Colonialism ‘made in China’

The recent agreement between the governments of Quito and Beijing to restructure the Ecuadorian debt with the China Development Bank and the Eximbank for loans worth 1.4 billion and 1.8 billion dollars, respectively, lengthening their maturities, has been a political success for the president, William Lasso. But it has also been an encouraging sign for a myriad of countries indebted to China, today the world’s largest financier of public works, far ahead of the World Bank.

In the last decade, the loans agreed by former President Rafael Correa (2007-2017) -which The Wall Street Journal estimated at some 18,000 million dollars, turned China into one of the main creditors of the Andean country. Since the credits were tied to oil supply, Ecuador was severely limited in the amount of crude it could sell on the open market. According to critics, the deals generated damages of $3.6 per barrel and $5 billion in lost revenue.

To offset the construction costs of the Coca Codo Sinclair dam by Sinohydro, some 2,245 million dollars financed by Eximbank, Beijing secured 80% of the country’s oil revenues for years. In February, Lasso traveled to Beijing to renegotiate the agreements with President Xi Jinping after having managed to restructure 6.5 billion dollars in loans with the IMF.

Despite Beijing’s legendary reluctance to acknowledge losses (write-offs) in failed or uncollectible loans (non-performing), Lasso managed to overcome the Chinese wall. After postponing maturities for three years and reducing their rates and oil exports to Petrochina, his government will now have 1,400 million dollars to increase social spending until 2025, a welcome relief when the country risk is at 1,446 points, 600 more than when Lasso took office.

Default risks

Since 2000, China’s domestic savings rate has never fallen below 45% of GDP, compared to 25% for the world’s major economies. The abundance of liquidity allowed state banks to grant 838,000 million dollars in credits to some 160 countries, mostly developing, to finance the projects of the Belt and Road Initiative (BRI), the new Chinese Silk Road.

Several of the countries that received them are experiencing the blows of a perfect storm: the simultaneous impact of the rise in Federal Reserve rates, the strength of the dollar and the consequent increase in fuel and food prices, which has triggered its inflation rates and external debt. Even in low-inflation countries, central banks have raised their rates to prevent depreciation of their currencies.

“Beijing does not demand fiscal discipline or agree to debt restructurings, which will make adjustments more painful when they become unavoidable and leave it to others – the IMF, the World Bank… – to solve the underlying solvency problems”

According to the IMF, 60% of low-income countries and 30% of middle-income countries have difficulty paying their debt. Among the 53 most vulnerable are Tunisia, Argentina, Ghana, Egypt and Sri Lanka due to their scarce liquidity, large trade deficits or because they are already in default.

To avoid balance of payments crises in its debtor countries, Beijing is granting them “emergency loans” that could be a cure worse than the disease. Sebastian Mallaby warns in Washington Post that in exchange for this aid, Beijing does not demand fiscal discipline or agree to debt restructuring, which will make adjustments more painful when they become unavoidable and will leave to others – the IMF, the World Bank… – the resolution of the underlying solvency problems .

chinese opacity

The absence of labor or environmental clauses in Chinese loans is not free. In addition to insuring as collateral (collateral) access to markets, natural resources, ports and maritime routes, the rates are usually similar to commercial ones and with short maturity terms. No operation is authorized without the consent of the Council of State.

AidData, a center of the William & Mary University (Virginia) that tracks credits from more than 3,000 Chinese entities to 165 countries, estimates that in the 50 most indebted to them, their obligations represent an average of 15% of GDP and 40% of its foreign debt. In Laos – where the China Railway Corporation has built a high-speed line between Vientiane and the Chinese border – that figure is 28%.

“Unlike the IMF, which makes public the terms on which it grants its credits, China operates almost in secret”

According to him Financial TimesSince 2017, Pakistan, Sri Lanka, and Argentina have received $32.83 billion in emergency loans, 75% from the China Development Bank and Eximbank. Unlike the IMF, which makes public the terms on which it grants its loans, China operates almost in secret.

The funds often go to state-owned companies whose accounts are nowhere to be found. A study by the Kiel Institute and Harvard University calculates that foreign debt held by China could be up to 50% higher than its official data shows. In Angola, the total figure could be 14,000 million dollars higher than previously thought, and in Venezuela, 33,000 million more.

‘Collateral’

China wants to avoid the conditions that caused the Asian crisis of 1997-98 and the Latin American debt crisis in the 1980s, in which it played no relevant role. In a minefield, fear is free. According to The EconomistZambia, which owes China some 6,000 million dollars, fears that Beijing will take advantage of its difficulties to take over Zesco, its largest electricity company, as it did in Sir Lanka with the port of Hambantota.

Many countries took out variable-rate loans from Chinese banks when rates were low. Loans were typically calculated by adding several percentage points to Libor, the London interbank market rate, which at the beginning of the year stood at 0.3%. In July it had risen to 4.2%. In 2014, Argentina, for example, received $4.2 billion in loans from Chinese state banks to build two hydroelectric dams in Patagonia. According to AidData, the interest payment was $87 million in January and $137 million in July.

On his last trip to Beijing, the South African president, Cyril Ramaphosa, negotiated credits worth 24,000 million euros whose conditions are the subject of all kinds of conjecture, including that the president offered the state-owned electricity company Eskom as a guarantee (collateral).

“Since Chinese officials have few scruples – and legal impediments – to bribe foreigners, suspicions of corruption hang over many of these operations”

The Financial Times He acknowledges, however, that if it weren’t for Chinese loans, financial crises would likely have broken out in several countries by now. Djibouti’s debt to Beijing, where China has a naval base, is equivalent to 70% of GDP. The Democratic Republic of the Congo at 30% and Kenya at 15%. Since Chinese officials have few scruples – and legal impediments – to bribing foreigners, suspicions of corruption hang over many of these operations, as in the case of the train between Nairobi and Mombasa in Kenya.

Public debt

In August 1982, Mexico suspended payment of its foreign debt. Before the year was out, 35 other countries followed suit. In 1990, 6% of world public debt was in default (unpaid). After the Asian crisis of 1997-98 –which fully affected Thailand, Indonesia and South Korea and spread from Southeast Asia to Russia and Brazil–, the Global South learned its lesson.

In 2008 the public debt of emerging countries was 33% of their GDP and in 2019 it was 54%. That last year, 80% of its bonds were denominated in local currencies and 16% of its debt in foreign currencies. Public debt in the hands of local banks is around 17% of GDP, figures that allowed them to weather the pandemic storm. In 2020, only six countries defaulted on their debts. Their economies barely account for 0.5% of world GDP.

the almighty dollar

The pandemic changed everything. Many countries had taken advantage of low rates to borrow as if tomorrow did not exist. In 2020, its average budget deficit ballooned to 9.3% of GDP, not far from the 10.5% of rich countries. To avoid currency risks, Brazil, India, Turkey, among other countries, are increasingly using regional currencies for their foreign trade. Still, 40% of global trade transactions are billed in dollars, whether or not the United States is involved.

But not only Russia and China want to change that order of things. Iran, a member of the Shanghai Cooperation Organization (SCO) since 2021, proposes to create a common currency for the bloc, which has already outlined a roadmap to increase trade in local currencies and design alternative cross-border payment systems.

At the SCO summit in Uzbekistan, Ankara agreed with Moscow to pay 25% of its Russian gas imports in rubles. Since 2011, China has signed currency agreements (currency swaps) with Uzbekistan, Kazakhstan, Russia, Tajikistan, Pakistan, Mongolia, Argentina, Turkey, and Armenia. Between 2014 and 2021, the proportion of Sino-Russian trade deals denominated in yuan increased from 3.1% to 17.9% of the total, up 447%.

«The share of Asian countries in the GDP of the emerging world has doubled, up to 60% of the total»

None of this, however, has undermined the strength of the dollar. Indeed, if India and China are off the hook it is due to their daunting foreign exchange reserves, the yuan’s non-convertibility and India’s minimal reliance on foreign funding. The GDP of the countries in difficulty is, after all, modest: 5% of world GDP and 3% of public debt.

The problem is that 18% of the world’s population lives in them. Since 1998, the weight of emerging markets in global GDP has gone from 21% to 43%. In 2005, the EU represented 20%. In 2030 it may be only 10% if it continues to grow at average annual rates of 0.5% as between 2009 and 2020, while the rest of the world grew at 3%, the US at 1.38% and China at 7.36 %. The share of Asian countries in the GDP of the emerging world has doubled, to 60% of the total. Latin America, on the other hand, only represents 5% of global GDP and 1.4% of the capitalization of world stock markets.

A new Brady plan?

In 1989, then-Treasury Secretary Nicholas Brady’s plan forgave 30% of the debt of poor and middle-income countries. During the pandemic, the G20 allowed 73 countries to defer payment of their debts. But this time Western countries do not want to grant aid that could end up in Chinese bank vaults.

Kristalina Georgieva, managing director of the IMF, wants China to help more with her bailouts, as it has already done in Zambia and Sri Lanka under the G20 programs. Chinese creditors, she says, should allow the terms of their loans to be made public so other creditors know they are taking their fair share of the cuts (haircuts).