China Provides Over 312 Trillion Won in Support Over 20 Years
Additional Loans to Developing Countries Facing Default Crisis
International Community Criticizes Debt Diplomacy
Swap Lines Reduced as Lending Institutions Face Difficulties
It has been revealed that the scale of China money distributed to developing countries since 2000 amounts to $240 billion (312.48 trillion KRW). Although this was a decision made to increase diplomatic influence over developing countries, as these countries face default (debt default) crises, there are concerns that China has fallen into a trap where it is increasingly unlikely to receive debt repayments.
On the 27th (local time), Bloomberg reported that the People's Bank of China (PBOC) has provided at least $240 billion in funds to 22 developing countries, including Pakistan, Argentina, and Nigeria, since 2000.
Supporting Developing Countries Without Repayment Ability Using Currency Swaps
Shehbaz Sharif, Prime Minister of Pakistan (left), and Xi Jinping, President of China (right) [Image source=Yonhap News]
Among these, $185 billion, accounting for 75% of the total funds, was concentratedly distributed between 2016 and 2021. This amount exceeds the $144 billion spent by the International Monetary Fund (IMF) during the same period. The surge in support over the past five years is analyzed as a result of the active promotion of the 'Belt and Road Initiative (land and maritime Silk Road),' an overseas infrastructure development project led by President Xi Jinping.
Most of the aid was provided through currency swaps. A currency swap is an intergovernmental agreement that allows a country to deposit its own currency with another country and borrow that country's currency or dollars in emergencies. Although it is usually an agreement made to secure liquidity between countries, China used it to support infrastructure construction projects in developing countries. Over the past 20 years, China has signed trade and currency swap agreements worth $580 billion with 40 countries, and the 22 developing countries withdrew $170 billion during this period. The remaining $70 billion was procured through loans from the Chinese government.
Did China Burden Developing Countries with Debt?
Regarding China's financial support, Bloomberg pointed out, "Most countries enter into agreements to increase liquidity, but developing countries use currency swaps to cope with credit rating downgrades and insufficient government budgets." In effect, China's central bank is acting as an emergency funding channel similar to the IMF.
Internationally, criticism has been raised that China has burdened developing countries without repayment ability with heavy debt. The massive financial support to developing countries is believed to have the hidden intention of keeping them indebted so that they cannot escape China's influence. According to the World Bank, China provided loans at an annual interest rate of around 5% as of 2021. During the same period, the Federal Reserve's (Fed) currency swap rates averaged only in the 0% range, and IMF bailout loans were available at interest rates in the 2% range annually.
Developing Countries' Default Crisis: Can They Repay?
In Colombo, the capital of Sri Lanka, Mahinda Rajapaksa (right), Prime Minister of Sri Lanka, is presenting a souvenir to Wang Yi (left), Chinese Foreign Minister. [Image source=AP Yonhap News]
However, as developing countries have consecutively faced default crises due to COVID-19, it is analyzed that the debt diplomacy approach has backfired on China. China has fallen into a vicious cycle of reluctantly providing new loans to prevent the countries it lent money to from going bankrupt.
In the case of Pakistan, China's largest debtor, the country faced a sovereign default crisis due to massive external debt compounded by adverse events such as COVID-19 and major floods. In response, China extinguished the urgent fire by providing $4 billion in loans through the Chinese government and $3.3 billion in refinancing through Chinese commercial banks in November last year. Pakistan narrowly escaped bankruptcy by agreeing with China to extend the repayment of $1.3 billion in debt.
Moreover, China's central bank is reportedly reducing currency swap lines by country recently. Carmen Reinhart, former chief economist of the World Bank, argued that the PBOC's move is closely related to the debt problems of developing countries with China. She stated that China took measures to reduce currency swap lines to indirectly rescue Chinese lending institutions that faced difficulties after issuing massive loans for the Belt and Road Initiative.
The New York Times (NYT) explained, "In September last year, China waived about 0.3% of loans that African countries had not repaid for 20 years. This suggests that China judged the likelihood of repayment to be low." It added, "Demanding repayment causes much greater repercussions than issuing loans, so Chinese officials currently managing developing countries face the uncomfortable situation of having to press for debt repayment."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
