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Chinese credit can be stifling, and it can even end in bankruptcy

Starting with Zambia’s $360 Million Airport Development Plan, Sri Lanka’s Cost is $1.4 Billion port development project Many developing countries suddenly found themselves facing the same problem. Having encountered repayment difficulties, they should agree with their creditors to reschedule their debts, but this is not possible without the Chinese state or state-owned enterprises.

However, the Chinese side does not want to face the public in many places, so repaying bad debts can quickly lead to bankruptcy – writes a summary In its analysis by Reuters.

China, which has the second largest economy in the world, has emerged as one of the largest lenders in the developing world in recent years, in a good part under the so-called “One Road, One Belt” or also known as the “New Silk Road” project. However, Chinese state or state-owned enterprises, which are willing to lend to smaller and weaker emerging countries, are not entirely famous for handling bilateral business affairs in a transparent manner. This applies not only to the granting of loans, but also to negotiations with troubled debtors, which in turn greatly complicates the work of debtors who encounter problems during negotiations with other creditors.

Many borrowers have become indebtedness problem

The shortcomings of the program were evident before, but they became painfully visible with the Covid-19 pandemic and its consequences. As a result, the economic situation in many developing countries has deteriorated significantly and more and more people are looking for a way out of the ever-increasing debt burden. Not surprisingly, the G7 nations specifically made their appeal to China last week when they called on creditors to help troubled countries.

The summary says that the world’s poorest countries should pay about $35 billion in debt or interest payments in 2022, and according to World Bank data, about 40 percent of that amount should go to China. However, according to analysts, the idea of ​​​​the International Monetary Fund and the World Bank, aimed at the equal role of creditors in reducing the debt burden in some countries, can easily be may collide with China, This can pose serious challenges to the entire process.

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The Chinese capital is everywhere

Denis Hranitsky, Head of Public Debt Affairs at Cowen Emmanuel, said funds allocated under the New China Silk Road Project can be found almost everywhere, so when public debt rescheduling is on the agenda, we encounter it regularly. Law firm.

China In 2013, the New Silk Road Project was presented as a platform on which Asian, Middle Eastern, African and European countries could strengthen international cooperation with China in the areas of infrastructure development, trade, investment and finance.

Zambia and Sri Lanka, which previously secured large Chinese loans, is now the veterinary horse of the compatibility of the Chinese program with other elements of the international financial system. Debt restructuring is necessary in both countries, and in both places I would like to use the assistance of the International Monetary Fund in this, as well as to reach an agreement with foreign bondholders.

Polina Kordiavko, Head of Emerging Markets at BlueBay Asset, said that China’s participation in the negotiations does not depend on the IMF, and in both cases the biggest challenge in the negotiations starting now is to bring the Chinese side to the negotiating table. management in London.

There is a lot of secrecy

During the program, China usually provides loans through government agencies and state-owned banks, often on somewhat vague terms. According to the US News Agency, National Bureau of Economic Research A research institute called the World Bank has prepared a study that says half of the nearly 5,000 loans China granted to 152 countries from 1949 to 2017 were not reported to the IMF or the World Bank, even though China is a member of both organizations. .

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Lack of transparency is a recurring problem for these Chinese loans, said Matthew Menge, chief analyst at Rhodium Group, who says China is stricter than usual on crypto regulations for commercial loans. AidData, a research institute at William & Mary College, has collected loans from Chinese state-owned banks over the past three years as part of a condition that borrowers give them priority over other lenders in terms of repayment. According to another group, the confidentiality requirements for loans granted by the Chinese to low- and middle-income countries can be considered unusually stringent. There are places where the existence of a loan is a strict commercial secret.

The situation is further complicated by the fact that although many of these loans are provided by the Export-Import Bank of China and the China Development Bank, a very large number of smaller Chinese banks also participate in these loans. Mingyi added that it is often seen that one Chinese bank has no idea what the other Chinese financial institution wants.

inexperience

At the same time, in most cases, it does not depend on the good or bad intentions of Chinese credit institutions that, if they are involved, the negotiation process between troubled borrowers and lenders stalls and slows down. Chinese banks often have no idea how to proceed in such cases due to lack of experience. In Zambia’s $17 billion state bankruptcy, many people clearly blame the slow negotiations on the pace of Chinese decision-making. Although in the case of Sri Lanka, thanks to the participation of the International Monetary Fund, negotiations are progressing faster, the position of the Chinese side is also unknown here, which also complicates the matter.

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In any case, the problem will only get stronger in the future. About 60 percent of low-income countries are either already in default or are at very high risk, at least according to the International Monetary Fund. In the case of 17 small developing countries, international investors are already demanding such a high return that these countries have practically priced themselves outside the international credit markets. This number is higher than at any time during the Covid-19 pandemic or the 2008 financial crisis.

The G20 countries were launched at the end of 2020 a program In order to bring the largest international creditors to the same negotiating table with the International Monetary Fund, India, China, the Paris Club and major private creditors to restructure and restructure public debt. However, this new mechanism, to which Zambia, Chad and Ethiopia have already signed up, has not yet been tested. The major drawback of the system is that, compared to previous practice, the already high bureaucratic burden of debt restructuring increases, and this may alienate many other countries from it.