Heading for a China-less recovery

The Chinese economy is likely to experience profound changes in the medium to long run, with a shift in the country’s priorities (dual circulation strategy), the slowdown of economic growth and a heavy domestic debt burden (see our recent report for more details). As a result, we expect China’s role as the global growth driver to recede in the coming years. To identify what this could mean for low- and middle-income countries, we look at three different channels of impact: debt, investment and trade. 

First, China is likely to gradually disengage from the debt-financing of low- and middle-income countries amid on-going repayment challenges. For our sample of ten economies , this would result in a USD47bn external financing gap by 2025. Over the past decade, Chinese financing to capital-scarce emerging and least developed economies had grown significantly , in line with its strategic objectives and the Belt and Road Initiative (BRI launched in 2013, see Appendix). This lending definitely helped some countries bridge their infrastructure gaps (e.g. Ethiopia, Kenya, Zambia). However, China also granted large amounts of commercial loans to countries with high default or sovereign risks, such as Argentina, Ecuador and Angola . These loans were sometimes backed by natural resources, ensuring that borrowing countries enjoyed acceptable interest rates depite a sensitive credit rating. Such asset-backed loans were generally accompanied by agreements for Chinese firms to own part of oil fields or refinery projects, offering an alleged “win-win solution” to both parties. 

But the tide turned in 2020 (and even before the Covid-19 outbreak), with increasing repayment difficulties of debtors and debt renegotiations . Ongoing partial defaults and payment deferrals have certainly paved the way for a slow decline in Chinese outbound lending in the coming years, accompanied by a more selective lending strategy. Indeed, the restructuring of Chinese commercial loans appears complex and incurs important losses for China. Moreover, the physical seizure of commodities and/or assets  by Chinese entities has turned out to be hard to implement in practice.

 

Contact

Francoise Huang
Euler Hermes
Selin Ozyurt
Euler Hermes
Georges Dib
Euler Hermes