Is China following debt trap policy?

A recent announcement by China that it is forgiving 23 loans for 17 African countries may be motivated by accusations of debt-trap diplomacy, say some analysts.

Critics have long accused Beijing of practicing debt-trap diplomacy, suggesting it deliberately lends to countries that it knows cannot repay the money, thereby increasing its political leverage. 

China vehemently rejects this, alleging it’s a way for the United States to discredit Beijing, Washington’s main challenger in the quest for influence in Africa.

China’s decision to forgive the zero-interest loans is, in part, aimed at countering the debt-trap narrative, said Harry Verhoeven, senior research scholar at Columbia University in New York.

“It is not uncommon for China to do something like this, forgive interest-free loans, now obviously it is connected to the overall debt-trap diplomacy narrative in the sense that clearly there’s a felt need on the part of China to push back,” Verhoeven said.

China’s announcement did not specify the countries or the amount of loan forgiveness, but analysts say that since 2000, China has regularly forgiven loans that are nearing their end but have a small balance.

“This is not a loan cancellation, but the cancellation of the remaining unpaid portion of interest-free loans that have reached maturity, that is if a loan was supposed to be fully paid off over 20 years, but it still has an outstanding balance, they cancel that outstanding balance,” Deborah Brautigam, Director of the China Africa Research Initiative at Johns Hopkins University’s School of Advanced International Studies. Brautigam’s research shows that between 2000 and 2019, China canceled at least US$3.4 billion of such debt in Africa.

While this applies to the Chinese government’s interest-free loans, it is not the case with the country’s interest-bearing commercial loans, which can be restructured but are never considered for cancellation, analysts explained.

Verhoeven said the sums of money involved in the 23 loans forgiven would likely be modest, but the politics of such gestures are noteworthy because for many years the Chinese would kind of shrug at various aspects, various lines of criticism, pertaining to their engagement in different African countries. But with the debt-trap allegations, China has belatedly woken up to the fact that this is a bit of public relations nightmare, said Verhoeven.

China has also been playing a role in restructuring the external debt of some African countries such as Zambia, which became the first African country to default on its debt during the pandemic. China, along with France, is chairing a committee to deal with debt relief efforts. The move, welcomed by the International Monetary Fund, is ongoing.

China is Zambia’s biggest creditor. Lusaka owes some US$6 billion to Chinese entities. In July, Zambia’s Finance Ministry announced it was canceling US$2 billion of undisbursed loans from its external creditors, US$1.6 billion of which are from Chinese banks. The move stopped construction of infrastructure projects largely funded by a Chinese bank, the South China Morning Post reported.

Shahar Hameiri, a political economist from the University of Queensland in Australia, agreed that the latest move by Beijing in forgiving African nations’ interest-free loans was probably just a goodwill gesture.

“The bigger loans are likelier to be restructured, if repayment problems loom, as we saw in Zambia,” said Hameiri

Senior officials in the United States have regularly warned developing countries, particularly in Africa, about the dangers of Chinese loans, and a 2020 State Department document, titled “The Elements of the China Challenge,” referred to China’s “predatory development program and debt-trap diplomacy.”

On a visit to the continent this month, the US Ambassador to the United Nations, Linda Thomas-Greenfield, touched on the idea that the wealthy and powerful have extracted Africa’s natural resources for their own gain. And it continues today through bad deals and debt traps. She did not mention China by name.

African politicians themselves have had mixed reactions to the debt-trap theory, with some, such as Ethiopia’s Ambassador to China, Teshome Toga Chanaka, refuting the idea, saying, “A partnership that does not benefit both will not sustain long.”

Others, including Kenya’s new President-elect, William Ruto, and Angolan opposition presidential candidate Adalberto Costa Jr., have expressed concern over taking Chinese loans.

The debt trap allegations have infuriated Beijing, which says Western private lenders are responsible for the bulk of poor countries’ debt and charge much higher interest rates.

The US allegation against China is simply untenable, Chinese Foreign Minister Wang Yi said this month.
Chinese state media constantly run articles aiming to debunk the narrative.

A number of economists and researchers are also saying the debt-trap narrative against China is unfounded.

“The debt-trap idea is that Chinese banks had ulterior motives, deliberately lending to countries when they knew those countries couldn’t repay,” Brautigam said.

“The reality is that like bondholders, which hold the majority of Africa’s debt, Chinese banks lent to countries that looked quite promising. All of these creditors have belatedly realized that risk profiles can shift dramatically in a short period of time.”

China restructured or refinanced about US$15 billion in African debt between 2000 and 2019, Brautigam’s research has found. She did not find that China had been involved in any asset seizures.

Echoing Brautigam, Hameiri said, “There is scant evidence that China has pursued ‘debt-trap diplomacy’ the idea that it would on purpose issue loans to ensnare recipients in unsustainable debt, in order to seize strategic assets or exercise control over their governments.”

Chinese lending has at times been problematic, Hameiri wrote, because in a frenzy to issue loans, Chinese lenders often spent little time considering debt sustainability. Chinese lending has contributed to debt problems in a number of countries, although it is not necessarily the only or even the primary cause as in Sri Lanka.”Some critics blamed China for the crisis in Sri Lanka earlier this year, when the cash-strapped government – which had defaulted on its debt – was deposed by mass protests. Beijing also is Colombo’s biggest bilateral creditor; however, Sri Lanka’s largest foreign lending source is in sovereign bonds.

Verhoeven said the growth in sovereign bonds has been an important factor in African nations’ debt too and rejected the Chinese debt-trap narrative.

“When it comes to China, the debt-trap narrative suggests … this is being done on purpose,” to get countries to vote with China in the UN General Assembly and to reduce Western influence, he said.

There “is little actual evidence that China’s been doing this for political gain,” Verhoeven said, “which is not to in any way say that Chinese lending is all fine, or that it’s always responsible or the best thing for countries to do, far from it.”

Since China has now been burned several times regarding its lending, with several countries defaulting on the loans, plus its own economic difficulties at home, there is certainly a sense that the good old days of 10 or 15 years ago where it could sort of give out loans left and right … are over,” said Verhoeven.

Where does Germany stand?

In the emerging new Cold War between the United States and China, it’s easy enough to slot some key global players onto one of the two sides. Russia stands with China and Japan stands with the United States.

Where does Europe stand is a key question mark. Long on the sidelines — much where President Xi Jinping has wanted — there are signs emerging that Germany, Europe’s economic engine, is undergoing a rethink about its trade and investment ties with China. German industry is fully cognizant of the danger of any fundamental shift, given its enormous reliance on China.

Outgoing Volkswagen AG China boss Stephan Wollenstein underscored last month that Asia’s biggest economy remains key to the fortunes of the German auto giant, which counted on China for 40% of its sales in the first quarter.

But the political tilt in Berlin is conspicuous. German Foreign Minister Annalena Baerbock said last month she is very serious about reducing the German economy’s reliance on China. 

Back in April, when Chancellor Olaf Scholz made his debut trip to Asia, he decided to stop first in Japan — a contrast with predecessor Angela Merkel, who put China first. Scholz highlighted that political symbolism was a priority in setting up the trip, saying in Tokyo that it was no coincidence his first trip as leader led him to that city.

Meantime, German lawmakers have pressed for greater scrutiny over their nation’s business ties with China. Despite industry lobbying, in 2021 they pushed through a supply-chain law that now requires companies to do due diligence on their suppliers, ensuring they don’t use slave labor — a move clearly targeted at China, amid concerns over practices in Xinjiang.

The Economy Ministry, led by Berbock’s Green Party colleague Robert Habeck, in May declined to renew investment guarantees for Volkswagen in China, over human-rights concerns, Der Spiegel and other media reported.

The increasing importance of geopolitics in Germany’s economic ties with China also hit home with the diplomatic spat between China and Lithuania. German firms that sourced products from Lithuania, including Continental AG, found their items held up in Chinese customs.

If a Baltic nation allowing Taiwan set up a representative office can end up disrupting German business operations in China, then it opens up a whole set of risks previously given little thought. One solution is to localize operations in China — effectively cordoning them off from overseas supply chains.

Germany Inc. is also facing a sea-change in terms of popular sentiment on the home front. Even before the Russian invasion of Ukraine — which did China little favor in terms of public opinion in most democratic nations, given Beijing’s support for Moscow — a majority of Germany’s population had turned negative on the country. A survey by Forsa, a research institute, last year showed 58% wanted Berlin to take a tougher stance against China even if it affected economic relations with the nation.

Germany is expected to release a fresh strategic game plan with regard to China later this year, and it will likely see the formal ditching Merkel’s approach of “wandel durch handel, or “change through trade,” says Yanmei Xie, a China policy analyst at Gavekal.

“How quickly the relationship changes will depend on how the argument resolves between Germans who favor values and strategic autonomy versus those who emphasize growth and profits,” she wrote in a note this month.

 Courtesy: Bloomberg

Even talk about hike in interest rate causes major decline at US stock exchanges

Over the years, I have been saying that Pakistan suffers from cost pushed inflation and any hike in interest rate erodes competitiveness of Pakistani businesses.

However, the policy planners in Pakistan, living in utopia have been persistently increasing interest rate having the least realization. I am sure this news will help the policy makers in understanding my point of view.

In the United States, stocks closed sharply down on Friday following comments from Federal Reserve Chairman Jerome Powell that the Fed will press forward with raising interest rates amid lingering inflation.

Higher interest rates can restrain economic growth by making borrowing money more expensive and slowing consumer spending. 

The Dow Jones Industrial Average dropped more than 1,000 points, while the Nasdaq composite dropped almost 500 points. The S&P 500 dropped by more than 140 points.

All three declines meant a more than 3% drop. All are still slightly above their levels a month ago, but much of their gains in that time were erased on Friday.

Powell gave a keynote address at the Fed’s annual policy summit in Jackson Hole, Wyo., saying that the central bank would be willing to take forceful and rapid steps to address inflation, even if it means potentially higher unemployment rates and a recession. 

The Bureau of Economic Analysis revealed on Friday that inflation slowed to 6.3% in July from exactly a year ago. This figure is down from the 6.8% annual inflation rate that was reported in June. 

But the Fed’s goal is to get inflation down to 2%, and Powell said the drop from last month is far short of what the Fed needs to see before it can be confident that inflation is dropping. 

The Fed has already raised interest rates from a range of 0 to 0.25% in March to 2.25% to 2.5% in July. This included two consecutive increases of 0.75 percentage points, the largest monthly increases in almost 30 years.

Powell said the Fed’s decision on how much to raise interest rates next month will be based on the data it receives.

 

Pakistan: Unlocking Economic Potential

This year Pakistan celebrated Independence Day (August 14), when the clouds of imminent default were getting thicker. Despite having complete faith in the economic resilience of Pakistan, people are worried about the ballooning ‘confidence deficit. They believe that breaching current account deficit as well as budget deficit is possible but overcoming confidence deficit may take years.

The brighter side of the story is that International Monetary Fund (IMF) is likely to release promised branch of about US$1.2 billion. This will pave the way for the inflow of foreign exchange from friendly countries and other multilateral lenders. At present the biggest support is coming from overseas Pakistanis who are sending around US$2.5 billion every month.

In last financial year, exports of textiles and clothing touched record high level. Now it is the responsibility of the policy planners to ensure there is no dip in export of textiles and clothing. The chances are bright because Pakistan is likely to get certain concessions under GSP Plus system.

It is my estimate that Pakistan is capable of earning more than US$50 billion per annum from export of textiles and clothing. However, to achieve this, Pakistani farmers have to double indigenous production of cotton to take textiles and clothing exports to the next level.

Since Pakistan’s exports of textiles and clothing are concentrated in United States and European countries, improvement in quality standards can boost ‘Unit Price Realization’ significantly. However, the target can only be achieved by ensuring uninterrupted supply of electricity and gas to the manufacturers at affordable cost.

A cursory look at the reasons of burgeoning current account deficit shows that import bill on energy products and edible oil are the two culprits. While boosting of oil and gas may take some time, shortfall of edible oil can be overcome by focusing cultivation oil seeds that include cotton, sunflower and canola. Nearly 50% reduction in the prices of palm oil is likely to reduce import bill of edible oil significantly. Similarly, crude oil prices are on the downwards trajectory.

This year Pakistan has been forced to import wheat due to its production below the target. Some analysts are of the view that if 20% wheat that goes stale before reaching the market can be saved, the country may not need to import the staple food, but extra foreign exchange would be earned by exporting the saved quantity.

Analysts fear that a significant quantity of wheat is smuggled to the neighboring countries. Pakistan can earn substantial foreign exchange if wheat and other food items are exported through the official channel.

Having reached at the consensus that Pakistan has to produce exportable surplus, supporting policies have to be evolved and implemented. These include operating fertilizer plants at or above name plate capacity. It is necessary to bring it at record that as against an installed capacity capable of 7 million tons urea annually, the country produced around 6 million tons. An additional one million tons of urea can be produced by supply ‘full required’ quantity of gas to urea plants.

At the prevailing global prices of urea, Pakistan can earn significantly foreign exchange by exporting urea, part of this may be used to import LNG or meeting the difference in cost of generation when furnace oil is used.

At stated earlier saving the wheat from going stale or containing smuggling its smuggling is possible. Government has to ensure construction of modern storage silos capable of storing up to 50 million tons to store wheat, rice and maize.

The central bank has already announced an incentive ladden plan for the construction of silos. It is necessary to share the news that warehouses have issued warehouse house receipts worth PKR100 billion electronically. However, this is only tip of the iceberg. Now it is the responsibility of the Government of Pakistan, central bank and commercial banks to convince the farmers to store their produce at the modern silos.

It is often said that indigenous production of oil and gas is constantly doing down. This process can be decelerated by drilling more exploratory and production wells. Along with this refineries operating in the country have to be up gradated to produce higher distillates.

This year Pakistan has once again faced floods, which has once again highlighted the need for the construction of dams. It is known to all and sundry that Pakistan is capable of producing more than 40,000MW electricity from hydel plants.

A lot of time has been wasted in finding justifications for some disputed dams. Analysts are of the view that Pakistan should establish ‘run of the river, type hydel power generation units. These are not only low cost but can be constructed within shorter span of time.

The added advantage is that cost of electricity produced from hydel facilities is one tenth of the cost of electricity produced at thermal plants. These hydel power plants can be constructed closer to the point of consumption. There will be no need to construct long transmission lines and transmission. The additional advantage is reduction in the transmission and distribution (T&D) losses.   

 

 

 

China lifting oil to offset Venezuelan debt

According to a Reuters report, a Chinese company has been entrusted to ship millions of barrels of Venezuelan oil despite the US sanctions. This is part of a deal to offset Caracas' billions of dollars of debt to Beijing.

China National Petroleum Corp (CNPC) stopped carrying Venezuelan oil in August 2019 after Washington tightened sanctions on the South American exporter. But it continued to find its way to China via traders who rebranded it.

Since November 2020 China Aerospace Science and Industry Corp (CASIC) has been carrying Venezuelan crude on three tankers it acquired from PetroChina. The oil is stored on a tank farm it also took over from PetroChina.

The firm has taken 13 cargoes carrying a total of about 25 million barrels of oil, including two vessels due to arrive in China in September, according to the loading schedules of Venezuelan state oil firm PDVSA, and tanker tracking data from Refinitiv and Vortexa Analytics.

The 13 shipments, worth about US$1.5 billion at formula prices for Venezuela’s flagship-grade Merey crude, were declared "crude oil" at Chinese customs, without specifying origin.

" shipments are strictly under a government mandate, where CASIC was designated to move the oil as payment to offset Venezuelan debt to China.

Without commenting on debt offset, China's Foreign Ministry said on Friday the two nations are engaged in cooperation over oil for humanitarian goods.

“The cooperation meets Venezuela's current needs and is also in line with humanitarian principles," a Ministry spokesperson said, adding that China opposes US unilateral sanctions and long-arm jurisdiction.

Another source said that although part of each cargo pays down debt, other goods, such as COVID-19 vaccines, are also being subtracted from the crude sales.

All money from proceeds stays in China. Venezuela’s Foreign Affairs Ministry is in charge of conciliation and accountability.

At roughly 42,000 barrels a day, these shipments have increased total Venezuelan oil to China to about 420,000 bpd between January and July this year, equivalent to about 3% of China's consumption, according to Emma Li, analyst with Vortexa, which tracks such flows.

Venezuela's debt dates to 2007, the era of then-President Hugo Chavez, when the country borrowed more than US$50 billion from Beijing under loan-for-oil deals.

China, the world's top oil buyer, has over the past few years benefited from cheaper oil supplies from Iran and Venezuela, and has in recent months ramped up imports from Russia amid soured relations with Washington.

CASIC, which started in 1956 as a defence research arm that developed China's first missile has over the decades expanded into a defence conglomerate specializing in space technology.

It was picked for the oil job because it is politically powerful and has limited global financial exposure, making it less vulnerable to sanctions.

The company has since 2015 worked with state oil giants, including CNPC and Sinopec, in petroleum equipment manufacturing, digital technology and overseas projects.

The CASIC Venezuelan oil shipments are transported by three Very Large Crude Carriers - Xingye, Yongle and Thousand Sunny, according PDVSA's loading schedules and ship tracking by Vortexa and Refinitiv.

All Venezuelan oil cargoes received by CASIC were originally picked up at the Jose port by Cirrostrati Technology Co, a firm with no track record in oil trading, acting as intermediary for only these cargoes.

The oil shipped by CASIC is mostly consumed by China's independent refiners, which have increasingly relied on cheaper crude from Iran and Venezuela and more recently Russia to maintain operations.

One independent refiner said they were offered the oil at US$8 per barrel below benchmark Brent crude ex-storage basis, versus a discount of more than US$30 for similar-quality crude marketed as a Malaysian export.

"It is more costly, but it's good that the government is now taking charge of these Venezuelan supplies, which saves us lots of logistics headaches and sanction-related risks," said an executive with the refiner.

Japan seeks to organize meeting of creditors to Sri Lanka

Japan is seeking to organize a Sri Lanka creditors' conference, hoping it could help solve the South Asia nation's debt crisis, but uncertainties cloud the outlook for any talks.

Tokyo is open to hosting talks among all the creditor nations aimed at lifting Colombo from its worst debt crisis since independence, but it is not clear whether top creditor China would join and a lack of clarity remains about Sri Lanka's finances.

Japan would be willing to chair such a meeting with China if that would speed up the process for addressing Sri Lanka's debt, estimated at US$6.2 billion on a bilateral basis at the end of 2020.

President Ranil Wickremesinghe told Reuters last week that Sri Lanka would ask Japan to invite the main creditor nations to talks on restructuring bilateral debts. He said he would discuss the issue with Prime Minister Fumio Kishida in Tokyo next month, when he is expected to attend the funeral of the assassinated former premier Shinzo Abe.

Tokyo, the number two creditor, has a stake in rescuing Sri Lanka, not just to recoup its US$3 billion in loans but also its diplomatic interest in checking China's growing presence in the region.

S&P Global this month downgraded Sri Lanka's government bonds to default after it missed interest and principal payments. The island nation of 22 million people off India's southern tip, with debt at 114% of annual economic output, is in social and financial upheaval from the impact of COVID-19 pandemic on top of years of economic mismanagement.

An International Monetary Fund (IMF) team met Wickremesinghe on Wednesday to discuss a bailout, including restructuring US$29 billion in debt, as Colombo seeks a US$3 billion IMF aid program. 

The president met the same day with Japan's ambassador.

Tokyo believes a new platform is needed to pull creditors together.

Sri Lanka is running out of time since it defaulted on its debt. The priority is for creditor nations to agree on an effective scheme.

Japan is keen to move this forward. But it's not something Japan alone can raise its hand and push through, the cooperation of other nations was crucial.

Japan's Foreign Ministry declined to comment. Sri Lanka's central bank and Finance Ministry did not immediately respond to requests for comment. An IMF spokesperson declined to comment.

Concerns include rivalry and territorial tensions between big creditors China and India, while Sri Lanka would have to commit to reforming its finances and disclose more information about its debt, the sources said.

Last month, shortly after Wickremesinghe took office when his predecessor fled the country, Chinese President Xi Jinping wrote to him that he was ready to provide support and assistance to the best of my ability to President Wickremesinghe and the people of Sri Lanka in their efforts.

Getting Beijing's cooperation on a debt restructuring was complicated by factors such as a large number of lenders.

A Chinese foreign ministry spokesman told Reuters that Beijing was willing to stand with relevant countries and international financial institutions and continue to play a positive role in helping Sri Lanka respond to its present difficulties, relieve its debt burden and realize sustainable development.

Japan hopes to see a new debt restructuring framework resembling one set up by the Group of 20 big economies targeting low-income countries. Sri Lanka does not fall under this "common framework" because it is classified as a middle-income emerging country.

It must be a platform where all creditor nations participate to ensure they all shoulder a fair share in waiving deb. Until these conditions are met, it would be difficult for any talks to succeed.

The common framework, launched by the G20 and the Paris Club of rich creditor nations in 2020, provides debt relief mainly through extension in debt-payment deadlines and reduction in interest payments.

Some people involved think an initial creditors' meeting could be held in September, but one source said it would "take a little while, possibly several months".

Restructuring talks are only possible after the IMF scrutinizes Sri Lanka's debt, the sources said.

 

 

Poppy Cultivation in Afghanistan

According to an article by Ambassador, Mark Green, President, Director and CEO, Wilson Center, at a time when the majority of Afghan population struggles to afford food under the collapsed economy and severe drought, the “poppy pledge” threatens to devastate the livelihoods of entire communities. 

According to Green, Afghanistan is the world's largest producer of poppy. Its production grew during the years when United States and coalition forces were present, despite the US spending more than US$8 billion to eradicate the crop.

Production grew during Taliban’s years of insurgency, despite its public opposition to poppy  production because narcotics are contrary to Islam, and perhaps because the militant group reportedly imposed “taxes” on poppy farmers and others involved in the trade as a way of funding its operations.

As Taliban representatives negotiated over the drawdown of Western forces with, first, the Trump Administration and then, later, Biden representatives, they promised to end poppy production in Afghanistan once they regained power.

Even though observers say Taliban have broken many of its other pledges—on matters like the role of women in society and tolerance for diversity of opinion— the “poppy pledge” may be one they’re serious about trying to keep.

In April, Taliban issued a decree that banned poppy cultivation in Afghanistan, and government spokespersons said that offenders would be tried according to Shariah laws and courts.

A representative of the interior ministry told the Associated Press, “We are committed to bringing poppy cultivation to zero.” 

Farmers in Helmand, the center of poppy cultivation in Afghanistan, recently reported that armed Taliban officials have begun seizing farms and tearing up fields of poppies with tractors.

Taliban campaign to eradicate poppy cultivation poses significant challenges for millions of impoverished farmers and day laborers that rely on their earnings from the profitable crop.

In 2021, the value of Afghanistan's poppy production was 14% of the country’s GDP at US$1.8 billion to US$2.7 billion, and day laborers can make more than US$300 a month harvesting poppy.