China's true 'debt trap' danger

The massive debts owing to China will not vanish just because Beijing puts up a wall of silence.

The Republic of Suriname resorted to the International Monetary Fund (IMF) for help earlier this year, when it was hit by an economic crisis and unpayable debts. The South American country committed to economic reforms and debt restructuring in exchange for a $690 million loan. But since the loan was announced, according to officials I’ve spoken with, no money has been disbursed—because the Export-Import Bank of China (Exim Bank) has not restructured roughly one billion dollars of debt owed it by Suriname. 

The roughly eight-month delay is part of a widening financial problem impacting countries that owe China hundreds of billions of dollars for infrastructure construction. While other lenders, particularly Western banks and bondholders, are also creditors to several of these nations, China's massive loan portfolio implies that Beijing's policy reaction will have a global impact.

It isn't just low-income countries that have trouble repaying China. As the pandemic-induced global economic downturn approaches the two-year mark, middle-income countries are likewise looking to restructure their Chinese loans. It's worth noting that IMF Managing Director Kristalina Georgieva recently urged on the Group of Twenty (G20) governments to pay attention to "other highly indebted countries," a clear indicator of the problem facing countries further up the development ladder.

However, when governments plead for relief, Chinese lenders are digging in their heels, particularly in nations that do not garner much media attention. And those countries are suffering as a result. Suriname's inability to access IMF funding, for example, implies less money for social programs at a time when the epidemic has boosted demand for health care and other poor-targeted programs.

Presidents Donald Trump and Joe Biden's administrations have accused China of using loans to lure borrowing countries into a "debt trap," giving Beijing control over critical assets and natural resources if governments fail to repay. Even if some Chinese loan agreements do contain onerous restrictions, that claim has failed to hold up under inspection.

That does not absolve China of responsibility. Beijing is pursuing a well-worn path of reckless lending, which has resulted in a tangle of unsustainable debt in a number of nations. The scenario is reminiscent of the 1980s Latin American debt crisis, when governments were unable to repay loans from Western commercial lenders, and the late 1990s low-income country bailouts from the IMF, World Bank, and other creditors.

Timely Chinese debt relief could help many indebted countries. But failure to act could create a real debt trap that would ensnare both foreign borrowers and Chinese lenders.

Below the Belt

President Xi Jinping's much-hyped Belt and Road Initiative (BRI), which was entrenched in China's constitution in 2017, covers Chinese funding for infrastructure projects. However, with nations seeking debt relief, the BRI looks to be slipping down the list of Xi's accomplishments: The program earned no mention in the Communist Party's plenum communiqué last month, and just one in the meeting's self-congratulatory resolution on party history.

This reflects dissatisfaction with the fact that many of the 144 countries that have signed BRI "cooperation agreements" are struggling to repay loans from Exim Bank, the China Development Bank (CDB), and other Chinese financial institutions, which have helped fund many of China's state-owned enterprises' more than 3,100 projects launched or planned as of 2018. While the actual amount borrowed from China under the BRI is undisclosed, the Rhodium Group believes that loans peaked in 2016 at $75 billion before plummeting as the debt crisis surfaced.

China's commitment of forty billion dollars in financial support to Africa at last month's Forum on China-Africa Cooperation emphasized this move away from loans. The package included ten billion dollars in credit lines and no interest-free loans (or grant aid), focusing instead on direct investment, trade financing, and channeling money through the IMF, down from sixty billion dollars at the last pledging session in 2018. China, on the other hand, committed twenty billion dollars in credit and fifteen billion dollars in interest-free loans in 2018.

China's stated attitude on debt relief is consistent with G20 policies, which include an end-of-year moratorium on debt-service payments for low-income countries and a commitment to the so-far ineffective "common framework" under which those countries are to discuss restructuring. The G20 also asks on private-sector lenders to engage in debt talks on a case-by-case basis, and China's banks have indicated that they are doing so—despite the fact that state-controlled financial institutions like Exim Bank and CDB account for a major amount of Chinese loans. (Beijing says that CDB is a commercial bank and hence is exempt from government-creditor programs, a claim that the World Bank president has questioned.)

Since the outbreak, Beijing has offered more than $12 billion in debt-service postponements and restructuring. Because China is the group's largest lender, this is the greatest sum among the G20 countries. Restructuring agreements have been reached with a handful of countries, including Angola, the Republic of Congo, and Ecuador—the latter in the context of an IMF program, like Suriname’s, that called for creditors to renegotiate terms.

Crying poverty

However, China's attitude has stiffened in recent months, and experts say Beijing may be hoping that a delay would be rewarded by rising commodity prices—particularly oil—and a global economic recovery, restoring nations' capacity to repay. Beijing may also be counting on the IMF to provide loans to governments even if they have defaulted on formal creditors, a technique known as "lending into arrears." However, as the Trump administration did during negotiations of a 2018 loan to Pakistan, other nations are likely to fight against any loans that permit payback to China, and some debtor countries may refuse to reimburse Beijing if IMF funds become available without a restructuring deal.

One IMF official told me that China is claiming internal constraints on offering debt relief: “They say, ‘We can help extend the payments, but fundamentally this money is owed to the people of China. We are not a rich country that can give out free foreign aid.’”

It's hard to believe that China, a global economic engine with over three trillion dollars in foreign-exchange reserves, is yet a poor nation. Domestic political limits do apply, however: In China, there is a high level of sensitivity to debt-related concerns at a time when the real-estate industry is beset by bad debt, putting the country's financial sector under strain and placing financial-sector authorities under scrutiny. This might also explain why BRI is no longer included in the campaign praising Xi's accomplishments.

Indeed, during a Chinese official conference on the Belt and Road Initiative last month, the Chinese leader took a defensive stance. Xi reminded the gathering officials that BRI "is not a debt trap, but a pie to benefit the people; it is not a geopolitical instrument, but a chance for shared growth," according to the Communist Party publication The People's Daily.

In China, discussion of foreign debt is strictly regulated. The state insurance business Sinosure, which offers export credit insurance and evaluates nation risk, published a "early warning analysis" when the IMF deal with Suriname was unveiled in April. Suriname's debt was highlighted in the briefing, however Exim Bank's loans were not mentioned.

The massive debts owing to China will not vanish just because Beijing puts up a wall of silence. And the individuals who can least afford to make sacrifices will unavoidably bear the brunt of the repayment load.

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