Seeking Relief: China’s Overseas Debt After COVID-19

In April 2019, Rhodium Group published a piece examining 40 cases in which China had renegotiated bilateral debts. Since then, the COVID-19 pandemic has plunged the global economy into recession. The downturn has reignited questions about the sustainability of China’s overseas lending and how Beijing will respond to the many countries now struggling to manage their external debt obligations.

To better understand the outlook for renegotiations involving China, we have expanded our database to include over 130 cases from 2000 through September 2020. The updated dataset broadens our knowledge of past restructurings and offers insights into Beijing’s current negotiating position and preferred outcomes. We find that:

Renegotiation requests are increasing: Even before the COVID-19 shock, China’s borrowers were seeking restructurings as major repayment deadlines loomed in 2019-2020. COVID-19 has accelerated the trend. We find that at least 18 processes of debt renegotiation with China took place in 2020, and 12 countries are still in talks with Beijing as of end-September, covering USD 28 billion in Chinese loans.

For large loans, debt cancellation (write-offs) and asset seizures are unlikely: Our research shows that debt write-offs are almost always limited to small zero-interest loans, and we continue to find very limited evidence that China’s policy banks have wiped away bilateral debt in exchange for control of strategic assets.

Instead, deferrals are most likely: Past and current cases suggest that deferrals remain Beijing’s preferred solutions. Deferrals are aligned with the Debt Service Suspension Initiative (DSSI) framework, and will provide some breathing room for recipients. However, China’s approach so far has been partial (focusing on principal repayment rescheduling, sometimes to the exclusion of interest payments), and talks are not standardized, open, or coordinated directly with other bilateral lenders.

As many as 1 in 4 dollars extended by China through overseas lending to date has come under renegotiation, amounting to USD 94 billion: Faced with the reality of unsustainable past lending, Beijing is recalibrating to limit and rationalize future flows, at least in the medium term. This will only be amplified by COVID-19.

Posted October 2, 2020
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China’s Overseas Lending: A Primer

China today is a key provider of financing to developing and emerging countries through a variety of channels, from lending for development and infrastructure projects to foreign direct investment and currency swaps. These channels are widely used by other countries, but China extends financing opaquely, providing extremely limited information on financing volumes, destinations, terms, and (re)negotiation processes. As a result, it is extremely difficult to accurately gauge how China’s lending affects recipient countries. Risks include pressure on their macroeconomic and fiscal health, negative consequences for other creditors and for Chinese banks engaged in overseas lending. The lack of transparency around Chinese financing practices makes it difficult to objectively assess their impact. This has led to wildly differing characterizations of these practices. China is described both as a vital “development alternative” and as a “debt trap” facilitator.

With a focus on lending (China’s primary type of overseas financing) and on emerging and developing countries, the objective of this primer is to provide an overview of major Chinese loan types, volumes, and associated terms and conditions, and explain how China handles debt renegotiations.

Posted October 2, 2020
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Booster or Brake? COVID and the Belt and Road Initiative

As the COVID-19 pandemic thrashes the global economy, a key question is how outbound financing for China’s Belt and Road Initiative (BRI) will be affected. Before the crisis China’s policy banks were already reducing new BRI loans. Now there is much speculation about Beijing opening the door for its institutions and firms to go on a buying and lending spree, given global needs and lower prices for assets. The question is whether China’s financial system permits that, given China’s ongoing domestic challenges and the need to prioritize investment at home. China’s long-term strategic answer to that is uncertain, but three short-term dynamics are clear:

  • If Beijing wants to keep BRI lending in high gear, it can. Policy banks are in a position to sustain the 2015-2019 pace. BRI loans are just a small part of China’s overall lending portfolio, and China Development Bank (CDB) and China Export-Import Bank (EXIM) have enough political backing to bear the cost.
  • Playing savior is cheap. Given the COVID-19 impact, China could achieve the same proportional impact on emerging and frontier markets, and the same or greater political goodwill, even with diminished financing.
  • Forbearance is not just for home team debtors. Regardless of new lending, Beijing will have no choice but to defer and renegotiate past loans across the world this year as macro conditions deteriorate.
Posted May 4, 2020
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