Posted by: Bixmoor

Chinese Overseas Aid – Forgiving debt comes at a cost

There has been much discussion about China’s foreign investment and development finance, but less attention on Beijing’s use of debt forgiveness, which is used as a very powerful tool in foreign policy.

This is particularly true when we consider how much money China lends overseas and the heated debate we are seeing on the “sustainability” of the ensuing debt. Beijing refers to the overseas lending of its two policy banks – China Development Bank and China Export-Import Bank – as “development finance”. It does not give much information about it, but central government did announce that their “overall portfolio of overseas lending” was $675 billion at end-2016, more than twice the size of the World Bank.

China’s aid grants and development lending can range from interest-free to normal commercial rates. Recent research from Heidelberg and Harvard concluded that, “only about 21% of China’s overseas development program is financed with aid in the strictest sense of the term”.

Thus, 80 per cent of ‘development finance’ resembles normal commercial lending. The research also stated that such commercial-style development funds “do not boost economic growth” in the recipient countries. It concludes that aid from the US and other countries or – strictly-defined – aid from China are all likely to generate economic growth. However, they could “find no robust evidence that World Bank aid promotes growth”.

Governments, multilateral institutions and commercial creditors have cooperated in recent years on $120 billion of debt relief for 39 highly indebted countries, of which the World Bank provided at least $44bn. To qualify for debt relief under these programs , so-called Highly Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI) countries “must pursue macroeconomic and structural reform programs and have implemented a poverty reduction strategy”.

While traditional debt relief processes retired $34bn, two multilateral agency programs eliminated $102bn at present value. For countries accepted into these programs, the relief reduced their qualifying debt by 97 per cent, or $136bn. However, it should be said that it was the countries which own the World Bank and the IMF who provided the money for the initiatives. Little, if any, came from the funds of the institutions themselves.

The purpose of these programs was to eliminate qualified public or publicly-guaranteed debt to allow highly indebted countries to re-enter international debt markets to seek capital to develop their economies. Unfortunately, many of them have done just this and are now highly indebted all over again. As a result, we may judge the programs to have failed rather than succeeded.

China has also been very active in debt relief, albeit not on the scale of the World Bank or the IMF. The total of debt relief by China between 2000 and 2017 which can be quantified is $3bn. Interestingly, almost 90 per cent took place in the decade between 2000 and 2009. Only 14 per cent was executed between 2009 and 2017, suggesting that Beijing’s interest in debt relief is waning.

While multilateral debt relief came with strict conditionality, China would say that its debt relief, like its development finance, is without intrusive conditions. Of course, this is not strictly correct. There is an understanding that countries should behave in a certain way towards China –  in voting at the UN, in compulsorily extraditing Chinese – or even Taiwanese – citizens requested by Beijing or in publicly avowing core Communist Party assertions such as the “One China policy” or on Tibet or Xinjiang or accepting China’s creeping colonization of the South China Sea. The compliance requirements differ depending on the situation of a country.

The countries concerned have a variety of different political systems but their governments are willing to trade values on faraway issues for funding at home. The largest example is Cuba where $6bn has been either forgiven or rescheduled. As we don’t know which, it is left off the list. The largest recipients of debt forgiveness are shown below with the estimated amounts:

Top Chinese Aid Recipients in Order

(US$m)                  Country

400                             Cambodia

288                              Zambia

246                              Ghana

174                               Rwanda

142                               Ethiopia

115                                Zimbabwe

108                               Tanzania

102                                Burma

75+                               Equatorial Guinea

76+                               Sudan

Sudan has had a known $76m of debt forgiven and a further unquantified sum in addition. Equatorial Guinea has had $75m plus at least two other sums in debt relief.

The clear winner is Cambodia. In 2002 and again in 2010, Beijing cancelled all its government debt to China which on both occasions totaled $200m. It is perhaps no surprise that the country has waged a very successful campaign to impede the ASEAN bloc from expressing its unhappiness at China’s gradual occupation of the South China Sea. Cambodia, Zimbabwe, Equatorial Guinea and Burma, under any name, are not even on the list of qualified ‘Highly Indebted Poor Countries’. Sudan is on the list but embargoed for deficient compliance. Given the size of exposure and the economic prospects, Venezuela is likely to feature on this list quite soon.

So China’s choice of favored countries is remarkably different from those anointed by the multilateral institutions. The list is brimming with countries which can offer political support, strategic advantage or natural resources opportunities to China. While the World Bank and the IMF impose requirements such as good governance, economic reform or poverty alleviation, China’s conditions tend to be expressed in private and often obliquely. The difference is that the world institutions insist on conditions they think are beneficial to the countries concerned; China insists on conditions which are beneficial to China.

While at some risk of comparing apples with oranges, we might say that if China has forgiven $3bn of public debt on a diverse overseas lending book of $675bn, then it appears something of a laggard compared with the World Bank’s $44bn of debt relief on a book of under $330bn. However, as China’s ‘conditions’ – or expectations – are much more policy-focused than the institutions, it appears to be getting better results for its money.

Bixmoor
Bixmoor is a primary bespoke research provider to business, governments and the financial community.