Analysis: China casts a giant shadow over emerging debt hunt

A Chinese flag flies outside China’s Ministry of Foreign Affairs in Beijing, China, Feb. 24, 2022. REUTERS/Carlos Garcia Rawlins

Register now for FREE unlimited access to Reuters.com

  • Poorer countries to pay $35 billion in debt service by 2022 – World Bank
  • Opacity, abundance of Chinese lenders to delay debt revisions
  • G20 Common Framework has not yet delivered debt restructuring

LONDON, July 4 (Reuters) – A $360 million project to expand Zambia’s international airport in Lusaka to a $1.4 billion urban port in Sri Lanka’s capital, Colombo, China is the missing piece in the puzzle of some pending debt talks in emerging markets.

The world’s second largest economy and largest bilateral creditor is a dominant lender to much smaller, riskier developing countries. But Beijing has been unobtrusive not only about its loan terms, but also how it renegotiates with borrowers in need.

That became more apparent after the COVID-19 pandemic hit. Many economies collapsing under economic pressure seek debt relief.

Register now for FREE unlimited access to Reuters.com

Now pressure is mounting on China to take a more active role in helping strained economies rethink their debt burden. Leaders of the Group of Seven Rich Democracies on Tuesday specifically appealed to China as they urged creditors to help countries.

The poorest countries will face $35 billion in debt repayments to official and private creditors by 2022, of which more than 40% of the total must be paid to China, according to the World Bank.

But analysts say the International Monetary Fund (IMF) and World Bank’s premise of fair burden-sharing in debt relief negotiations could put them on a collision course with China, casting doubt on the prospect of comprehensive debt restructuring. .

“Chinese ‘Belt and Road’ money is everywhere — so we’ll see this time and time again in sovereign debt restructuring,” said Dennis Hranitzky, head of sovereign disputes at law firm Quinn Emanuel.

According to Beijing, the Belt and Road Initiative, unveiled in 2013, is a platform for international cooperation in infrastructure, trade, investment and financing that connects China with other parts of Asia, the Middle East, Europe and Africa.

China’s foreign ministry and central bank have not responded to requests for comment.

Zambia and Sri Lanka are test cases of how quickly debt talks are moving. Both also need to restructure with foreign bondholders and work out IMF programs.

“China’s involvement in debt talks is not in the hands of the IMF or governments,” said Polina Kurdyavko, head of emerging markets at BlueBay Asset Management in London.

“Getting China to the negotiating table in time could be the biggest challenge in the coming debt restructuring.”

OPACITY

Chinese loans are usually provided by state-controlled agencies and policy banks and are often opaque.

A US National Bureau of Economic Research working paper shows that half of the 5,000 loans and grants granted to 152 countries between 1949 and 2017 have not been reported to the IMF or the World Bank, despite China being a member of both multilateral organisations. †

“Opacity is a recurring problem with some of these Chinese loans,” said Matthew Mingey, senior analyst at Rhodium Group, adding that China had stricter confidentiality clauses on its commercial loans.

Data collected over three years by AidData, a US research lab at the College of William & Mary, showed that the terms of loans from Chinese state banks require borrowers to prioritize repayment.

Examinations of 100 Chinese loans with 24 low- and middle-income countries showed – compared to those of other bilateral, multilateral and commercial creditors – that an unusual level of confidentiality is demanded in some cases, “even the existence of the contract” , found the study led by Georgetown Law professor Anna Gelpern.

Where China has agreed to ease its debt burden, details are often unclear.

The abundance of Chinese lenders also adds to the complexity, although the Export-Import Bank of China and the China Development Bank play the main role.

“When it comes time to renegotiate, individual Chinese banks may not necessarily have an idea of ​​what other Chinese banks are doing,” Mingey said.

GLACIAL

Progress was often slow.

Zambia seeks relief from $17 billion in external debt after becoming the first default in the COVID pandemic era more than two years ago. Part of the slow progress is due to China’s lack of experience with tricky debt restructuring, say those familiar with the matter. read more

Talks in Sri Lanka are accelerating and the IMF confirms it is on track for a new program. However, China’s approach is not yet clear.

Meanwhile, according to the IMF, about 60% of low-income countries are in, or at high risk of, indebtedness.

Seventeen smaller emerging economies have seen premium investors demand to keep their debt levels so high that they are effectively locked out of international markets. That number is higher than during peak COVID-19 or the 2008 global financial crisis.

At the end of 2020, the Group of 20 launched a common framework to bring creditors such as China and India to the negotiating table, together with the IMF, the Paris Club and private creditors. Together with Zambia, Chad and Ethiopia have applied to restructure under this new, yet to be tested mechanism.

But the framework has also added “a layer of bureaucracy to the already complex process of debt restructuring” that could discourage other countries from joining, said Patrick Curran, senior economist at Tellimer.

Register now for FREE unlimited access to Reuters.com

Reporting by Jorgelina do Rosario; Additional coverage by Ryan Woo in Beijing and Karin Strohecker in London; Editing by Kenneth Maxwell and xxxxxx xxxxxxxx

Our Standards: The Thomson Reuters Trust Principles.

Leave a Comment