BEIJING – When Suriname was unable to repay its debt, a Chinese state-owned bank seized money from one of the South American country’s accounts.
When Pakistan was struggling to deal with a devastating floods already inundated a third of the country, repayments to China are growing rapidly.
When Kenyans and Angolans go to the polls in Presidential election in AugustChina’s loans by countries, and how to repay them, is a prominent political issue.
Across most developing countries, China finds itself in an uncomfortable position, a geopolitical giant that currently wields considerable influence over the financial futures of many countries but is also owe a huge amount that may never be repaid in full.
Beijing is Lender of choice For many countries over the past decade, funds have been given to governments to build high-speed trains, hydroelectric dams, airports and highways. As inflation rises and economies weaken, China has the power to cut back, lend more or, in the most pleasant times, be able to forgive a small portion of its debt.
Economic hardship in poor countries is evident, as a result of the lingering consequences of the pandemic, along with high food and energy prices following Russia’s invasion of Ukraine. Many people have borrowed money from China. In Pakistan, total public debt has more than doubled over the past decade, with loans from China growing the fastest; In Kenya, public debt increased ninefold and in Suriname tenfold.
The nature of China’s loans is increasing the challenges. China issues more loans to poor countries at adjustable interest rates than Western governments or multilateral institutions. With global interest rates rising rapidly, debt payments are skyrocketing when these countries are least able to afford them. And their weak currencies make it even more expensive for many countries to pay off Chinese loans, almost all of which are paid in dollars.
Bureaucratic warfare between powerful government ministries in Beijing has hindered any easy solution to the debt problem and risks delaying it any further. A new group of ministers will take over in March, likely to restart the process to resolve debt issues.
Last month, China and France negotiated the drafting of an agreement to reduce Zambia’s debt, with final details still to be worked out. It was made under the so-called Common Framework, a plan by the Group of 20 largest advanced and emerging economies to ease the debt burdens of dozens of poor countries.
In August, Beijing forgave about 0.3% of loans to African countries. It focuses on 20-year defaults, money that China is very unlikely to get back.
Western nations are pushing for more such moves, on a much broader scale. “We have repeatedly told China that we want them to discuss and participate in the Common Framework,” Treasury Secretary Janet Yellen said in an interview in Washington.
Chinese officials and academics say the West has been too hasty to blame China. While most U.S. government funding for poor countries is now done through non-lending grants, U.S. hedge funds have been major lenders to developing countries. grow by buying their bonds.
China also complains that multilateral lending institutions such as the World Bank, traditionally led by Americans, and the International Monetary Fund have not forgiven loans to poor countries – despite doing so. This could jeopardize their credit rating.
“Western commercial creditors and multilateral institutions, who hold the majority of the debt, have refused to participate in the effort,” Wang Wenbin, a spokesman for the foreign ministry, said at a press conference. ministry meeting a month ago.
China’s Foreign Minister, Wang Yi, has repeatedly asserted that his country is doing its best to help borrowers. He also went on to criticize the Trump administration’s past accusations that China engages in “debt-trap diplomacy,” which means lending so much money to poor countries that they will become financially dependent on them. Beijing.
This year, Mr. Wang said: “This is not a ‘debt trap’, but a monument to cooperation.
China and the United States favor different approaches to debt problems. In the past, Beijing has tended to lend more money to some countries, including Argentina, Ecuador and Pakistan so they can continue to pay off existing loans. China’s approach helps these countries afford to import food and fuel, but leaves them with more debt.
The US likes to ask government agencies and banks to forgive part of their loans. This was done during the Latin American debt crisis of the 1980s, so that borrowers could afford to pay interest on the remaining debt.
But this approach requires banks to immediately accept heavy losses, a tough sell in China amid the country’s economic slowdown and housing crisis. Weakening house prices and stalled real estate transactions have left Chinese banks burdened with bad loans to developers and homebuyers.
Those conditions also mean that Chinese banks are reluctant to lend to countries more, including under the Belt and Road Initiative, China’s policy framework for developing countries. develop. Such contracts fell 5.8 percent in the first eight months of this year from the same period last year, according to data from China’s Ministry of Commerce.
The sheer size of China’s lending until very recently allowed many governments to continue to raise debt.
Sri Lanka borrowed money from China. Even after the pandemic started and tourism dried up, China made four more major loans between March 2020 and August 2021, to help keep Sri Lanka solvent.
Then China stopped, exacerbating an economic and political crisis. Violent street protests toppled President Gotabaya Rajapaksa in July.
“The Rajapaksa government took Chinese capital for granted, and they thought China would continue to support, so they continued to borrow,” said Nalaka Godahewa, a former minister in Rajapaksa’s government. and invest in projects without any return plan,” said Nalaka Godahewa, a former minister in Rajapaksa’s government.
Countries are also being affected by macroeconomic forces as central banks around the world raise interest rates. Many countries have borrowed adjustable-rate loans from China that initially seemed manageable when interest rates were low – and are now stuck with strained payments. Their loans are usually calculated by adding a few percentage points to the London interest rate which was 0.3% earlier this year but is now around 4.2%.
“It’s like when you take out a mortgage and pick an adjustable mortgage, and it’s a good bet,” said Deborah Brautigam, director of the China Africa Research Initiative at Johns Hopkins University. for a long time, until it doesn’t happen.
In 2014, Argentina borrowed $4.7 billion from three Chinese state-owned banks to build two hydroelectric dams in southern Patagonia. Bradley Parks, executive director of AidData, a research institute at the College of William and Mary, a research university in Williamsburg, Va., estimates that Argentina’s twice-a-year interest payments are $87 million. in January and $137 million in July.
Argentina will owe a payment of more than 170 million dollars into the loan in January if interest rates continue to rise at the same rate, he calculates. Argentina’s finance ministry did not respond to emails and text messages about the loan.
According to the IMF, three-fifths of the world’s developing countries are currently having significant difficulty repaying loans or are already in debt. More than half of the world’s poor countries owe China more than all Western governments combined.
Currently, Chinese officials in poor countries face the unpleasant job of debt collectors.
“You have more influence when you provide a loan, than when you beg for repayment,” said Brad Setser, international payments expert at the Council on Foreign Relations.
Abdi Latif Dahir in Nairobi, Emily Schmall in New Delhi, Skandha Gunasekara in Colombo, Sri Lanka, Salman Masood in Islamabad, Pakistan, contributed reporting. Li You and Ana Lankes contribution research.