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Seeking Relief: China’s Overseas Debt After COVID-19

The global economic downturn triggered by COVID-19 has reignited questions about the sustainability of China’s overseas lending and how Beijing will respond to the many countries struggling to manage their external debt obligations

In April 2019, Rhodium Group published a piece examining 40 cases in which China had renegotiated bilateral debts. Since then, the COVID-19 pandemic has plunged the global economy into recession. The downturn has reignited questions about the sustainability of China’s overseas lending and how Beijing will respond to the many countries now struggling to manage their external debt obligations.

To better understand the outlook for renegotiations involving China, we have expanded our database to include over 130 cases from 2000 through September 2020. The updated dataset broadens our knowledge of past restructurings and offers insights into Beijing’s current negotiating position and preferred outcomes. We find that:

Renegotiation requests are increasing: Even before the COVID-19 shock, China’s borrowers were seeking restructurings as major repayment deadlines loomed in 2019-2020. COVID-19 has accelerated the trend. We find that at least 18 processes of debt renegotiation with China took place in 2020, and 12 countries are still in talks with Beijing as of end-September, covering USD 28 billion in Chinese loans.

For large loans, debt cancellation (write-offs) and asset seizures are unlikely: Our research shows that debt write-offs are almost always limited to small zero-interest loans, and we continue to find very limited evidence that China’s policy banks have wiped away bilateral debt in exchange for control of strategic assets.

Instead, deferrals are most likely: Past and current cases suggest that deferrals remain Beijing’s preferred solutions. Deferrals are aligned with the Debt Service Suspension Initiative (DSSI) framework, and will provide some breathing room for recipients. However, China’s approach so far has been partial (focusing on principal repayment rescheduling, sometimes to the exclusion of interest payments), and talks are not standardized, open, or coordinated directly with other bilateral lenders.

As many as 1 in 4 dollars extended by China through overseas lending to date has come under renegotiation, amounting to USD 94 billion: Faced with the reality of unsustainable past lending, Beijing is recalibrating to limit and rationalize future flows, at least in the medium term. This will only be amplified by COVID-19.

Click here for the full “Seeking Relief” note