China's Big Money Diplomacy
Politically Guided Lending Backfires on China

China’s program of massive overseas lending has backfired on Beijing, with Chinese policy banks now heavily exposed to countries at high risk of default. The Financial Times reports:

A Financial Times analysis shows that six of the 10 biggest recipients of Chinese development finance between 2013 and 2015 are considered to be most at risk of default using an Organisation for Economic Co-operation and Development measure. […]

Last year Xi Jinping, the Chinese president, pledged $35bn in preferential loans to Africa in a gesture meant to reassure its partners on the continent that China’s interest extended beyond extracting oil and resources.

But with oil prices around $50 a barrel undermining borrowers’ ability to repay oil-backed loans, Chinese lenders and African borrowers are becoming more cautious in signing up to new projects. Some oil-backed loans have turned sour, leading to debt renegotiations from Chad to Ghana and Angola. 

The disintegration of the Venezuelan economy has also caused many within China to question China Development Bank’s overseas lending and risk assessment. 

Politically guided banks, in China as elsewhere, excel at picking losers. The problem in China’s case is not merely the fall in oil prices, which has undermined the oil-backed loans, but also the unrealistic, extravagant bets that its political banks were willing to make. Unlike China’s more sober and risk-averse commercial banks, policy banks lack clear debt sustainability limits, enabling China to extend huge credit lines to risky countries. In the case of Ghana, for instance, China offered $3 billion for a natural gas project that has turned into a boondoggle.

It is worth remembering that politics, much more than business, has been the driving force behind hundreds of billions of dollars in domestic lending in China as well. While the recent loan failures may cause Beijing to revise their approach, further fallout from China’s political lending is all but inevitable.

Expect the news about Chinese banks to keep coming out, and expect also that much of it will be, as they say, “worse than expected.”

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