China is lending billions to countries in financial trouble | ET REALITY


After lending $1.3 trillion to developing countries, mostly for big-ticket infrastructure projects, China has shifted its focus to rescuing many of those same countries from piles of debt.

The initial loans were mostly part of the Belt and Road Initiative, which Xi Jinping, China’s top leader, launched in 2013 to build stronger political, transportation and communications links in more than 150 countries.

But now the two major Chinese state banks that provided the majority of infrastructure loans have reduced their new lending. Bailout loans rose to 58 percent of China’s loans to low- and middle-income countries in 2021 from 5 percent in 2013, according to a new report from Help dataa research institute of William and Mary, a university in Williamsburg, Virginia, that compiles comprehensive data on Chinese development financing.

“Beijing is navigating an unfamiliar and uncomfortable role: that of being the world’s largest official debt collector,” the institute wrote.

While the Belt and Road Initiative bought geopolitical influence for Beijing and helped finance economically useful projects, Chinese loans were also used to build expensive projects that have not stimulated economic growth and have saddled countries with debts that are now They can not pay.

Much of Beijing’s recent lending consists of loans from China’s central bank to the central banks of countries that borrowed from the Belt and Road Initiative. Another large and growing share comes from state-controlled Chinese commercial banks, which work in conjunction with Western banking groups.

Unpaid debts to China are part of the billions that developing countries owe to other nations, the International Monetary Fund and private lenders. Unsustainable debt has been a long-standing problem for poorer nations. But recent economic shocks caused by the Covid pandemic and the global rise in energy and food prices due to the Russian invasion of Ukraine have made the current cycle especially acute.

China is shifting the focus of its lending as the United States seeks to match China’s early success in establishing strong ties with developing countries.

The U.S. International Development Finance Corporation, created by the Trump administration and Congress in response to the Belt and Road Initiative, plans to announce this week a $125 million loan for shipyard modernization in Greece and even $553 million in loans for port expansion in Sri Lanka, said U.S. officials with detailed knowledge of the plans, who were not authorized to speak publicly about the loans before they were announced.

China’s early and rapid expansion of the Belt and Road Initiative alarmed American officials, who saw the program as an erosion of American influence. The Trump administration and Congress merged and expanded two agencies in 2018 to create the development finance corporation. The agency provided $9.3 billion in project financing in the 12 months ended Sept. 30, up from $7.4 billion a year earlier.

Between 2014 and 2017, AidData found, China provided almost three times as much development finance as the United States. But in 2021, China was outspending the United States by only 30 percent.

Sri Lanka was the site of one of China’s most politically charged infrastructure projects: the construction of a $1.1 billion port in Hambantota, a city about 130 miles southeast of Colombo that was Mahinda Rajapaksa’s political base. then president of Sri Lanka. The port attracted little traffic. When the project failed to pay its debts, Chinese entities obtained a 99-year lease for the port and 15,000 acres of land around it. (The US loan of up to $553 million would be for the expansion of the busy port of Colombo, Sri Lanka’s capital and main city.)

Much of the work for the Belt and Road Initiative has been done by Chinese construction and engineering companies, which sent thousands of engineers, heavy equipment operators and other specialists across Asia, Africa, Latin America, Europe of the East and the Pacific.

AidData estimated that China had lent $1.3 trillion since 2000, almost all of it to Belt and Road Initiative countries.

China provided the money almost entirely in the form of loans, not grants, and the loans tended to be at adjustable interest rates. As global interest rates have soared over the past two years, poor countries have found themselves owing Beijing much higher payments than they expected.

Chinese lenders and contractors were able to build projects quickly because the Chinese government rarely required extensive environmental studies, financial viability reviews, or controls on the displacement of local populations forced to give up land. National governments in developing countries were required to guarantee the repayment of loans made to their local and provincial governments.

In the early years, 65 percent of loans were provided by China’s state-run political banks, particularly the China Development Bank and the Export-Import Bank of China, AidData found. But faced with many problem loans, they have cut back, and in 2021 those loans accounted for less than a quarter of loans.

Chinese commercial banks listed on the stock market but with controlling stakes still in government hands now account for another quarter of loans. But they lend primarily to developing countries through Western banks that have stricter lending standards.

Chinese officials defend their current credit policies toward developing countries as prudent, while avoiding direct discussion of past loans.

“Development must be safeguarded with risk protection,” Guo Lei, vice president of global finance at the China Development Bank, said at the International Finance Forum in late October in Guangzhou, China.

China’s emergency rescue loans, usually from China’s central bank, are primarily going to countries that are struggling to repay previous loans from Beijing financial institutions, said Bradley Parks, chief executive of AidData.

The institute’s new report found that China’s average bailout loan package in recent years to countries already heavily indebted to China was $965 million. By comparison, countries that did not owe much to Chinese creditors received bailout loans on average of $26 million, AidData found.

The International Monetary Fund grants more money in bailout loans each year than China, although the gap has been narrowing. Beijing is increasingly at odds with the IMF and other creditors over who accepts losses by easing debt pressure on developing countries.

Reza Baqir, a former IMF official who became governor of Pakistan’s central bank until 2022, said at the Guangzhou forum that China’s bailouts should not be seen as competition for the IMF.

“I see it more as something complementary, rather than as a compensation for going to the IMF,” he said.

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