China’s emergency yuan loans to debt-beset nations mark ‘strategic pivot’ in helping poorer countries pay back Beijing

China is lending less for overseas infrastructure projects but issuing more yuan-denominated emergency loans to ensure that its own banks get at least partly repaid for old projects such as ports and railways, analysts say.

The move illustrates Beijing’s ramped-up efforts to deal with distressed economies, many of which are facing default risks amid a prolonged US rate-hike cycle, and the initiative marks a different approach from Western countries, which continue to pressure the Chinese government to take more responsibility in debt relief.

China remains the world’s biggest source of “international development finance”, and its rescue lending has reached about US$250 billion and 22 countries, according to the AidData research lab at William & Mary University in the US.

The debt-laden projects are often linked to China’s Belt and Road Initiative, a 10-year-old campaign aimed at smoothing foreign trade routes, largely through new infrastructure.

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The lab said 58.4 per cent of China’s official loans in 2021 to low-income and middle-income countries were made for rescue financing, compared with none in 2010.

“Beijing is responding to this repayment challenge with a strategic pivot,” said AidData’s executive director, Bradley Parks. “It’s ramping down infrastructure-project lending, and it’s ramping up emergency-rescue lending. It is bailing out countries with the biggest belt-and-road project debts.”

The world’s second-largest economy, which has refuted allegations of engaging in debt-trap diplomacy, has been pushed by the international community to provide more help to vulnerable countries.

Before her closed-door meeting with Vice-Premier He Lifeng on Friday, US Treasury Secretary Janet Yellen said they “seek to cooperate on global challenges like climate change and debt distress in low- and middle-income countries”.

They’re going to continue to lend emergency loans because the problem isn’t going to get solved any time soon

Alicia Garcia-Herrero, Natixis

Beijing is not a member of the Paris Club and has long argued that the lending done by state-controlled banks does not count as sovereign debt. The Paris Club is an informal group of creditor nations that tries to find solutions to payment problems faced by debtor nations.

Emergency loans date back 10 years, but they are proliferating now to ensure debtor nations pay back at least the interest on old projects, said Alicia Garcia-Herrero, chief Asia-Pacific economist with French investment bank Natixis.

“They’re going to continue to lend emergency loans because the [project-financing] problem isn’t going to get solved any time soon,” she said.

Most emergency loans to developing countries are denominated in yuan, while China has a particular incentive to bail out Argentina, Pakistan, Turkey and Venezuela, according to AidData’s Parks.

The yuan’s proliferation also aligns with Beijing’s vision of promoting its overseas use.

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“It represents that China has assumed the responsibility of providing global public goods,” Wang Fang, associate dean of the Renmin University’s School of Finance, told Financial Street Forum 2023 on Thursday.

Belt-and-road investment has declined since a 2018 peak, according to data gathered by the Green Finance & Development Centre under Fudan University in Shanghai, and finance and investments reached US$67.8 billion last year.

The Belt and Road Forum in mid-October marked a pivot to “ small yet smart” infrastructure projects, and it came as investments and construction contracts have faced difficult hurdles in countries such as Laos, Myanmar, Sri Lanka and some sub-Saharan African countries.

“Developing countries have very few places to turn to get a bailout,” said Barry Sautman, an emeritus professor at the Hong Kong University of Science and Technology.

The International Monetary Fund (IMF) also makes emergency loans, but debtor nations may object to the UN agency’s transparency rules and repayment terms.

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Gita Gopinath, the fund’s first deputy managing director, welcomed China’s efforts in debt relief after the state-controlled Export-Import Bank of China recently agreed to a deal with debt-ridden Sri Lanka.

“If you look at the different country cases, starting from Chad all the way to the more recent cases of Sri Lanka and Ghana, things are getting done faster,” she said at a media briefing in Beijing on Wednesday. “We still have to make a lot more progress. We need to be able to provide even more timely debt relief. And, again, China is a very important player in this space.”

Foreign ministry spokesman Wang Wenbin said on Tuesday that financing “cooperation” abroad still revolves mainly around infrastructure construction and “other” means to help solve “development bottlenecks”, including a lack of funding.

Additional reporting by Ji Siqi and Kinling Lo

South China Morning Post