During the last Belt and Road Forum, President Xi Jinping revealed China is going to commit to more favourable lending standards. The announcement came after the recent critics that several Belt & Road projects may leave Chinese partners with a considerable debt burden, as China is offering them terms in its debt contracts that some host countries are struggling to comply with.
During the past decade, emerging countries renegotiated $50 billions of loans: the most frequent options were debt forgiveness, term extension or refinancing. A recent study conducted by the researcher provider Rhodium Group analysed 38 B&R renegotiations between China and 24 counterparts: according to the results, the latter have more contractual power and the majority of deals is, indeed, concluded in favour of the host country. To dive a little deeper, debt write-offs made up 37% of the cases, deferments the 29%, whilst the remaining 34% was represented by new agreements on the loan’s term.
The US were the first to suggest the risk of a “debt–trap” or, in other words, that China is aiming to leverage on loans in order to gain the property on the developing countries’ assets. How likely is this to happen? Given the past decade of Chinese lending, only one case has seen an actual asset seizure occur, and it was the case of Sri Lanka’s Hambantota Port in 2017. In addition, given that this case has been so controversial, Chinese officials have become even more careful and selective in their financing decisions.
It must be pointed out that such compliant agreements tend to be motivated by a willingness to improve the relations among different States: it is, for example, the case of the write-off of $386 million on the loan with Cuba in 2010 and of the more recent $40 million of debt in Zimbabwean. Currently, the Maldives, where the recent elections have considerably impacted the political landscape, announced to be under negotiation for a reduction of the sum owed, while the Ethiopian government declared last week that “China has cancelled interest-free loans owed by Ethiopia that matured at the end of 2018”, without disclosing any amount.
In addition, the Rhodium report found out that, when the host state had access to other financing sources (e.g. the IMF or global capital market), they had an even higher contractual power over China.
On the other side, there are still concerns related to the fact that this large number of renegotiations could put at risk the sustainability of China’s Road & Belt Initiative. The Chinese lending institution lacks the competences to deal with these cases: this, combined with the keenness to support broader political targets, could lead to low potential returns and possible huge losses.
To sum up, what we should be truly worry about is not the risk of a “Debt Trap” for host Countries, as warned by most of western developed countries, but the downsides of a “spiral of unprofitable investment” for China.
Simone Farina
During the past decade, emerging countries renegotiated $50 billions of loans: the most frequent options were debt forgiveness, term extension or refinancing. A recent study conducted by the researcher provider Rhodium Group analysed 38 B&R renegotiations between China and 24 counterparts: according to the results, the latter have more contractual power and the majority of deals is, indeed, concluded in favour of the host country. To dive a little deeper, debt write-offs made up 37% of the cases, deferments the 29%, whilst the remaining 34% was represented by new agreements on the loan’s term.
The US were the first to suggest the risk of a “debt–trap” or, in other words, that China is aiming to leverage on loans in order to gain the property on the developing countries’ assets. How likely is this to happen? Given the past decade of Chinese lending, only one case has seen an actual asset seizure occur, and it was the case of Sri Lanka’s Hambantota Port in 2017. In addition, given that this case has been so controversial, Chinese officials have become even more careful and selective in their financing decisions.
It must be pointed out that such compliant agreements tend to be motivated by a willingness to improve the relations among different States: it is, for example, the case of the write-off of $386 million on the loan with Cuba in 2010 and of the more recent $40 million of debt in Zimbabwean. Currently, the Maldives, where the recent elections have considerably impacted the political landscape, announced to be under negotiation for a reduction of the sum owed, while the Ethiopian government declared last week that “China has cancelled interest-free loans owed by Ethiopia that matured at the end of 2018”, without disclosing any amount.
In addition, the Rhodium report found out that, when the host state had access to other financing sources (e.g. the IMF or global capital market), they had an even higher contractual power over China.
On the other side, there are still concerns related to the fact that this large number of renegotiations could put at risk the sustainability of China’s Road & Belt Initiative. The Chinese lending institution lacks the competences to deal with these cases: this, combined with the keenness to support broader political targets, could lead to low potential returns and possible huge losses.
To sum up, what we should be truly worry about is not the risk of a “Debt Trap” for host Countries, as warned by most of western developed countries, but the downsides of a “spiral of unprofitable investment” for China.
Simone Farina