End of Chinese banking windfall leaves poor countries vulnerable

It surprisingly quickly became quite the lender. Compared to developing countries, China is now a bigger creditor to the International Monetary Fund or the World Bank.

At first, this generosity was a real boon for low-income countries that wanted to finance infrastructure projects. But things got complicated. Beijing is not part of the Paris Club, an informal grouping of creditors made up mainly of wealthy countries, and drags its feet on reducing the debts of countries that are no longer able to repay them.

“small is beautiful”

However, the situation is not hopeless. Although China has not yet resolved the mistakes made in the past, it seems to be learning from them and is now more cautious. Construction companies, which once used to get contracts overseas without taking the risk, are now more responsible. In the wake of Chinese President Xi Jinping, who urged investors to accept the principle of “small is beautiful”, regulators are now limiting the amount of international loans.

In 2016, the commitment of China’s two main strategic banks to sovereign wealth funds and state-backed institutions was twice that of the World Bank. In 2021, the equivalent outstanding at the same banks were ten times less. This caution is undoubtedly good news for the Chinese balance sheet. This probably won’t be the case for many poorer countries, who can remember a time when China was reckless in funding infrastructure that was as important as it was unprofitable.

country on the verge of bankruptcy

Furthermore, Chinese loans already granted may soon experience turbulence. The fear of no longer having access to this funding is one reason why some poor countries have been slow to seek debt relief. If China no longer offers its funds, requests for restructuring are likely to increase. The giant, which sees the World Bank as the credit institution of the West, wonders why its loans are not affected by restructuring plans, while Chinese banks are forced to pocket money. Beijing refuses to reduce the nominal value of its claims in principle, but is not closed to the idea of ​​exercising other forms of relief. Thus it may participate in the effort to extend maturity and reduce interest.

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It will be necessary to find a solution, of course the abandonment of the debts is the best. Oxford Economics estimates that the planet’s infrastructure financing needs by 2040 are $15 trillion. This is of course the business of Chinese banks, but not only. And the degree of urgency is high. Remember that countries like Ghana and Egypt are on the verge of bankruptcy.