An airport in Indonesia. A hydro-electric dam in Pakistan. A gas pipeline in Russia.
The Chinese government is funding these infrastructure projects, and many more. ‘One Belt, One Road,’ a portfolio of infrastructure investment modeled vaguely on the old Silk Road, is the poster-child for this effort, even though observers find it an ambiguous label, not easily distinguished from the rest of China’s lending. In recent years, Beijing has become the single largest lender to poor economies seeking to emulate China’s export-driven path to an explosion of economic growth.
Instead, with the coronavirus pandemic, many of these same countries are facing a recession.
At the Group of 20, the world’s richest nations coordinated a plan to allow the poorest government borrowers to defer payments on loans for six months and perhaps into the future. China reluctantly signed on to that plan, but policymakers in the US and Europe worry it will treat many of its loans, even from state-backed banks, as “commercial” and not “development” finance—and therefore won’t offer as much relief. These fears have been exacerbated by China’s opaque approach to bilateral lending; it does not disclose all of its loans or their terms the way other bilateral lenders do.
That could become a problem for individual borrowers, who may need to make interest payments they cannot afford or surrender collateral. But it also highlights a problem for the entire practice of providing coordinated debt relief to countries in trouble through groups like the Paris Club, which brings together lending nations from around the world. It could mean another multilateral anchor of global prosperity is in danger of pulling free.
Scott Morris, a former US Treasury official who studies development finance at the Center for Global Development, fears that other wealthy countries will look at China and say: “Why should we bear the cost of relieving our debts and allow China to be a free rider?”
Trouble on the horizon
The coronavirus is hardly done attacking global prosperity.
The hardest-hit countries, mostly advanced economies, are now struggling to reopen businesses and public spaces, but health experts are watching poorer nations with bated breath. While testing indicates that many low-income countries have yet to experience the worst, outbreaks in Latin America suggest the hope that climate or demographics will spare them are in vain.
And for poor countries, it’s not simply the cost of fighting the virus. They’ll also fight spillover effects from the impacts of the disease in the US, China, and Europe. Many emerging markets depend on tourism, a sector likely to be in recession for years; commodity and manufacturing exports, which fall as demand slackens in wealthier countries and oil prices sink; and access to remittances and capital from abroad, which have all but dried up.
And all this comes after a period when many low-income countries have borrowed extensively, with an increase in debt equal to 11% of their GDP on average, leaving them more vulnerable to external shocks.
At the outset of the crisis, according to IMF director Kristalina Georgieva, private investors pulled nearly $100 billion from emerging markets, more than three times as much as the reduction after the 2008 financial crisis. David Malpass, the head of the World Bank, said last week that some 60 million people around the world could be pushed into poverty by the crisis.
Methods of relief
Alleviating near-term suffering and mitigating long-term damage will require governments to spend more money on social services while recouping fewer tax revenues than expected—the ugly dilemma that defines a recession. Often dependent on borrowing in foreign currency, emerging markets don’t have the ability of wealthier countries to rely on their own central bank to backstop this spending.
That’s why policymakers like Georgieva and Malpass have been focused on encouraging lenders to give these countries a break, while also providing billions in grants and concessional loans. The group of twenty largest economies (G20) halted debt service payments on government loans May 1.
China, somewhat ironically for the world’s most prominent communist government, says many of its loans were made on commercial terms and should be unaffected by this policy. For example, the government-backed US Export-Import bank provides loans for other countries to buy US goods, and its loans are generally considered to be government-backed. Beijing, on the other hand, says some loans from the government-backed China Export-Import Bank are the same as loans from a private bank. That means relief will come in the form of a negotiated work-out, not an automated moratorium on payments.
“Preferential loans for which the principle was raised by the Export-Import Bank of China through the market and set with lower interest rates … are not applicable for debt relief and are more complex with regards to any difficult debt problems,” Song Wei, an official at the Chinese Ministry of Commerce, wrote in an article published in a state newspaper the day after the G20 agreement.
Instead of deferring obligations automatically, Wei suggests that creditors can negotiate with Chinese lenders to obtain other kinds of relief, “such as China adding grants to help bring projects back to life, conducting debt-to-equity swaps, or hiring Chinese firms to assist operation.”
Former officials at the IMF and World Bank say that these institutions are running into challenges in asking China to deliver meaningful debt relief. “What I’m hearing is that there is disappointment,” Mark Sobel, the US representative at the IMF from 2015 to 2018, and now US chairman of the Official Monetary and Financial Institutions Forum. “When I read the G7 statement, I read it as an encouragement to China to participate in the [debt service suspension initiative].”
Angola, China’s largest borrower, has joined the G20 debt moratorium, but has to negotiate with China over payment of its loans. “As an important strategic partner of Angola, China takes Angola’s needs seriously,” China foreign ministry spokesperson Zhao Lijian said June 3. “Relevant departments and financial institutions are in touch with the Angolan side.”
Still, the general lack of clarity around Chinese lending makes it hard to understand Beijing’s policy. Chinese officials did not respond to Quartz’s request for comment. Deborah Bräutigam, the director of Johns Hopkins University’s China-Africa Research Initiative, is less convinced Wei’s article is an official statement and predicts China will eventually take a pragmatic approach.
“They will take a haircut [in some countries] but it is going to take some time before they come to terms with it,” Bräutigam says, adding that private sector lenders are also only reluctantly considering relief.
Debt diplomacy
One thing is clear: China is the most important lender to the low-income world. A 2019 paper co-authored by Carmen Reinhart, now the chief economist at the World Bank, estimated China’s total outstanding lending at nearly $400 billion in 2017. The same year, the members of the Paris Club reported $313 billion in outstanding loans.
How has China become such a major lender?
One, its economic growth since 2000 gave it the resources to do so. Two, its leaders see this lending plan as a way expand their geopolitical influence and create demand for Chinese products and services. Historically, overseas lending has been tied to global power, and China’s lending is comparable to the loans made by colonial powers in the 19th century, driven by geopolitics, resource concerns, and a subtle note of gunboat diplomacy.
Third, and most importantly, these borrowers need the money and the projects they finance. If you’re the leader of one of the poorest countries in the world and China shows up with a multi-billion-dollar construction project ready to go, saying no is hardly an easy option.
Often, they’ve already borrowed as much as they can from the other public and private lenders when China shows up with a loan offer. The rules on the China’s loans are different, too, in ways that can make them attractive to local governments: Chinese lenders generally don’t require rigorous environmental impact studies or transparent procurement to prevent corruption.
The projects, like many enormous infrastructure construction tasks, have not always panned out the way their organizers hope. Infamously, when the government of Sri Lanka couldn’t make regular payments, China accepted a 99-year lease on a major seaport instead, raising fears about predatory lending. Still, the argument that China is laying traps with the primary purpose of seizing assets—a charge often levied by US Secretary of State Mike Pompeo—fails to capture the ambition of the project, which seeks long-term influence.
Part of the challenge is that the economic gains from infrastructure can be hard to capture by governments seeking to repay lenders, especially with the higher commercial rates often found in Chinese loans. Morris points out a $5 billion railway being built across the country of Laos, a project costing about a third of the country’s annual production.
“There’s just inherent risk in projects of that size when they are situated in countries that are capacity-constrained,” Morris says. “It’s an exaggeration to say that China is out there putting up a lot of bad deals. That’s not to say they always make sense for developing countries.”
Shining a light on hidden debt
The criticisms of China’s lending practices are often made in ideological terms, but the divide between China and the rest of the world on development lending is not between communism and capitalism. It’s an old-fashioned question of power politics, and what kind of rules nations can play by on the international stage.
One challenging reality is that about half of Chinese loans are not publicly disclosed. That’s an issue for other national lenders, because they may not know the real risks faced by their borrowers when underwriting new loans. The Paris Club was formed so that lenders would be willing to give relief to distressed countries with the understanding that the losses were being shared; China has rebuffed invitations to join the Paris club because it doesn’t want to meet those standards.
If confidence in borrowers evaporates with China hiding loans and declining to provide relief, it could become more difficult in the future for emerging markets to win development loans. Already, there are concerns that official debt relief will benefit private sector lenders more than the poor countries it is intended to aid.
At the same time, restoring that confidence will be difficult as the US under president Donald Trump continues its own efforts to undermine governance through global consensus. China has little incentive to adopt others’ rules around foreign lending when it dominates the market. “The Paris Club used to matter because it represented the vast majority of government creditors in the world,” Morris says. “Today, China alone is a bigger creditor than all of those Paris club members combined.”
But there is a potential debt trap for China, too, as it vies to establish itself as the leading economic power. Emerging market leaders have become increasingly skeptical of loans marketed by China, often due to the high costs of the Chinese firms that are typically required to perform the labor. In Africa, China’s paternalistic approach to its borrowers, combined with discriminatory treatment of their citizens during the pandemic, is undermining the gains generated by the economic projects.
That may lead China to be a friendlier lender—unless economic costs of the virus back home constrain its ability to be flexible. It’s difficult to predict how China will proceed as borrowers’ economies deteriorate and as it tries to revive its own—which due to coronavirus lockdowns contracted for the first time since its economic miracle started.
If the pandemic recession forces renegotiations, there may be a public relations incentive not to go around demanding its borrowers give up collateral. And only half of the countries eligible for the payment moratorium promoted by the G20 have taken them up on the offer—perhaps because they don’t want to signal financial weakness to global markets, or perhaps because the impact of the virus has been overestimated.