The growing tensions between EE. United States And China, responsible for the coronavirus pandemic, has helped to revive the debate on trade, technology transfer and the question of whether Chinese companies should be able to raise funds in US public markets . But the next front of the conflict between the two largest economies in the world could be an emerging debt crisis.
As a deep global economic recession threatens the ability of the poorest countries to pay sovereign debt, the G20 group of rich countries agreed in April To freeze repayments of bilateral loans, China is working to ensure that its Belt and Road initiative, which has generated at least $ 350 billion in infrastructure loans to the poorest countries, is not threatened, says Benn Steil, director. the Council’s international economy. Foreign relations.
“China signed the G-20 pledge, but then said the loans from the China Export-Import Bank were not part of it,” Steil told MarketWatch. pointing instructions by Song Wei, an official with the Chinese Ministry of Commerce in the Global Times, a newspaper aligned with the Chinese Communist Party. “You would have to be skillful enough to know that Exim Bank is the BIS piggy bank.”
US Secretary of State Mike Pompeo criticized China’s lending policy to Africa, particularly at a recent press conference. “There is a huge debt that the Chinese Communist Party has imposed on African countries throughout the region,” he said, adding that African nations must seek relief “in certain agreements which have incredibly burdensome conditions which will impact Africans for a terrible time. ” long time.”
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Meanwhile, a group of 16 Republican senators published a letter Pompeo and US Secretary of the Treasury Steve Mnuchin, asking them to “put pressure on Chinese institutions to renegotiate the underlying debt of developing countries without political counterpart”, and allege that BIS loans are not granted only for economic reasons, but for political influence, calling the program “debt trap diplomacy”
Senators cited the example of a Chinese state-owned enterprise taking control of the port of Hambantota in Sri Lanka under a 99-year lease after the country “paid no more than $ 1 billion of Chinese debt. ” compared to its construction.
Others argue that the BRI program is a benign effort to stimulate economic growth in the country and the Greater China region, and that most of these agreements are mutually beneficial. Deborah Bräutigam, Director of the China Africa Research Initiative at Johns Hopkins University discussed that China has welcomed foreign investment and experience, and Belt and Road is simply China exporting the same tools to the poorest countries in the world.
“The BIS is perfectly positioned in the development aspirations of low-income countries. China has surplus currency, manufacturing capabilities and mid-range manufacturing and has to send it all overseas, ”he wrote in American Interest. “Only developing countries in Asia need infrastructure investments of around $ 1.7 trillion a year to support growth, reduce poverty and mitigate climate change. In Africa, on the sidelines of the BIS, the African Development Bank estimates that annual infrastructure needs are between $ 130 billion and $ 170 billion. “
According to the International Monetary Fund, total debt in emerging and border markets increased from around 75% of GDP to more than 100% in 2020, in parallel with the downgrade of the credit rating of issuers and the proportion of foreign owners of emerging market debt has increased.
“Most low-income economies were becoming at high risk of debt distress by the end of last year, so it stands to reason that any stress, not to mention the kind of economic shock we expect from this crisis, will lead to an estimate of some sort, “said Scott Market, a senior researcher at the Center for Global Development at MarketWatch.
After the onset of the last economic recession, $ 100 billion in capital has leaked from emerging market economies, while remittances from rich to poor countries are projected to decline further by $ 100 billion during the year. , according to the IMF.
These dynamics have soared the interest rates at which poor countries can borrow money and have raised concerns about the impending emerging debt crisis. The interest rates demanded by investors for emerging market debt have increased in recent months, with the difference between the performance of the JP Morgan Emerging Market Bond index and the 10-year US Treasury note.
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dropping from 2.9% in December to 5.4% Thursday, according to Bloomberg.
The Chinese One Belt One Road project has been one of the main drivers of debt in emerging markets, particularly in Africa, according to Andrew Davenport, director of operations at RWR Advisory Group.
Davenport said the ongoing coronavirus epidemic could be a moment of truth for the BIS. “What China does not want, even if it is attributed to the virus, is that these countries cannot pay their debts, and this is considered to be the epilogue of the Belt and Road experience,” he said. -he declares.
“The United States has long said that these loans were not dictated by market principles, were not constructive and, in many cases, fulfilled the objectives of strategic projection of Beijing’s power,” he said. -he adds. “The failure of some of these countries to repay their Chinese loans could be seen as legitimizing this message. This is the story that China is eager to avoid.”
However, Harvard University economist Kenneth Rogoff said that to view the next emerging market debt crisis through the lens of US-China energy policy would be to understate the magnitude of the problem. Although the G20’s moratorium on emerging market debt is a start, even if China undertakes a general restructuring of BIS loans, more needs to be done, including by US-led institutions like the World Bank.
“It is an opportunity” for the United States to counter “China’s agenda for projecting world power”, he said, taking the lead on this issue and pushing massively for debt restructuring governments, multinational institutions and private lenders.
“There is so little recognition in Washington that massive humanitarian aid may be needed around the world.” We are all seeing these trillion-dollar budgets, but I have seen nothing of foreign aid, “added Rogoff.” We are almost certainly witnessing the great depression of the emerging markets. “