The risks of China’s loans to Africa

Capital market update

The mystery of why some countries are wealthier than others is a mystery that economists have been trying to solve since the birth of this bleak science. One of the factors is access to capital.

If a country cannot provide funding for infrastructure construction, how can it expect to prosper from trade? For poor areas in Africa and elsewhere, the answer is often to seek support from foreign governments, including China.

This “One Belt One Road” InitiativeCoupled with loans from the Beijing Development Bank, it means that China has replaced Western countries as the largest government creditor on the African continent. Research Stephany Griffith-Jones of Columbia University and Marco Carreras of the University of Sussex stated that since 2015, China has accounted for 13% of all bilateral loans. The United States, the second largest creditor nation, holds only 4%.

Some Western economists expressed concern about the nature of China’s lending behavior. Until recently, these terms—just like the terms of general bilateral government loans—have been shrouded in secret. But a fascinating research collaboration between the Peterson Institute for International Economics, the Keele Institute for World Economics, AidData, and the Center for Global Development reveals a wealth of information about how China provides loans to African countries.

Chinese loans are good. Griffith-Jones said: “This really puts more pressure on the United States and Europe to provide more credit.” “And the loan period it provides is usually not short-term, which eliminates some of the borrower’s risk. ”

Although Beijing did not participate in the Paris Club used by Western governments to negotiate sovereign debt relief, Chinese creditors have restructured loans in the past and appear to be ready to renegotiate arrangements and allow borrowers to postpone repayments. With the retreat of Western governments, for some countries, there are few alternatives other than the Chinese.

The lowest interest rate in ten years has triggered a global search for yield, which makes everything possible from the creation of meme stocks to the cryptocurrency boom. However, it failed to allow private capital to flow into the poorest regions in the world.

The stock of multilateral loans of the World Bank and the African Development Bank has increased, but not at a speed.African countries may be more concerned about Beijing’s desire to control foreign investment Rather than the terms it provides support.

However, there are reasons to worry about how much China will influence its debtors—a situation that is particularly problematic during the pandemic that hit some of the world’s poorest countries the hardest.

A particular threat emphasized in the document is that in order to repay debts, the proceeds from the sale of goods by the debtor country can be deposited in bank accounts controlled by creditors. This may cause African debtors to lose control of their income.

“The fact that the income account pays the money first, coupled with the confidentiality of these contracts, is likely to cause other creditors to suspect the worst case and demand exactly the same thing,” Peterson researcher Anna Guy Said Anna Gelpern. Co-author of the research institute and the paper. “If every creditor wants collateral, then the debtor’s stock of assets may be dismembered long before it gets into trouble.”

Strikingly, when Zambia became the first African country to default on its sovereign debt after failing to repay its Eurobonds in November 2020, the creditors Want more information Regarding the country’s obligations to the Chinese. Zambia is unlikely to be the last African country in trouble.Kristalina Georgieva, President of the International Monetary Fund (IMF), highlights the high risk of default in many poorer countries Appeal to all creditors -Including those from China-work together to reduce or forgive debts.

It takes more than that to solve this mystery and close the gap between rich and poor countries. Collective action and transparency are required not only in the provision of relief, but also in the provision of credit.

“The risk of lending to poor economies is very high, and they may need to mortgage their assets,” said Gelpen, a professor at Georgetown Law School. “But creditors need to figure out how they can do this in a coordinated way, so we won’t take up all resources before the relevant countries have a chance to stand up.”

[email protected]

Source link