China renegotiated $50bn in loans to developing countries

Developing countries have renegotiated about $50bn of Chinese loans in the past decade, with term extensions, refinancing and debt forgiveness the most frequent outcomes, according to research challenging “debt-trap” accusations surrounding Chinese lending.

An examination of 38 Chinese debt renegotiations with 24 countries in the past decade by the Rhodium Group, a consultancy, concluded that China’s leverage remains limited, with many of the renegotiations resolved in favour of the borrower.

Debt write-offs were found in 14 cases, deferments in 11 cases, and refinancing and debt term changes accounting for most other cases.

US officials have warned that China is strategically using overseas financing to gain assets from developing countries. But the study found that outright asset seizure had occurred only in the case of Sri Lanka’s Hambantota port in 2017.

“The finding that deferments, refinancing, and new terms are much more common than asset seizures is a good illustration of the limitations of the debt-trap narrative,” said Agatha Kratz, an author of the report. 

At the Belt and Road Initiative summit in Beijing last week, President Xi Jinping said China had signed $64bn in new deals. The announcement highlighted the country’s continued use of cheque book diplomacy even as it made parallel promises to be more fiscally responsible over concerns that host countries were being mired in debt.

The Rhodium report found that countries had more leverage over China when they had access to alternative financing sources such as the IMF or international capital markets, while new incoming governments also seemed to generate increased leverage.

Debt forgiveness is often motivated by a desire to improve bilateral relations, and also in cases of acute financial distress, the report found. China wrote off Rmb2.6bn ($386m) of Cuban debt in 2010, and $40m of Zimbabwean loans in 2015, according to Rhodium, which also reported that Angola had refinanced and renegotiated the terms of $21.3bn in Chinese loans in 2015. The Maldives, whose new government said it would ask China to reduce the sums owed, is listed as being under negotiation.

The renegotiations account for a significant chunk of China’s sovereign lending when the totals are compared to figures identified in other research. Academics at Johns Hopkins University in the US have been studying Chinese loans in Africa worth $143bn from 2000 to 2017, while Boston University researchers have identified more than $140bn in Chinese loans to Latin America and the Caribbean since 2005. 

The Rhodium report adds that the large number of renegotiations point to “legitimate concerns about the sustainability of China’s outbound lending”. 

The problems encountered with Chinese lending point to a lack of competency among lending institutions, combined with their eagerness to support broader political goals despite low potential returns, and weak project planning capacity, according to Ms Kratz.

“Given the huge backlash around the Hambantota case . . . Chinese lenders might become more picky and careful when lending in the first place,” she said. 

China has a decade-old policy of forgiving interest-free loans to developing countries, and the Rhodium Group said it had excluded from its study more than two dozen cases of debt forgiveness whose terms have not been disclosed.

The Ethiopian government said this week that “China has cancelled interest-free loans owed by Ethiopia that matured at the end of 2018”, without giving an amount.

Additional reporting by Tom Wilson in Nairobi




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