“Trapping” or “incompetence”? Sri Lanka’s debt crisis revives debate over Chinese loans

While Chinese lending may have added to debt problems in some countries, the debt owed to China was in most cases dwarfed by what was owed to other lenders.

While Chinese lending may have added to debt problems in some countries, the debt owed to China was in most cases dwarfed by what was owed to other lenders.

As Sri Lanka’s ongoing debt crisis shines a spotlight on China’s lending practices, Beijing has pushed back against allegations of what has been called “debt trap diplomacy”.

Many economies are reeling from the impact of the COVID-19 pandemic, which has heightened financial stress. Some of these countries, such as Sri Lanka and Zambia, have also benefited from large Chinese loans.

Former Chinese central bank governor Zhou Xiaochuan acknowledged at a conference last month that there were debt problems in partner countries, but refuted suggestions that China had a motive to foment such crises.

“The most of [the lending] is for projects that companies from debtor countries have demanded, and at the same time they have economic benefits and are beneficial to the country in the long run,” he said, as quoted by the Hong Kong-based agency. . South China Morning Post. “There is a degree of difficulty in this process and it needs to be carefully considered and designed to find a way to alleviate the debt problems of countries along the Belt and Road, while avoiding suggestions according to which there are bad motives,” he said.

Experts noted that while Chinese lending may have added to debt problems in some countries, debt owed to China was in most cases dwarfed by what was owed to other lenders, including the Bank. world and the International Monetary Fund.

In 2020, Zambia became the first significant default during the pandemic. Since the end of last year, the To post reported, its debt had reached $32 billion, or 120% of GDP. Chinese loans, however, accounted for 18% of this figure.

For Sri Lanka, this figure is even lower. According to the Sri Lankan government, China accounted for 10% of outstanding external debt of $35 billion in April 2021.

Either way, China’s debt appeared to be more a symptom than a cause of the crisis, due to economic policies that led governments to seek short-term solutions or pursue projects they could not afford. . Some governments have turned to China because they could not find loans on similar terms elsewhere. In these cases, Chinese lending worsened rather than caused, which was already about exposure. And the countries themselves have sought Chinese funding.

With the increase in Chinese lending, especially since the launch of the Belt and Road Initiative in 2013, an increasing number of countries are exposed to Chinese debt. A 2021 study by AidData, a development research lab at the College of William & Mary in the United States, found $385 billion in underreported debt in projects in dozens of countries around the world. BIS framework, and 42 countries now have levels of public debt exposure to China above 10% of GDP.

From 2000 to 2017, Iraq ($8.5 billion), North Korea ($7.17 billion) and Ethiopia ($6.57) were the top recipients of Chinese aid, while Russia ($151.8 billion), Venezuela ($81.96 billion) and Angola ($50.47 billion) were the largest recipients of Chinese loans. India ranked 23rd in the list of top Chinese loan recipients from 2000 to 2017, receiving $8.86 billion, according to the study.

While debt is rising and fueling problems for partner countries, however, the gains for China are not clearly apparent, as the “debt trap” theory suggests. In most of these cases, Chinese companies had little to gain from defaulted loans and ended up restructuring the loans rather than repossessing the assets.

Research by Chinese scholars Deborah Brautigam and Meg Rithmire showed that “Chinese banks are willing to restructure the terms of existing loans and have never seized an asset from any country, let alone Hambantota Port” in Sri Lanka, which is the most widely cited. example of the “debt trap” theory.

However, this does not mean that Chinese loans are without problems. A study that analyzed 100 contracts between Chinese public entities and government borrowers in 24 developing countries in Africa, Asia, Eastern Europe, Latin America and Oceania, led by Anna Gelpern at the Peterson Institute for International Economics, Sebastian Horn at the Kiel Institute for the World Economy, and others have found that one of the problems with Chinese contracts is “unusual confidentiality clauses that prevent borrowers from disclosing the terms or even the existence of the debt”.

Other research on Chinese loans suggests that the funding from China, rather than a plan coordinated by Beijing, has been haphazard and very poorly thought out, resulting in losses for Chinese companies. As noted in a study by Lee Jones of Queen Mary University of London and Shahar Hameiri of the University of Queensland for Chatham House, China’s overseas loans were “a system of international development finance fragmented and uncoordinated”.

It’s not unlike lending in China itself, where domestic debt has reached alarming levels and regulators have sought to tighten debt-fueled growth and cut wasteful spending on unnecessary projects. .

As noted Beijing-based economist Michael Pettis recently observed, the debt problems facing countries that received Chinese loans were more likely the result of “incompetence,” rather than a consequence of ” nefarious conspiracies”.

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