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Earlier this week Ecuador announced the signing of an agreement with its biggest creditor, China. With this debt restructuring, China is coming to the rescue of a country in financial disarray. Is it replacing the IMF?
This is not the first time that China has actually offered a bailout to one of its borrowers, and it will no doubt be called upon to do so again more and more often. Because today 60% of the loans it has granted abroad are owed by States in a situation of financial stress, it was only 5% in 2010 according to a study carried out in the spring with the assistance of an economist from the World Bank. It is during the last ten years that China has become Ecuador’s main creditor. These loans obtained on very advantageous terms for Beijing, including long-term oil sales contracts, have become a real drag with the deterioration of the economy. The shock of the pandemic, and now galloping inflation and rising US rates, are putting Ecuador in big trouble.
A pattern found in dozens and dozens of countries heavily indebted to Beijing
Forty-four countries must repay China a debt representing at least 10% of their GDP. Their future is now compromised by the burden of repayments. If China does not ease the burden on poor countries, their growth will be permanently curbed, an adviser to US Treasury Secretary Janet Yellen warned yesterday. A new attack on the theme of the Chinese debt trap. According to this advisor China’s role is essential because she has become the world’s largest creditor, ahead of the IMF, the World Bank and the Paris Club creditors combined ».
Total outstanding Chinese official loans reportedly between $500 billion and $1 trillion
These figures are disputed by Beijing and also by independent observers. It is difficult to get an idea of the reality because many loans granted by Chinese public institutions are difficult to mark. The financial situation of the countries indebted to Beijing is comparable to that of the developing countries in the 1980s. We then speak of a lost decade for the growth of these countries stunned by the service of the debt with regard to of western countries. Until the initiative in favor of heavily indebted poor countries adopted in 1996 freed them.
Is China ready today to erase part of this debt in favor of the countries in difficulty?
In recent years, China has multiplied restructuring agreements by favoring the extension of maturities rather than the pure and simple cancellation of the debt. It slightly changed its position in 2020 by accepting the G20 initiative to suspend debt service. But his concrete commitment leaves much to be desired. The restructuring agreement with Zambia is continually postponed. Chad and Ethiopia, also seeking restructuring, have still not obtained concrete action from Beijing. China has granted loans under very opaque conditions and is in no hurry to question them. It now has observer status within the Paris club where the management of the debt of States is dealt with, but it still blocks on the conditions of the club: transparency and equal treatment between all creditors. The announcement made in August of the cancellation of the bilateral debt owed by 17 African countries struck a chord, but its scope seemed limited. $610 million of debt has been erased, a paltry amount compared to China’s total claim on the African continent. It is estimated at more than 80 billion dollars.