s policy response will affect as many people as possible. country of the world.

It’s not just low-income countries that are struggling to repay China. Middle-income countries are also looking to renegotiate their Chinese debts as the pandemic-induced global economic slowdown approaches the two-year mark. It should be noted that IMF Managing Director Kristalina Georgieva recently called for “other heavily indebted countries” to gain the attention of the Group of Twenty (G20) governments, a clear signal of the challenge facing them. the most advanced countries on the development ladder.

But Chinese lenders are backing down as governments ask for relief, especially with countries not receiving media attention. And these countries feel the pain. For example, Suriname’s inability to access IMF funds means less money for social programs at a time when the pandemic has increased demand for health care and other programs targeting the poor.

The administrations of US Presidents Donald Trump and Joe Biden have accused China of using loans to lure borrowing countries into a “debt trap” that gives Beijing a grip on strategic assets and natural resources when governments fail. can not refund. But that accusation has not stood up to scrutiny, even though some Chinese loan agreements contain severe conditions.

This does not mean that China is free from blame. Beijing follows a familiar scenario of delusional lending that has a habit of creating an unsustainable debt quagmire in many countries. The situation echoes the debt crisis in Latin America in the 1980s, when countries were unable to repay loans from Western commercial lenders, and the desperate situation of low-income countries in the late 1990s which resulted in led to bailouts from the IMF, World Bank and other creditors.

Timely Chinese debt relief could help many indebted countries. But failure to act could create a real debt trap that traps both foreign borrowers and Chinese lenders.

Under the belt

Chinese loans for infrastructure projects fell under President Xi Jinping’s Belt and Road Initiative (BRI), which was enshrined in China’s constitution in 2017. But with countries seeking now in debt relief, the BIS appears to be undergoing a downgrade in Xi’s pantheon of achievement. : The program received no mention in the Communist Party plenary assembly statement last month, and only one in the self-righteous resolution on the party’s history released at the meeting.

This likely reflects unease that many of the 144 countries that have signed BIS “cooperation agreements” are struggling to repay loans from Exim Bank, China Development Bank (CDB), and China. other Chinese financial institutions that have helped finance many of the more than 3,100 projects launched or planned by Chinese state-owned enterprises in 2018. While the exact amount borrowed from China under the BIS is unknown, the Rhodium Group estimates lending peaked in 2016 at $ 75 billion, before dropping sharply as problem debt began to emerge.

This loan abandonment was highlighted in China’s pledge of $ 40 billion in financial assistance to Africa at the China-Africa Cooperation Forum last month. The package, up from $ sixty billion in the last pledging round in 2018, but still substantial, contained ten billion dollars in lines of credit and no interest-free loans (or grants), focusing instead on the direct investment, trade finance and pipeline. funds through the IMF. In contrast, in 2018, China pledged $ 20 billion in credit and $ 15 billion in interest-free loans.

China’s official position on debt relief aligns with policies approved by the G20, which include a moratorium on debt service payments by low-income countries expiring on December 31 and a pledge towards the so far unsuccessful “common framework” in which these nations must negotiate restructuring. The G20 is also calling on private sector lenders to initiate debt talks on a case-by-case basis, and China has said its banks are following this stipulation, even though a significant portion of Chinese loans come from financial institutions controlled by the G20. State. like Exim Bank and CDB. (Beijing claims the CBD is a commercial bank and therefore does not fall under programs for government creditors, a position the World Bank president has criticized.)

Beijing has provided more than $ 12 billion in debt service deferrals and restructuring since the start of the pandemic. This is the highest amount among the G20 countries, with China being the largest lender in the group. Restructuring deals have been reached with a handful of countries, including Angola, the Republic of Congo and Ecuador, the latter under an IMF program, like Suriname’s, which called on creditors to renegotiate conditions.

Mourn the poverty

But China’s stance has hardened in recent months, and officials suggest Beijing can hope the delay will be rewarded with rising commodity prices, especially oil, and a global economic recovery that would restore capacity. reimbursement countries. Beijing can also bank on the IMF granting loans to governments even if they have fallen behind in repaying official creditors – a process called “lending in arrears.” But other governments are likely to oppose any loan that could allow repayment to China – as the Trump administration did during discussions over a 2018 loan to Pakistan – and some debtor countries may refuse to pay. repay Beijing in the absence of a restructuring agreement if IMF funds become available.

An IMF official told me that China is claiming internal constraints to offer debt relief: “They say, ‘We can help extend the payments, but basically this money is owed to the Chinese people. We are not a rich country that can provide free foreign aid.

The idea that China – a global engine of growth with more than $ 3 trillion in foreign exchange reserves – remains a poor country beyond comprehension. Nonetheless, domestic political constraints apply: There is considerable sensitivity to debt issues in China at a time when the real estate sector is burdened with bad debt, putting the Chinese financial sector under considerable pressure and officials. the financial sector are being investigated. It may also help explain why BRI is no longer featured in the campaign touting Xi’s accomplishments.

In fact, at a Chinese government symposium on the BIS last month, the Chinese leader adopted a rather defensive tone. According to the Communist Party newspaper People’s DailyXi told officials gathered that the BIS “is not a debt trap, but a pie for the benefit of the people; it is not a geopolitical tool, but an opportunity for common development.

Discussions about foreign debt in China are tightly controlled. When the IMF’s program with Suriname was announced in April, the state insurance company Sinosure, which provides export credit insurance and analyzes country risk, issued an “early warning analysis”. The bulletin spoke of Suriname’s debt, but did not mention Exim Bank loans.

The huge debts owed to China will not go away just because Beijing erects a curtain of silence. And the burden of repayment will inevitably be borne by those who can least afford to make the sacrifices.

Jeremy Mark is a Senior Non-Resident Researcher at the Center for Geoeconomics at the Atlantic Council. He previously worked for the IMF, The Wall Street Journal, The Asian Wall Street Journal, and CNBC Asia.

Further reading

Image: A Chinese yuan banknote is pictured in this illustrative photo on May 31, 2017. By Thomas White / REUTERS.

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