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China is ‘the world’s biggest debt collector’ as poorer countries struggle to repay loans | China


The country, whose debt is estimated at $1.5 trillion, increases penalties for late payments and cuts infrastructure projects

China has become the world’s biggest debt collector, as the sums owed to it from developing countries soared to between $1.1bn (£889bn) and $1.5bn, according to a new report. An estimated 80% of China’s overseas loan portfolio in the Global South is now earmarked to support countries in financial difficulty.

As of 2017, China is the world’s largest bilateral lender; its major development banks issued nearly $500 billion between 2008 and 2021. Although some of this issuance predates the Belt and Road Initiative (BRI), Beijing’s flagship development program mobilized a large part of the investments in developing countries.

But a new report by researchers at the AidData research lab at William & Mary, a public university in Virginia, finds that China, the world’s second-largest economy, is now playing the role of an international debt collector as well as a lender. bilateral agreement with large companies. infrastructure projects.

Loans from Chinese state-backed banks helped build railways in Kenya and power plants in Cambodia, as well as thousands of other projects. AidData researchers analyzed 20,985 projects in 165 low- and middle-income countries, which were financed with grants and loans worth $1.34 trillion between 2000 and 2021.

The researchers found that as debts to Chinese lenders increased, so did the number of suspended or canceled projects. With a high share of loans going to countries in or at risk of financial difficulty, Beijing is now increasingly concerned about the risk of default.

In June, Zambia reached a historic deal to restructure $6.3 billion in debt, two-thirds of which is owed to the Export-Import Bank of China, one of the country’s two main policy banks.

To mitigate the risk of future defaults, Chinese policymakers have introduced a number of measures, including reducing loans for infrastructure projects while increasing emergency loans. In 2015, loans for infrastructure projects accounted for more than 60% of China’s loan portfolio. In 2021, this share was just over 30%, with emergency loans accounting for almost 60%.

“China is increasingly behaving like an international crisis manager,” the researchers conclude. China has created “a safety net” for countries in financial difficulty – “and, by extension, for their highly exposed Chinese creditors”.

Chinese lenders are also trying to reduce their risk exposure by increasing penalties for late repayments, a move that could alienate borrowers. The AidData report cites Gallup World Poll figures that show public approval ratings for China in low- and middle-income countries fell from 56% in 2019 to 40% in 2021.

The terms and conditions of some Chinese loans are often not transparent, but economists estimate that Chinese government loans to low-income countries typically have an interest rate of 2%, compared to the standard 1.54% for concessional loans from the World Bank. But AidData researchers found that between the early years of the BRI (2014-2017) and the latest period (2018-2021), Chinese lenders increased the maximum interest rate for late repayments by 3%. at 8.7%.

Bradley Parks, one of the report’s authors and executive director of AidData, said: “Beijing is trying to find its place as the world’s largest official debt collector at a time when many of its biggest borrowers are illiquid or insolvent. And debt collectors don’t win many popularity contests.”

Still, Parks noted that “China is not going to stand idly by and watch its flagship global infrastructure initiative crash and burn.” Beijing is currently on a “rescue mission” to minimize the debt overhang, but the government is also “playing the long game,” Parks said. “It puts in place a set of loan repayment guarantees…designed to sustain the Belt and Road Initiative.” »

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