China’s Debt Diplomacy Dilemma Will Extend Beyond Africa

CHINA’S DRIVE TO secure from Africa commodities, farmland and infrastructure construction contracts has made it the largest bilateral lender to the continent over the past two decades, racking up a tab of some $150 billion to governments and state-owned companies. One of every five dollars borrowed by African governments is owed to a Chinese lender.

The Covid-19 pandemic is raising questions about African capacity to repay, or even to keep current on the interest payments on that debt.

The continent is facing its greatest contraction in GDP in the post-colonial era. That will increase debt service as a percentage of government spending when countries will need funds to stabilise their economies.

On November 13, Zambia, where Chinese firms have copper mining interests and some previous, is likely to become Africa’s first sovereign default in a decade. China has at least as much debt there as the $3 billion owed to the eurobond holders who saw a coupon repayment skipped earlier this month.

There are eight African countries that each owe Chinese lenders at least $5 billion, and barely one that does not owe something. Beijing’s deep pockets and willingness in contrast to multilateral lenders not to become involved in domestic politics, have won it ready borrowers across the continent. However, the price of non-conditionality has tended to be high interest rates and low transparency.

Debt-service relief and fiscal support from multilateral organisations and G20 donors will offer some limited breathing room to African debtors. It may not be sufficient to prevent a liquidity crisis from developing into a debt crisis. However, Beijing has proved reluctant to go along wholeheartedly with the debt relief plans of other international lenders.

The G20 has extended its debt service suspension initiative for loans by its members to the world’s 73 poorest countries to June 2021 with the repayments spread over six years. China is the biggest contributor to the initiative, suspending $1.9 billion in repayments due this year, according to an internal G20 document seen by the Financial Times. That accounts for more than one-third of the total suspended debt service.

However, China is due to receive a further $11.5 billion this year from loans to countries covered by the initiative, with more than $3 billion due from Angola and nearly $1 billion from each of Ghana and Kenya. It is unclear how Beijing will handle that.

The Angola number does not include a further $6.7 billion of debt service payments due this year to China Development Bank, China Export-Import Bank and ICBC that are reportedly being renegotiated directly with the lenders.

This points to a separate track that Beijing is pursing — a debt relief plan of its own. One aspect of that emerged in June when President Xi Jinping announced the cancellation of interest-free debt due to mature by the end of this year for some of the countries that participate in the Forum on China-Africa Co-operation.

A further risk for Beijing is that rising interest rates could make dollar- and euro-denominated debt prohibitively expensive for African countries, pushing them to turn even more to Beijing for help in refinancing their maturing debt. That could test both China’s capacity and, more so, willingness to lend when the quality of Chinese banks’ loan books is of growing concern to authorities at home.

This debt dilemma is the flip side of the commercial diplomacy that has advanced China’s national interests in Africa. However, for Beijing, the predicament is not limited to Africa, which contains only half of the world’s poorest countries. World Bank figures show China’s share of bilateral debt owed by the world’s poorest countries to G20 members rose to 63% last year, up from 45% in 2015.

1 Comment

Filed under Banking, China-Africa

One response to “China’s Debt Diplomacy Dilemma Will Extend Beyond Africa

  1. Pingback: Beijing Remains Cautious Over Debt Relief For Africa | China Bystander

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