China has provided billions in secret ’emergency loans’ to vulnerable countries

In recent years, China has disbursed tens of billions in opaque ’emergency loans’ to at-risk countries, indicating a shift towards providing short-term emergency loans rather than infrastructure loans. longer term.

Since 2017, Beijing has provided $32.8 billion in collective emergency loans to Sri Lanka, Pakistan and Argentina, according to AidData, a research lab at William & Mary University that focuses on China’s global finance activities.

China has also offered emergency loans to Eastern European countries, Ukraine and Belarus; South American countries, Venezuela and Ecuador; the African nations of Kenya and Angola; alongside Laos, Egypt and Mongolia. Overseas Chinese lending and credit relationships remain ‘unusually opaque’, says World Bank researchers. “Chinese lenders demand strict confidentiality from their debtors and do not publish granular breakdowns of their loans,” they wrote.

But researchers have found that the bulk of Chinese lending abroad – around 60% – is now going to low-income countries that are currently mired in over-indebtedness, or high risk. Beijing’s pivot to short-term bailout loans highlights its growing role as an emergency lender of last resort, making it an alternative to the Western-backed International Monetary Fund (IMF).

Experts worry about what’s next, as many countries that have borrowed from China are facing an extraordinary debt crisis in an era of inflation and climate change. For example, a Pakistani official said last week that the epic floods that covered most of the South Asian country will cost more than $10 billion.

Secret loans

Beijing’s emergency loans to at-risk countries were aimed at avoiding defaults on infrastructure loans it made through the BIS, according to a FinancialTimes report.

“Beijing has tried to keep these countries afloat by providing emergency loan after emergency loan without asking its borrowers to restore economic policy discipline or pursue debt relief through a coordinated restructuring process. with all major creditors,” said Bradley Parks, chief executive of AidData. say it FT.

Emerging economies in Asia, Africa and the Middle East are struggling to repay their BRI loans. The COVID-19 pandemic and Russia’s war on Ukraine have exacerbated these countries’ food and fuel shortages and balance-of-payments crises. Nearly 70% of the world’s poorest countries will hand out $52.8 billion this year to pay off their debts, more than a quarter of this amount going to China.

This means that China has become the most important official player in global sovereign debt renegotiations, according to World Bank researchers. But because Chinese lenders demand strict confidentiality from their debtors and do not publish a granular breakdown of their loans, there is a gaping knowledge gap about what happens to Chinese claims in the event of over-indebtedness and default. of payment, they wrote.

IMF Alternative

Gabriel Sterne, former IMF economist and current head of global emerging markets and strategy research at Oxford Economics, say it FT that China’s emergency loans only “delay the day of reckoning” for indebted countries that might seek Chinese loans and avoid the IMF, the latter “demanding painful reform”.

In the past two weeks, China and the IMF have signed or approached bailout deals for Sri Lanka, Pakistan and other countries. Beijing, meanwhile, has promised cancel 23 interest-free loans to 17 African countries and redirect $10 billion of its IMF reserves to the continent.

There are now signs that the IMF is pushing for full transparency from vulnerable nations to receive funding. AidData parks say it South China Morning Post last month that the IMF pressured borrowers to disclose details of their BIS loan contract.

The IMF has “focused on cash collateral clauses in BIS loan contracts that give China a senior claim on foreign currencies in borrowing countries,” Parks said.

Some countries are already complying with the stricter lending conditions. Pakistan, for example, has “shared details with the IMF…in consultation with the Chinese side,” Muhammad Faisal, a researcher at the Institute for Strategic Studies in Islamabad, say it SCMP.

Yet World Bank researchers predict that China’s appetite for overseas financing, lending and debt relief is likely to decline as Chinese lenders come under pressure at home and abroad. ‘foreign. Emerging economies risk a “sudden halt” in Chinese lending, which could have “substantial” ripple effects around the world.

[This report was updated to include a final paragraph on World Bank researchers’ predictions.]

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