BEIJING — When Suriname failed to pay its debts, China’s state-owned bank seized gold from one of the South American country’s accounts.
As Pakistan struggles to cope with devastating floods that have inundated a third of its land, loan repayments to China have surged.
When Kenyans and Angolans took to the polls in August’s presidential election, China’s loans and how they were repaid was a key political issue.
In most developing countries, China is in an uncomfortable position. The geopolitical giant currently wields great influence over many countries’ financial futures, but owes them enormous sums of money that they may not be able to repay in full.
The Chinese government has been a preferred lender to many countries over the past decade, providing funding for the government to build bullet trains, hydroelectric dams, airports and highways. With inflation rising and the economy weakening, China has the power to cut them off and lend more or forgive some of their debt when it’s most convenient.
Given the lingering effects of the pandemic, coupled with high food and energy prices following Russia’s invasion of Ukraine, the economic hardships of poor countries are evident. Many borrowed heavily from China. In Pakistan, total public debt has more than doubled over the past decade, with loans coming from China growing fastest. In Kenya the public debt is 9 times his and in Suriname he is 10 times.
The nature of China’s lending complicates the challenge. China lends far more to poor countries at adjustable interest rates than Western governments and multilateral institutions. With global interest rates rising rapidly, debt payments are skyrocketing at a time when these countries can’t afford to pay. A weaker currency also makes it more expensive for many countries to repay Chinese loans, almost all of which must be paid back in dollars.
A bureaucratic war between Beijing’s powerful government ministries has already put off an easy solution to the debt problem and threatens to delay it further. A new minister will take office in March, and the process to address the debt problem could be restarted.
China joined France last month in negotiating the outline of a deal to reduce Zambia’s debt, although final details have yet to be revealed. This was done under the so-called Common Framework, a plan by the G20, made up of the largest developed and emerging economies, to reduce the debt burden of dozens of poor countries.
In August, Beijing exempted about 0.3% of its loans to African countries. It focused on a 20-year-old debt default, money that China is very unlikely to get back.
Western countries are pushing more such moves on a broader scale. “We always tell China that we want them to join the Common Framework,” US Treasury Secretary Janet Yellen said in an interview in Washington.
Chinese officials and academics say it is too early for the West to blame China. Most U.S. government financing for poor countries now comes through grants rather than loans, but U.S. hedge funds are big lenders to developing countries by buying bonds.
China also complains that traditionally American-led multilateral financial institutions such as the World Bank and the International Monetary Fund do not tolerate lending to poor countries.
“Western commercial creditors and multilateral institutions, which hold the largest share of the debt, have refused to participate in this effort,” foreign ministry spokesman Wang Wenbin said of the ministry a month ago. said in a briefing.
Chinese Foreign Minister Wang Yi has repeatedly insisted that China is serious about helping borrowers. He has also continued to accuse the Trump administration of past accusations of China engaging in “debt trap diplomacy”, lending poor countries so much money that they become financially dependent on China.
“These are not ‘debt traps’, they are monuments of cooperation,” Wang said this year.
China and the US have supported different approaches to the debt problem. In the past, the Chinese government has tended to extend more loans to some countries, such as Argentina, Ecuador and Pakistan, so that they can continue to pay off existing loans. China’s approach helps these countries import food and fuel, but leaves them with more and more debt.
The US wants to require government agencies and banks to forgive some loans. This was done during the Latin American debt crisis of the 1980s to allow borrowers to repay interest on their remaining debt.
However, this approach would require banks to take large immediate losses, a tough sell in China given the economic slowdown and housing crisis. China’s banks are already saddled with bad loans to developers and homebuyers due to falling house prices and slowing real estate transactions.
These conditions also mean that Chinese banks are reluctant to lend to the country, including under the Belt and Road initiative, China’s policy framework for developing countries. Data compiled by China’s Ministry of Commerce showed that such contracts fell 5.8% in the first eight months of the year from the same period last year.
Until recently, the sheer size of China’s lending allowed many governments to continue piling up debt.
Sri Lanka borrowed a lot of money from China. From March 2020 to August 2021 she made four more major loans to keep Sri Lanka solvent, even after the pandemic began and tourism dried up.
Then China stopped, exacerbating the economic and political crisis. Violent street protests overthrew President Gotabaya Rajapaksa in his July.
“The Rajapaksa government took Chinese funding for granted and believed that China would continue to help them, so they continued to borrow and invest in projects without plans to repay,” said the Rajapaksa government. Former Minister Naraka Godahewa said.
Countries are also being hit by the macroeconomic impact as central banks around the world are raising interest rates. Many countries have borrowed from China at variable rates, initially thought to be manageable when interest rates were low, but now repayments have ballooned. Their loans are usually calculated at London interest rates, which were 0.3% at the beginning of the year, plus a few percentage points, but are now around 4.2%.
“It’s like taking out a mortgage and choosing an adjustable mortgage, and it’s been a good bet for a long time, but it’s not the case,” said Deborah Brautigam, director of the China-Africa Studies Initiative at Johns Hopkins University. There was not.
In 2014, Argentina borrowed $4.7 billion from three Chinese state-owned banks to build it. Two hydroelectric dams in southern PatagoniaBradley L. Parkes, executive director of AidData, a research institute at the College of William and Mary, a research university in Williamsburg, Virginia, said Argentina’s semi-annual interest payments were $87 million in January, up from $87 million in 2016. estimated at $137 million. July.
Argentina owes more than $170 million He calculated for January loans if interest rates continue to rise at the same pace. Argentina’s Ministry of Finance did not respond to emails and text his messages regarding the loan.
According to the IMF, three-fifths of the world’s developing countries are currently having significant difficulty paying their debts or are already in arrears. More than half of the world’s poorest countries owe more to China than all Western governments combined.
For now, Chinese officials in impoverished countries face uncomfortable jobs as debt collectors.
“When you’re offering a loan, you’re much more influential than when you’re begging for repayment,” says Brad Setser, an international payments specialist at the Council on Foreign Relations.
Abdi Latif Dahir in Nairobi, Emily Schmoll in New Delhi, Skanda Gunasekara in Colombo, Sri Lanka Salman Massoud Contributed to the report in Islamabad, Pakistan. Re You When Anna Ranks Contributed to research.