07/04/2022, 13.18
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Economic crisis: Beijing risks losing billions of dollars lent to poor countries

By the end of the year, developing nations must repay foreign debts amounting to billion: 40% is owed to China. Dialogue between the Chinese, the World Bank and the International Monetary Fund on debt cancellation or restructuring is difficult. Beijing risks losing face (or a crisis of its state-owned banks).


Beijing (AsiaNews) - With the economic crisis looming worldwide, China risks losing billions of dollars lent to poor countries, struggling with the effects of the Covid-19 pandemic and the Russian war on Ukraine. World Bank estimates that China is owed 40% of the  billion in debt that developing nations must repay by the end of the year.

Beijing is the world's largest lender. The US and its allies claim that Chinese loans are actually 'debt traps' for the most vulnerable states. It is a fact that many loans allocated by Chinese state lenders have received 'collateral' from client governments.

Several studies have shown the opacity of Chinese financial schemes: almost nothing is known about the real conditions for granting loans and the ways in which repayment problems are dealt with. Researchers have found that in order to grant loans, Chinese state banks require their client countries prioritise the payment of their debts to them.

Furthermore, the actual amount of the sums lent is unknown. Last September, AidData revealed that to the 'official' debt of poor countries to China must be added a 'hidden' quota, not declared by the governments concerned - and by Beijing - to the World Bank's debt control system: in total it is around 350 billion dollars. 

Like other major world economies, Beijing is under pressure to write off or restructure the debt of poor countries, 60% of which have debt problems, according to International Monetary Fund estimates. Analysts note, however, that there are problems in the dialogue between the Chinese government, the World Bank and the Monetary Fund on this issue.

The most striking case of default on its foreign debt at the moment is that of Sri Lanka. Colombo has amassed debts to foreign institutions amounting to 38.6 billion dollars, 47% of the national GDP; about 10% is in the Chinese share. At the beginning of the year, the Sri Lankans had not repaid an outstanding debt of USD 7 billion. After the Gotabaya Rajapaksa government failed to reach an agreement with China on debt cancellation or restructuring in April, Colombo suspended payments to some of its foreign creditors pending a review of the terms.

Minxin Pei, an expert on Chinese affairs at Claremont McKenna College in the US, points out that China now faces a dilemma: if it presses struggling debtors like Sri Lanka, it will not get back what it lent and at the same time destroy its international reputation; if it writes off the debt, on the other hand, it will put its state-owned banks in crisis, forcing the government to cover the losses.

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See also
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