China, Sri Lanka and a developing debt crisis

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But, instead, he went to Beijing, the so-called ATM of the developing world. China has more money lent to poor countries around the world than the combined loans of the 22 rich countries that make up the Paris Club of creditor countries, according to the World Bank.

Beijing lent Sri Lanka an additional $3 billion. But without a debt restructuring on its existing $35 billion or a policy correction, that money, too, quickly disappeared.

Alan Keenan of the International Crisis Group criticizes Beijing for two reasons. First, it encouraged expensive infrastructure projects that did not produce significant economic returns.

The Rajapaska brothers: Mahinda Rajapaksa, Gotabaya and Basil, pictured in April, have dominated Sri Lankan politics for a decade. They also have strong ties to Beijing.Credit:PA

“Equally important has been their active political support for the ruling Rajapaksa family and its policies,” says Keenan. “These policy failures are at the heart of Sri Lanka’s economic collapse.”

Sri Lanka has since turned to the IMF for emergency credit, but the Washington-based lender cannot negotiate with a country that has no leader.

The island nation was the most carefree, but it is one of many countries that has more debt than it can afford.

Before the pandemic, the IMF supported around 20 countries. Today it supports 90. COVID is costing countries around the world a fortune.

Now there is a new drama. The United States raises interest rates in an effort to curb inflation. But higher US interest rates attract capital from investors, as they are attracted by higher yields.

Capital began to rush out of the rest of the world and into the United States. As a result, the greenback soared against other currencies, even reaching parity with the euro for the first time in 20 years.

IMF Managing Director Kristalina Georgieva: “Look no further than Sri Lanka for a warning sign.

IMF Managing Director Kristalina Georgieva: “Look no further than Sri Lanka for a warning sign.Credit:Bloomberg

This makes it even more difficult for poor countries to pay for their imports and repay their foreign debts. In fact, most of the world’s poor countries – 60% of them – are currently over-indebted or at high risk, according to the World Bank.

“Countries with high debt levels and limited policy space will face additional stress,” IMF Managing Director Kristalina Georgieva said on Saturday. “Look no further than Sri Lanka for a warning sign.”

Other countries at risk include Laos, Pakistan, Bangladesh and the Maldives. And guess who was a big lender for each of them? Their friendly neighborhood ATM, China. As one commentator put it, “China’s Belt and Road program has hit a major pothole.”

Worse still for Beijing, China has lent prodigious sums to Russia in recent years – $125 billion. In fact, Beijing is Russia’s largest creditor, according to the World Bank. But with Moscow groaning under economic sanctions as it tries to pay for a war, Vladimir Putin is hardly a good credit risk.

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“China’s exposure to distressed debtors had begun its upward march as early as the mid-2010s, when Venezuela defaulted on its debts,” World Bank economist Sebastian Horn writes in an article with the professors. Economics Carmen Reinhart and Christoph Trebesch. In 2010, 5% of Chinese loans abroad were granted to countries at risk of payment default. That jumped to 60% today, they calculate.

Beijing has gone too far. He has now turned off the ATM. Two years ago, Beijing’s official banks transformed from spendthrift lenders to “global debt collectors”, the three researchers explain. “Such a sudden shutdown impacts much of the developing world that owes a significant debt to China.”

Worse, China almost never accepts any reduction in the amount owed by struggling countries. This is a contrast to the usual Paris Club practice where everyone agrees to get a haircut.

China operates in a separate club. It will agree to extend the terms of its loans or make other concessions, but does not actually waive any amounts owed, Horn and his colleagues explain.

Now China’s economic growth has stalled under the restrictions of its continued Covid lockdowns. And its real estate developers are in a liquidity crisis. On Sunday, China’s banking regulator issued an extraordinary call for banks to “assume their social responsibility” by lending more to property developers.

Why? Because hundreds of thousands of Chinese citizens have paid for apartments that are not built; furious, many threaten to organize a “mortgage strike” and suspend payments, a social and banking crisis in preparation.

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Investment bank Nomura estimates that only 60% of pre-sold apartments between 2013 and 2020 are completed.

“There are many early warning signs that China may soon face debt settlement,” according to Minxin Pei, a US government professor and author of Chinese crony capitalism. China is big and its banks too, but there are limits.

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