A surge in overseas lending has left Chinese policy banks highly exposed to countries at risk of default, forcing a rethink that could reshape its engagement with developing economies.
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. By contrast only two of the top 10 recipients of World Bank development loans between 2011 and 2015 were in the same risk category.
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.
"China continues to talk about its mutual beneficial relationships with these commodity-rich countries but something has fundamentally changed, for the worse, in the commodity exporting countries in Africa and South America," said Matt Ferchen, a scholar at the Carnegie-Tsinghua Center in Beijing.
In response, China is shifting its focus from risky clients such as Zimbabwe and Sudan to alternatives such as Ethiopia, now emerging as a regional manufacturing powerhouse. this month, a $3.4bn electrified railway service, financed and built by China, began service between Addis Ababa and Djibouti, where China is building its first overseas naval base.
China is also trying to spread its lending more evenly among its policy banks and its commercial banks. But it has found that commercial banks are less willing to make extravagant bets and require a much lower risk before signing off on a project, analysts said. Chinese policy banks are more inclined to accept projects considered politically expedient.
The push to include commercial banks has led to renegotiations of many state-to-state deals agreed between politicians. “They have the big ceremony and announce the deal only to be told by the commercial banks that the project isn’t bankable,” said one risk analyst at an international bank.
Chinese policy banks do not have clear cut debt sustainability limits when making loans, unlike the World Bank, says Deborah Brautigam, China Africa scholar at SAIS.
This results in unrealistic deals such as the $3bn credit line extended to Ghana by CDB in 2010, part of which was drawn down for a natural gas project that became embroiled in delays.
In Angola as well, deals secured with daily oil exports have been revised so that larger amounts of oil need to be exported daily — a measure built into the original deals, according to Ms Brautigam.
China Export-import Bank has traditionally taken the lead in lending in Africa, but some outside observers believe its portfolio may be nearing saturation.
CDB, which expanded its overseas lending aggressively during the oil boom, has more concentrated exposure. Both banks saw an increase in capital in April 2015 after the drop in oil prices revealed the extent of their exposure to oil exporters. The increase was ostensibly to support China’s strategic One Belt, One Road programme.