Analysis: China's debt restructuring policy under scrutiny as more countries call for bailouts

Analysis: China’s debt restructuring policy under scrutiny as more countries call for bailouts

Chinese President Xi Jinping, Senegalese President Maki Sall, Congo President Félix Antoine Tshisekedi, Egyptian President Abdel Fattah al-Sisi, South African President Cyril Ramaphosa, UN Secretary-General António Guterres, African Union Commission Chairman Moussa Faki Mahamat and Comoros? President Azali Assoumani attends the opening of the China-Africa Cooperation Forum (FOCAC) via video link in Dakar, Senegal, November 29, 2021. REUTERS/Cooper Inveen/File Photo

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  • China regularly forgives interest-free loans to Africa
  • Chinese state-owned banks take a tougher stance on other debt obligations
  • Chinese lenders prefer longer repayment periods rather than a haircut

LONDON/BEJING, Sep 8 (Reuters) – In August, China’s ambassador to Zambia took the stage at a new convention center in the capital Lusaka, which he called “a gift from the Chinese government to our Zambian friends,” to talk about lending to the debt-ridden South African nation.

China is the world’s largest bilateral lender but does not disclose much about the terms of the loan or how it is revisiting negotiations with borrowers in distress, so interest in how it is handling Zambian debt is high, especially as the fact that more and more countries, such as Sri Lanka, are trying to repay loans. read more

The leaders of the G7 rich democracies called on China to play a more active role in helping struggling countries overcome their debt burdens.

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Shortly after Ambassador Du Xiaohui’s speech in Lusaka, China confirmed that it had forgiven 23 interest-free loans to 17 African countries, fulfilling President Xi Jinping’s promise at the 2021 China-Africa Cooperation Forum (FOCAC). China said the loans had expired but did not provide details.

The announcement was welcomed, but interest-free loans make up a tiny fraction of China’s lending on the continent. African governments treat them like grants anyway, so this is not surprising, according to researchers and government officials.

Such debt relief, which China has pursued for more than two decades, masks a tougher stance on restructuring much of its lending to developing countries under the Belt and Road Initiative (BRI) launched in 2013, analysts say.

“This is the simplest fruit,” said Hanna Ryder, chief executive of Development Reimagined, an African development consultancy headquartered in Beijing.

“China can do more.”

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China generally does not disclose the terms of the loan, while debt relief usually comes through repayment extensions or new lending rather than write-offs.

“China has long provided various types of assistance, including interest-free loans, to Africa within its capacity and actively supports the economic and social development of African countries,” a spokesman for the Chinese Foreign Ministry said in a written statement to Reuters. He did not answer the question of how much the 23 forgiven loans cost in total.

Interest-free loans account for less than 5% of China’s $843 billion in loan commitments to 165 governments worldwide between 2000 and 2017, tracked by the research lab. Help Data.

TIPS FROM ZAMBIA

Slow progress has begun on the restructuring of Zambia’s $17 billion external debt — the first default of the pandemic era in Africa — as part of the Common Vision created by the Group of 20 Largest Economies in 2020. Sources involved in the process blamed China for the delay. read more

The Chinese Foreign Ministry denied this, saying it was “not true”.

“China has played a positive role in Zambia’s debt restructuring. It was thanks to China’s assistance that the committee of creditors was able to successfully hold two meetings,” Reuters wrote in a response.

The result of the second meeting was the acceptance of obligations on restructuring and the creation of conditions for the IMF to sign a loan program in the amount of $1.3 billion. However, the assistance offered by each lender is still under discussion. read more

China may be pushing to extend the maturities of its $6 billion loans to Zambia instead of agreeing to write them off, a source familiar with the talks said.

“The choice between a haircut and an extension of the repayment period … is a matter of negotiation,” Zambian Finance Minister Situmbeko Musokotwane told a press conference last week, declining to specifically comment on China’s role. read more

Musokotwane added that some creditors “would rather get their money faster,” while others would rather pay off their debt over a longer period rather than a haircut.

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“In dealing with the debt problem, the principle of ‘joint action and a fair burden’ should be adhered to,” China’s foreign ministry said in a statement in response to criticism over the delay in restructuring.

However, there is uncertainty about whether China will take a multilateral approach to other debtor countries, such as crisis-hit Sri Lanka, which defaulted on an external debt that reached $47 billion late last year.

In late August, Tokyo said it would coordinate with other creditor countries, including India and China – Sri Lanka’s biggest bilateral creditor – and called for joint restructuring talks. read more

“We are ready to work with relevant countries and international financial institutions,” Chinese Foreign Ministry spokesman Zhao Lijian said in response last week.

“LASER-FOCUSED”

Between 2000 and 2020, Chinese lenders, mostly state-owned banks, agreed to lend $160 billion to African countries, according to Boston University.

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China canceled at least $3.4 billion of debt between 2000 and 2019, almost all interest-free loans to African countries, while state-owned lenders restructured or refinanced $15 billion on their own, according to John University’s China Africa Research Initiative (CARI) Hopkins.

According to AidData’s Brad Parks, Chinese state-owned banks have been “focused on the laser,” noting that in 2019 the Republic of the Congo renegotiated a $1.3 billion loan from China’s Eximbank, extending repayment terms and raising interest rates. The debt rose to $1.6 billion.

Beijing’s ambassador to Zambia said in an August speech, “We didn’t want to be on the G20 creditor committee, the Common Framework,” adding that friendly bilateral cooperation is “the best way to deal with debt between two friends.”

However, Du added that an “important” May 31 phone call between the presidents of Zambia and China convinced Beijing to join the multilateral talks. read more

“There are real, healthy discussions in China about how to deal with their first giant debt crisis, and they should welcome their discussions,” said Kevin Gallagher, a professor of global development policy at Boston University.

“But if they don’t act quickly, it will only get worse.”

(This story corrected the name of Johns Hopkins in Chart 2, corrected to “billion” (not m) in Charts 1 and 3)

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Reporting by Rachel Savage in London and Martin Quinn Pollard and Yu Long Tian in Beijing; Additional reports by Tetsushi Kajimoto in Tokyo, Georgelina before Rosario and Mark Jones in London and Chris Mfula in Lusaka; Edited by Karin Strohecker and Alexandra Hudson

Our standards: Thomson Reuters Trust Principles.

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