Last week, the Zambian government announced that its creditors—a coalition of French and Chinese lenders that includes China Exim Bank—would cancel $2 billion of the country’s $17 billion external debt. The landmark debt restructuring agreement sets a new precedent for Chinese state creditors that have typically refused to cancel loans for foreign governments struggling to repay them. With a host of other countries along the Belt and Road Initiative (BRI) in similarly fraught financial situations, China appears to be entering a new chapter in its overseas lending and development finance. 

Jevans Nyabiage from the South China Morning Post reported on the background to Zambia’s debt restructuring:

Zambia said it had notified Chinese lenders and contractors about plans to cancel undisbursed loan balances for 14 projects.

[…] In 2020, Zambia became the first African country to default during the pandemic when it failed to make payments on US$17 billion of external debt, including US$3 billion dollar-denominated bonds. Lusaka owes Chinese lenders about US$6 billion, which went into building mega projects, including airports, highways and power dams.

In addition to cancelling contracts and stopping the disbursement of loans, Lusaka has received a reprieve after official creditors led by China and France agreed to provide debt relief. The decision paves the way for the country to access a US$1.4 billion bailout from the International Monetary Fund. Still, Lusaka has to seek similar relief from private creditors over the US$3 billion it owes Eurobond holders. [Source]

Zambia’s debt distress is part of a much larger problem for Chinese creditors. “This is the worst period of debt pressure since the start of the Belt and Road Initiative,” said Matthew Mingey, senior research analyst at Rhodium Group. “The Covid-19 pandemic took existing problems and supercharged them.” The editorial board at the Financial Times diagnosed these issues as China’s first overseas debt crisis: 

The total value of loans from Chinese financial institutions to projects in BRI countries that had to be renegotiated in 2020 and 2021 hit $52bn, according to data collected by the Rhodium Group, a New York-based research group. This represented more than three times the $16bn of the previous two years.

In this way Xi’s scheme is becoming China’s first overseas debt crisis. The renegotiations — which mostly involved loan write-offs, deferred payment schedules and reductions in interest rates — were necessitated by deteriorating financial conditions in debtor countries plus project-specific problems.

The scale of the BRI makes this an issue of global importance. China ranks as the world’s largest source of development credit to the rest of the world, having eclipsed the World Bank and IMF. It also extends more overseas development loans than the 22 members of the Paris Club put together. [Source]

With a larger population and economy than Zambia, Sri Lanka is another country engulfed in a debt crisis and seeking Chinese support. In May, it defaulted on its foreign debt, leading to a series of cascading events: foreign reserves dwindled, fuel prices soared, protesters stormed the prime minister’s office, and the president fled the country and resigned. Sri Lankan economists have reported that 20 percent of the country’s total public and publicly guaranteed debt is owed to China, surpassing all other foreign sources besides international sovereign bonds. While China has been dragging its feet on plans to restructure Sri Lanka’s debt, officials from both countries are negotiating a potential $4 billion aid package from China for essential goods in order to keep the country afloat. However, many of China’s social media users are not keen on bailing out Sri Lanka. Antara Ghosal Singh at the India-based Observer Research Foundation summarized the discourse regarding Sri Lanka’s debt crisis on Chinese social media:

There has been largescale condemnation on the Chinese internet, of what is being called Sri Lanka’s “victim rhetoric”. There are accusations that the island nation “took advantage” of China, used it as an ATM, and is now “publicly embarrassing China”. The words being used for Sri Lanka and its political class are far from flattering, which include “white-eyed wolf (白眼狼), “backstabber”, “ungrateful”, “capricious”, “completely untrustworthy”, “treacherous”, and so on and so forth, and therefore, “unworthy of China’s pity or assistance”. Instead, they say that it is time for Sri Lanka to be taught a lesson and made to pay a heavy price. [Source]

At the same time, netizens have also derided Xi Jinping for his massive investments in foreign countries while China maintains one of the largest income disparities in the world. One commonly-used nickname to describe the chairman is “big spender” (dà sābì 大撒币), a play on  “throw money” (sābì 撒币) and “stupid cunt” (shǎ bī 傻逼). The term has been banned from Weibo since at least 2016. 

Besides Zambia and Sri Lanka, other countries heavily indebted to China are also nearing the brink. According to World Bank estimates in April, Laos’s external debt was 66 percent of its GDP, half of that was owed to China, and the country has only a few months-worth of foreign reserves left for importing essential goods. Highlighting another example this week in Foreign Affairs, Husain Haqqani and Javid Ahmad commented on Pakistan’s growing debt crisis and unhealthy financial reliance on China: 

Thanks to the country’s size, the stakes are even bigger in Pakistan than they were in Sri Lanka. Pakistan is home to the world’s fifth-largest population and a $340 billion economy. In the last six years, economic productivity has fallen to record lows, domestic revenues and foreign reserves have shrunk, the currency has depreciated, unemployment is soaring, and political corruption has increased. The country’s total foreign debt has nearly doubled since 2016, reaching a monumental $131 billion. Alarm bells are ringing even as Pakistan’s bickering leaders refuse to listen.

[…] Any consideration of Pakistan’s parlous financial situation must involve China; Islamabad owes nearly a quarter of its foreign debt to Beijing. But no Pakistani leader has dared to question the country’s unequal relationship with its neighbor to the north, silencing any criticism of China. Pakistan is quick to upbraid its neighbor India for attacks against and the marginalization of India’s minority Muslim population, but it has refused to condemn China’s gross mistreatment of the Muslim Uyghur population. [Source]

At The Diplomat, Aquilah Latiff and Anushka Wijesinha explained how China might approach debt restructuring negotiations with Sri Lanka and similar countries in distress:

Chinese lenders like China Exim bank and China Development Bank typically treat restructuring or cancellation on a case-by-case basis. Despite being state owned and funded, they are profit-making institutions functioning under a geopolitical strategy of the Chinese government and the aegis of the People’s Bank of China (PBOC), which – as the largest shareholder of these banks – will ultimately face the largest losses from any debt restructuring. This means the resolution process is still subject to the scrutiny and control of PBOC.

[…] Observing how China approaches and deals with other countries in debt distress shows that Beijing prefers to negotiate bilaterally, offer bespoke debt relief terms, and has been ambivalent toward participating in multilateral debt discussions. Their case-by-case approach influenced by geostrategic or resource considerations, coupled with a clear aversion to write off or take haircuts on commercial loans, presents an added challenge. Any attempt by Sri Lanka to offer (or for China to request) highly preferential treatment would not only draw the ire of other bilateral and commercial creditors but entangle and delay the overall debt restructure pathway.

[…] Undoubtedly, the way in which China approaches Sri Lanka’s case will not only set the tone for China-Lanka relations in the decades ahead, but will also have major bearings on China-borrower relations in many other developing countries around the world. [Source]

Part of China’s overseas debt problem arose from its tolerance for investing in riskier projects when other international lenders remained reluctant to write big checks. The tendency for BRI projects to omit or conceal environmental impact assessments has added to the risk, compounded by protests from local environmental and human rights groups that disrupt harmful projects once they have begun. At the heart of these issues is an infamous lack of transparency. Jorgelina Do Rosario from Reuters reported on the opacity of loans extended by Chinese state-controlled agencies and policy banks: 

A working paper of the National Bureau of Economic Research in the United States found half of the 5,000 loans and grants extended to 152 countries from 1949 to 2017 have not been reported to the IMF or the World Bank, despite China being a member of both multilaterals.

“Opacity is a recurrent problem with some of these Chinese loans,” said Matthew Mingey, senior analyst with Rhodium Group, adding China had stricter confidentiality clauses on its commercial loans.

Data compiled over three years by AidData, a U.S. research lab at the College of William & Mary, found terms of Chinese state-owned banks’ loans require borrowers to prioritise them for repayment.

Examinations of 100 Chinese loans with 24 low- and middle-income countries showed – when compared to those of other bilateral, multilateral and commercial creditors – demands for an unusual level of confidentiality, in some cases, “even the fact of the contract’s existence”, the study led by Georgetown Law professor Anna Gelpern found. [Source]

Last week at Radio Free Europe/Radio Liberty, Reid Standish interviewed Christoph Nedopil Wang, the director of the Green Finance and Development Center at Fudan University, who outlined other factors restricting Beijing’s BRI financing:

There’s a clear recognition now of the risks involved and also a reduced appetite for further financial engagement. You also have other impediments right now, such as China having very strict travel controls due to COVID restrictions.

It’s very hard right now for Chinese managers or Chinese developers to travel from China to any of the BRI countries to make deals or to actually do due diligence and plan a large-scale project. That’s a major detriment to making new deals. It doesn’t mean that there aren’t any new deals, because Chinese companies and financial institutions have staff on the ground, but things are just more cumbersome now.

[…] China is also domestically in a different situation than it was in 2015-2017 when a lot of these BRI deals were being signed. Chinese financial institutions are focusing a lot of their effort to support the domestic economy and are potentially less interested in adding on more loans to foreign projects. So, there’s also a reevaluation happening from the financial institutions. [Source]

Now forced to confront this mounting overseas debt crisis, Chinese lenders are shifting their investments from massive infrastructure projects emblematic of the early years of the BRI to smaller, less risky ones. Since Xi Jinping called for “small and beautiful” projects last year, China’s central bank has issued new regulations limiting external lending, and China Exim Bank and China Development Bank have been more cautious in their lending. From 2021 to 2021, the average deal size for Chinese overseas construction projects decreased from $558 million to $325 million, and certain high-risk countries such as Russia, Sri Lanka, and Egypt saw no new Chinese investment. Chinese lenders are modifying not just the size but the structure of financing for overseas projects, moving from a public-debt financing model to public-private partnership model, which allows Chinese private companies to lower the risks of repayment. 

As it waits for this new BRI strategy to yield results, as Tom Hancock reported for Bloomberg, China is dishing out emergency relief loans to boost its debtors’ currency reserves and contain the international debt crisis:

China has “pivoted in a significant way away from project lending and toward balance of payment lending, doing emergency rescue lending,” said Brad Parks, AidData’s executive director.

State-owned Chinese banks have lent $21.9 billion in short-term loans to Pakistan’s central bank since July 2018, while Sri Lanka received $3.8 billion of mostly medium-term lending since October 2018, according to figures compiled by AidData, based on official documents and media reports.

The loans show China is now playing a similar role to the International Monetary Fund, providing financing during balance of payments crises, rather than World Bank-style concessionary project financing to which BRI lending has generally been compared. [Source]