ANALYSIS-China casts giant shadow over EM chase for debt relief

Band Jorgelina do Rosario

LONDON, July 4 (Reuters)From a $360 million project to expand Zambia’s international airport in Lusaka to a $1.4 billion urban port in the Sri Lankan capital of Colombo, China is the missing piece of the puzzle of a number of ongoing debt talks in developing markets.

The world’s second largest economy and largest bilateral creditor is a dominant lender to many smaller and riskier developing countries. But Beijing has kept a low profile not only on loan terms but also on how it renegotiates with troubled borrowers.

This became more evident after the COVID-19 pandemic. Many economies under economic pressure are seeking debt relief.

Now, pressure is mounting on China to play a more active role in helping struggling economies restructure their debt burdens. On Tuesday, leaders of wealthy Group of Seven democracies specifically called out China when they urged creditors to help the countries.

The poorest countries will face $35 billion in debt service payments to public and private sector creditors in 2022, with more than 40% of the total owed to China, according to the World Bank.

But analysts say the International Monetary Fund (IMF) and World Bank’s premise of fair burden-sharing in debt relief talks could put them on a collision course with China, challenging question the prospect of comprehensive debt restructurings.

“Chinese ‘Belt and Road’ money is everywhere – so we’ll see it again and again in sovereign debt restructurings,” said Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel.

According to Beijing, the Belt and Road Initiative unveiled in 2013 is a platform for international cooperation in infrastructure, trade, investment and finance linking China with other parts of Asia, from the Middle East, Europe and Africa.

China’s foreign ministry and central bank did not respond to requests for comment.

Zambia and Sri Lanka are test cases for how quickly debt talks are moving. Both must also restructure with foreign bondholders and develop IMF programs.

“China’s engagement on debt negotiations is not in the hands of the IMF or governments,” said Polina Kurdyavko, head of emerging markets at BlueBay Asset Management in London.

“Bringing China to the negotiating table in a timely manner could be the biggest challenge in upcoming debt restructurings.”

OPACITY

Chinese loans are mainly granted by state-controlled agencies and political banks and are often opaque.

A National Bureau of Economic Research working paper in the United States found that half of the 5,000 loans and grants given to 152 countries from 1949 to 2017 were not reported to the IMF or the World Bank, although the China is a member of both multilaterals. .

“The opacity is a recurring problem with some of these Chinese loans,” said Matthew Mingey, senior analyst at Rhodium Group, adding that China has stricter confidentiality clauses on its commercial loans.

Data compiled over three years by AidData, a US research lab from the College of William & Mary, found that the terms of Chinese state-owned bank loans require borrowers to repay them first.

Reviews of 100 Chinese loans with 24 low- and middle-income countries showed – compared to those of other bilateral, multilateral and commercial creditors – requirements for an unusual level of confidentiality, in some cases “even the fact of l existence of the contract,” the study by Georgetown law professor Anna Gelpern found.

Where China has agreed to ease the debt burden, the details are often hazy.

The plethora of Chinese lenders also adds to the complexity, although the Export-Import Bank of China and the China Development Bank feature prominently.

“When it comes time to renegotiate, individual Chinese banks don’t necessarily have a sense of what other Chinese banks are doing,” Mingey said.

GLACIAL

Progress has often been slow.

Zambia is seeking relief from its $17 billion external debt after becoming the first defaulter of the COVID pandemic era more than two years ago. Part of the slow progress is due to China’s lack of experience with delicate debt restructuring, according to people familiar with the matter.

Sri Lanka talks are moving faster, with the IMF confirming it is on track for a new program. China’s approach, however, is still unclear.

Meanwhile, some 60% of low-income countries are in debt distress or at high risk of being so, according to the IMF.

Seventeen smaller emerging economies have seen premium investors demand to keep their debt skyrocketing to levels effectively shutting them out of international markets. This number is higher than during the peak of COVID-19 or the global financial crisis of 2008.

At the end of 2020, the G20 launched a common framework to bring creditors such as China and India to the negotiating table with the IMF, the Paris Club and private creditors. Along with Zambia, Chad and Ethiopia have asked to restructure within the framework of this new mechanism which remains to be tested.

But the framework “also added a bureaucratic layer to the already complex process of debt restructuring” that could discourage other countries from joining, said Patrick Curran, senior economist at Tellimer.

China lends to poorest countrieshttps://tmsnrt.rs/3ujozgl

Chinese loans to African nationshttps://tmsnrt.rs/3OUY9cB

(Reporting by Jorgelina do Rosario; Additional reporting by Ryan Woo in Beijing and Karin Strohecker in London; Editing by Kenneth Maxwell and xxxxxx xxxxxxxx)

((jorgelina.dorosario@thomsonreuters.com;))

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