As per a study, all Chinese rescue loans have gone to low-and middle-income nations with significant debts outstanding to Chinese banks.
NEW DELHI: A report authored by experts from four different financial institutions has confirmed the long-held assertion that China was trying to emerge as the new financial creditor to the world with the objective to gain control over the sovereign decision of the countries that it was assisting.
Significantly, it has found that as of the end of 2022, 60% of China’s overseas lending portfolio debtors were in financial distress, up from just 5% in 2010, thereby suggesting that China’s “investment” in these countries were sinking.
The said report, authored by scholars of the World Bank, Harvard Kennedy School, Germany-based Kiel Institute for the World Economy and US-based research lab AidData has found that in total, more than 20 debtor countries have received USD 240 billion in Chinese rescue lending since 2000.
Of this, more than USD 185 billion has been extended in the past five years alone. As per the study, Beijing has been targeting a limited set of potential recipients—all Chinese rescue loans have gone to low-and middle-income countries with significant debts outstanding to Chinese banks. To put it simply, these countries were taking loans from Chinese banks to repay another existing Chinese loan.
“China has developed a system of ‘Bailouts on the Belt and Road Initiative’ that helps recipient countries to avoid default, and continue servicing their BRI debts, at least in the short run. China’s role as an international crisis manager can, therefore, be compared to that of the US Treasury during previous Latin American debt crises or to a regional financial institution like the European Stability Mechanism, which helped to avert, delay, or resolve defaults by highly indebted borrowers, rather than to a global financial backstop with ‘deep pockets’,” the report, titled “China as an International Lender of Last Resort”, which was released earlier last week, said.
The Sunday Guardian in its earlier reports (China refuses to lavish money, CPEC comes to a halt), (Pak panel questions future of stalled CPEC in country), (Xi stares at write-off of PRC’s investments in Pak, Lanka) had highlighted on Chinese investments in South Asia turning into losses.
As per the researchers, in all, China provided at least 128 “rescue loans” in 22 countries from 2008 to 2021. Most of these were “rollovers”, meaning loans renewed upon maturity and going to the same country. The top three countries in this list were Argentina, which received the largest loans with $111.8 billion, followed by Pakistan with $48.5 billion, and Egypt with $15.6 billion.
Some debtors, like Argentina, Mongolia and Pakistan, have received continuous balance of payments support from Chinese banks and the People’s Bank of China (PBOC). “These types of repeated bailouts by China are reminiscent of the ‘serial lending’ practices by the IMF in recent decades and more broadly, the serial restructurings and bridge credits by private creditors prevalent during the 1980s debt crisis,” it said. The report quotes an example of Pakistan in which a loan that was taken in 1997 and supposed to be paid back in two years, was paid after 14 years.
“An early example of such serial rescue lending goes back to the late 1990s when one of China’s neighbors—Pakistan—experienced an acute shortage of foreign exchange reserves. The Bank of China issued three deposit loans to Pakistan’s central bank in 1997 and 1998, with maturities of less than two years and annual interest rates above 8%. Pakistan subsequently defaulted on its foreign debt repayment obligations (1998/99) and none of the Bank of China loans were repaid on their scheduled maturity dates. Instead, they were repeatedly rolled over for more than a decade and Pakistan’s central bank did not make its first principal repayment until 2008, with full repayment completed only in 2011. In sum, it took 14 years to repay a set of loans that were originally scheduled for repayment within 1-2 years,” the report said.
Dr Bradley Parks, the Executive Director of AidData, told The Sunday Guardian that the study raises questions on the long-term sustainability of China’s Belt and Road Initiative. “Beijing went on a lending spree and issued thousands of loans worth nearly a trillion dollars for big-ticket infrastructure projects spread across 150 countries. Now, many borrowers are having difficulty repaying their infrastructure project debts to Beijing. Back in 2010, only 5% of China’s overseas lending portfolio supported borrowers in financial distress. Today, that figure stands at 60%. So, Beijing faces a major loan repayment challenge and it’s responding with a strategic pivot: it’s ramping down infrastructure project lending and it’s ramping up emergency rescue lending. China has already provided 128 emergency rescue loans worth $240 billion to 22 countries. But I think this is only a sign of things to come: Chinese banks have an interest in ensuring that their biggest overseas borrowers are sufficiently liquid to continue servicing their existing infrastructure project debts. So, Beijing is probably going to be in the emergency lending business as long as its biggest borrowers are in financial distress.”
While these researchers have stated that China’s bailouts are small compared to both IMF’s global lending portfolio and the US Federal Reserve (Fed), it was nonetheless significant as it was reaching out to needy countries swiftly. Interestingly, China’s rescue loans came with an average interest rate of 5%, more than double the rate typically provided by the International Monetary Fund.
The researcher found that 13 countries made total drawings of US$170 billion from Chinese institutions in situations that can be described as that of economic or financial distress. This included Argentina (2014-2021), Mongolia (2012-2021), Suriname (2015-2021), and Sri Lanka (2021), which drew on their Renminbi swap lines right before and/or after sovereign defaults on their external creditors.
“Other important users include Pakistan (2013-2021), Egypt (2016-2021) and Turkey (2021), which made large drawdowns during protracted balance of payments crises, as demonstrated by their crashing currencies in the face of dwindling foreign exchange reserves. Another group, including Russia (in 2015 and 2016) and Ukraine (in 2015) activated their swap lines with the Chinese banks in the face of sanctions and deep geopolitical crises,” it said.
The researchers were able to identify four countries—Malaysia, Singapore, South Korea and Thailand—that utilised their PBOC swap lines without any indication of macroeconomic distress and, thus, likely for trade and investment purposes alone.
Overall, China’s rescue lending activities are spread across 22 countries. They include, among others, Argentina, Ecuador, Suriname and Venezuela in Latin America; Angola, Sudan, South Sudan, Tanzania and Kenya in Africa; Turkey, Oman and Egypt in the Middle East; and Pakistan, Sri Lanka, Mongolia and Laos in Asia. “While China has focused its sovereign debt restructuring efforts (with little or no new money) in low-income countries, its international bailout activities are concentrated in middle-income countries,” the researchers noted.
A common characteristic of the recipient countries of Chinese rescue lending, the report claims, is that they have borrowed extensively from Chinese banks during the lending boom of the 2010s. “Our findings have major implications for the evolution of the international financial system, as cross-border rescue operations become less institutionalized, less transparent, and more piecemeal. China has demonstrated that a major creditor country (notwithstanding its current status as an emerging market) can create a large system of cross-border rescue lending to nearly two dozen recipient countries, while at the same time keeping its bailout operations largely out of public sight,” the report further found.
According to Dr Parks, the notion of “Chinese debt trap” is a “media myth” as the debt trap diplomacy narrative is premised on the assumption that China collateralizes its loans against physical assets—like airports and seaports—that can be seized in the event of default. This is demonstrably false.
“The reason why Beijing has had difficulty putting the issue to rest is because its loan contracts are shrouded in secrecy. If China wants to put to rest the popular media narrative that it is engaging in predation and entrapment, it should be more transparent about its overseas lending program. It has aroused suspicion and fuelled speculation about its actions and motivations by refusing to disclose comprehensive and detailed information about the individual projects that it funds. It still does not publish a country-by-country breakdown of its lending activities. Nor does it publish detailed information about the individual loans that it makes to other countries. It has also rejected invitations to join the Paris Club (a group of official creditors who coordinate debt rescheduling agreements), which effectively frees it from any requirement to share information about its overseas lending activities,” he said.