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African debt to China: ‘A major drain on the poorest countries’

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Over the past two decades, China has emerged as the biggest bilateral lender to Africa, transferring nearly $150bn to governments and state-owned companies as it sought to secure commodity supplies and develop its global network of infrastructure projects, the Belt and Road Initiative.

But, as Zambia heads for Africa’s first sovereign default in a decade and pressure mounts on other debt-burdened countries during the coronavirus pandemic, the crisis has revealed the fragmented nature of Chinese lending as well as Beijing’s reluctance to fully align with global debt relief plans.

China’s share of bilateral debt owed by the world’s poorest countries to members of the G20 has risen from 45 per cent in 2015 to 63 per cent last year, according to the World Bank. For many countries in sub-Saharan Africa, China’s share of bilateral debt is larger still.

Chinese lenders have lent money to almost every country on the continent and eight have borrowed more than $5bn apiece this century. But Beijing’s involvement in a debt service suspension initiative from the G20 group of the world’s largest economies has been slow.

“It’s frustrating,” said David Malpass, president of the World Bank, this month. “Some of the biggest creditors from China are still not participating and that creates a major drain on the poorest countries . . . if you look at the [Chinese] contracts, in many cases they have high interest rates and very little transparency.”

The DSSI offers a moratorium on repayments due on bilateral loans made by the G20’s members and their policy banks to 73 of the world’s poorest countries, spreading the repayments over four years. This month, it was extended to June 2021, with repayments spread over six years.

China is so far the biggest single contributor to the DSSI, suspending at least $1.9bn in repayments due this year according to an internal G20 document seen by the Financial Times, out of roughly $5.3bn suspended by G20 members for 44 debtor countries. The next biggest contributors are France with about $810m and Japan with about $540m.

But the extent of China’s commitment is unclear. It was due to receive the largest amount this year of any G20 lender, with payments of about $13.4bn coming due from DSSI countries, according to the World Bank, while France and Japan were each due to receive about $1.1bn.

Column chart of Debt stock of sub-Saharan sovereign borrowers, $bn showing African governments have turned to bilateral and commercial lenders

However, those figures do not include about $6.7bn of repayments that the IMF has said are under negotiation between Angola and three major creditors, which analysts believe to be China Development Bank, China Export-Import Bank and ICBC, another Chinese lender.

Angola, Africa’s second-biggest crude producer, has been the continent’s biggest borrower from China this century, receiving $43bn of the $143bn lent by China, according to the China Africa Research Initiative at Johns Hopkins University.

Sonangol, the state oil company, borrowed billions of dollars at commercial rates from the CDB, while the China ExIm Bank lent to the government at concessional rates. ExIm Bank loans are eligible for the DSSI, while Beijing counts the CDB as a commercial lender, meaning it can choose whether or not to participate. The ExIm Bank and CDB did not respond to requests for comment.

Angola’s borrowings illustrate one of the debt initiative’s major problems — China has lent to African states through a variety of organisations, meaning that information about who owes what to whom is partial and fragmented.

Ethiopia has also been one of the top borrowers, borrowing at least $13.7bn between 2002 and 2018 for everything from roads, to sugar factories, to a railway line to Djibouti. Over the past two years, China has pledged to restructure some of Ethiopia’s loans. “The Ethiopian government . . . has too many [Chinese] loans,” said a Chinese official in Ethiopia.

Chinese lending should be understood as a product of “fragmented authoritarianism”, said Deborah Brautigam, director of the China Africa Research Initiative. President Xi Jinping has committed to working with other G20 members to implement the DSSI, she noted. “That gives [Chinese lenders] a signal that they should do it, but not necessarily on the same terms.”

Chinese lenders’ domestic projects complicate matters, said Liu Ying, at Beijing’s Renmin University. “Every time China commits to relieve debt in Africa, there will be an outcry and pressure domestically from people who still say that they don’t have enough to eat.”

Bar chart of Repayments on bilateral debt due this year ($bn) showing China is the dominant bilateral lender in sub-Saharan Africa

Even as bilateral debt has risen, it still makes up only about a fifth of the debts owed by DSSI countries. Zambia has turned increasingly to China and international bond markets over less costly multilateral lenders. Its debts have quadrupled to $12bn in less than a decade, with $3bn owed to bondholders and at least that amount to China. Zambia’s bondholders question if they will be treated equally to Chinese creditors.

With the DSSI making clear the difficulty of getting all creditors working together, the G20 is preparing a “common framework” on debt restructuring. G20 officials hope this will ensure bilateral lenders share the burden equally and make relief conditional on borrowers seeking the same treatment from banks and bondholders. “It will be a proxy for China joining the Paris Club,” said one official involved in negotiations, referring to the informal group of bilateral lenders born of the debt crises of the late 20th century.

As it stands, China’s lending strategy carries risks, said Trevor Simumba, a Zambian analyst. “China has been using cheap secret loans to get access to African resources. China needs to rethink its strategy otherwise they will end up with a huge pile-up of debt that will be very difficult to restructure and even put many Chinese state enterprises at higher risk of default.”

For African countries, attracted by less onerous conditions on Chinese loans, “this crisis serves as a lesson”, said Yvonne Mhango, economist at Renaissance Capital. “To be more cautious about how much they borrow from the Chinese.”

Additional reporting by Christian Shepherd in Beijing and Andres Schipani in Dar es Salaam



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Emerging Markets

South Korea looks to fintech as household debt balloons to $1.6tn

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South Korea Economy updates

After her family business of ferrying drunk people home was hit by closures of bars due to Covid-19 curfews and social distancing, Lee Young-mi* found herself juggling personal debts of about Won30m ($26,000).

The 56-year-old resident of Suncheon in South Korea was already struggling to pay off or refinance four credit cards, but now faces the prospect of those debts rapidly multiplying after her husband was diagnosed with cancer.

“We’ve had little income for more than a year as not many people are out drinking until late into the night,” said Lee. “Now my husband won’t be able to work at all for the next three months after his surgery.”

Lee’s story is playing out across Asia’s fourth-largest economy as self-employed workers, who make up nearly a third of the labour force, have seen their incomes reduced sharply due to coronavirus restrictions. Now, after struggling for years to keep a lid on household debts that hit a record Won1,765tn ($1.6tn) in March, Seoul is looking to fintech companies and peer-to-peer lenders for answers. 

Chart showing increase in South Korea's household debt

Among them is PeopleFund, which touts tech-based investment products backed by machine learning that allow borrowers to refinance their higher-interest loans from banks and credit card companies.

The company has loaned at least $1bn to more than 7,500 customers since it was established in 2015. Its products allow borrowers to switch their debts to fixed-rate, amortised loans at annual interest rates of about 11 per cent, a change from the riskier floating rate, interest-only loans common in South Korea. 

PeopleFund has received about Won96.7bn in financing from brokerage CLSA, and along with Lendit and 8Percent is one of the first among the country’s 250 shadow banks to win a peer-to-peer lending licence. 

“The country’s most serious household debt problem is with unsecured non-bank loans, whose pricing has been too high. We can offer more affordable loans to ordinary people unable to receive bank loans,” Joey Kim, chief executive of PeopleFund, told the Financial Times.

The proliferation of digital lenders and fintechs in South Korea, where higher-risk borrowers are often cut off from bank financing, has been encouraged by the country’s government.

“We hope that P2P lenders will help resolve the dichotomy in the credit market by increasing the access of low-income people to mid-interest loans,” said an official at the Financial Supervisory Service.

South Korea’s household debt situation has become more pressing since the onset of the pandemic, with increases in borrowing for mortgages, to cover stagnating wages and to invest in the booming stock market. South Korean households are among the world’s most heavily indebted, with the average debt equal to 171.5 per cent of annual income.

South Korea’s household debt-to-GDP ratio stood at 103.8 per cent at the end of last year, compared with an average 62.1 per cent of 43 countries surveyed by the Bank for International Settlements.

Much of the new debt has been risky. Unsecured household loans from non-bank financial institutions were Won116.9tn as of March, up 33 per cent from four years ago, according to the Bank of Korea, much of it high interest loans taken out by poorer borrowers.

Getting on top of the problem has taken on national importance. In a rare warning in June, the central bank said the combination of high asset prices and excessive borrowing risked triggering a sell-off in markets and a rapid debt deleveraging.

“If financial imbalances increase further, this could dent our mid-to-long-term economic growth prospects,” BoK governor Lee Ju-yeol said in July.

The country’s economic planners, however, are struggling to contain debt-fuelled asset bubbles without undermining South Korea’s fragile economic recovery.

The government has attempted to address the danger by tightening lending rules. Regulators in July lowered the country’s maximum legal interest rate that private lenders can charge their customers from 24 to 20 per cent.

Economists caution that rising debt levels increase South Korea’s vulnerability to an economic shock. 

They also warn that the asset quality of financial institutions could be hit by a jump in distressed loans when the BoK rolls back monetary easing, expected in the fourth quarter.

“Monetary tightening is needed to curb asset bubbles but this will increase the household debt burden, holding back consumption further,” said Park Chong-hoon, head of research at Standard Chartered in Seoul. “The government is facing a dilemma.”

For Lee Young-mi, however, the 11 per cent rate offered by the PeopleFund is still too high. “I am not sure how to pay back the debt.”

*The name has been changed



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European and Chinese stocks rise after calming words from Beijing

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Chinese equities updates

European shares chased gains in China after calls from Beijing for greater co-operation with Washington helped sooth jitters over a regulatory crackdown in the world’s biggest emerging market.

Europe’s Stoxx 600 index rose 0.7 per cent on Monday to hit new all-time highs, while the UK’s FTSE 100 rose 1 per cent led by economically sensitive stocks including banks and energy groups. London-listed lender HSBC gained 1 per cent after it reported second-quarter figures that easily beat analysts’ expectations.

The gains came after the China Securities Regulatory Commission, Beijing’s market regulator, called on Sunday for closer co-operation with Washington, stressing the country’s efforts to improve transparency and predictability after a crackdown on tutoring groups obliterated the market value of the $100bn sector’s biggest companies.

Chinese listings in the US have become a geopolitical flashpoint as Beijing has sought to exert greater control over the country’s powerful tech sector. The US Securities and Exchange Commission said on Friday that Chinese groups that sought to sell shares in America would be subject to stricter disclosures.

Shares in China rebounded after their worst month in almost three years, with China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed blue-chips rose 2.6 per cent on Monday, while Hong Kong’s Hang Seng index added 1.1 per cent. The city’s Hang Seng Tech index, which tracks big internet groups including Tencent and Alibaba, reversed early losses to rise 1 per cent. Futures tracking Wall Street’s benchmark S&P 500 index climbed 0.6 per cent.

Last month, China’s cyber-security regulator announced plans to review all foreign listings by companies with data on more than 1m users after top leaders in Beijing called for an overhaul of how the country regulates initial public offerings in the US. The crackdown came just days after the $4.4bn listing of ride-hailing group Didi Chuxing.

The intensifying scrutiny of how Chinese groups access capital markets has pummelled stocks, delivering the worst month for China tech groups listed in the US since the global financial crisis. The Hang Seng Tech index fell 17 per cent last month.

“While we do not consider it prudent to completely avoid investments in China, further volatility can be expected until the first quarter of 2022, by which time we believe most regulatory changes may already be in place,” analysts at Credit Suisse wrote in a note on Monday.

Meanwhile, data released by China at the weekend showed that factory activity grew at the slowest pace in 15 months in July as demand contracted for the first time in more than a year.

Government bonds were steady with the yield on the benchmark German 10-year Bund, which moves inversely to its price, gaining 0.01 percentage points to minus 0.45. The equivalent US 10-year yield was steady at 1.234 per cent.

Bond yields have been falling in recent weeks, despite higher than expected inflation readings in the US and indications from the US federal Reserve last week that it was moving a step closer to the day when it would start tapering its $120bn in monthly asset purchases.

The euro rose 0.1 per cent against the dollar to $1.1885, while the pound gained 0.1 per cent to purchase $1.3924. Prices for global oil benchmark Brent crude fell 1 per cent to $74.66.

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Turkey battles to quell wildfires as residents and tourists flee

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Turkey updates

Turkey has contained more than 100 wildfires after a series of blazes near its Mediterranean coastline killed six people and forced thousands of residents and foreign tourists to flee holiday resorts, the government said on Sunday.

Winds gusting at 50km per hour, low humidity and temperatures hovering near 40C have made controlling the fires difficult, Bekir Pakdemirli, the forestry minister, said on Twitter and in comments reported in state-run media.

The fires began on July 28, and the simultaneous start of so many conflagrations raised suspicions they may have been deliberately set, Pakdemirli said, although he did not offer evidence of arson.

About 100 Russian nationals were evacuated from the Bodrum peninsula in western Turkey on Saturday and moved to hotels elsewhere, the Russian consulate in the city of Antalya said in a statement, according Sputnik, a Russian state media outlet. Local tourists were also among the evacuees, with some forced to leave by sea as the blaze cut off other escape routes.

Flights from Russia, Turkey’s biggest source of tourists, only resumed in late June after Moscow suspended charter trips amid a record outbreak of Covid-19 cases in Turkey in the spring. Coronavirus-related travel restrictions to Turkey have hammered its tourism sector, which directly and indirectly accounts for about 13 per cent of gross domestic product.

Villagers water trees to stop the wildfires that continue to rage in the forests in Manavgat, Antalya, Turkey © AP

The forestry ministry website showed at least 15 active fires on Sunday. Villagers and forestry workers were among the six people who died, according to Turkish media. Mehmet Oktay, mayor of the resort town of Marmaris, said one volunteer firefighter had died and another 100 people had been injured in a spate of fires that have scorched more than 10,000 hectares near the town.

A half-dozen fires continued to sear areas mostly inaccessible by road, and the number of blazes across Turkey meant not enough firefighting planes were available, he said. “It’s heartbreaking, and I am fighting back tears to concentrate on the emergency at hand. It will take more than a decade to restore this land,” he said.

Thousands of farm animals and untold numbers of wild animals also perished in the fires, which one meteorologist estimated reached 200C.

Wildfires are an annual occurrence in south-west Turkey’s pine forests, and one expert told CNN Turk television that 95 per cent are deliberately or accidentally sparked by people.

Yet the scale of the current conflagration is remarkable, and some are blaming climate change for the disaster. Turkey recorded its highest ever temperature in a south-eastern town last month, and much of the country has been gripped by drought this year, while deadly floods struck north-east Turkey last month.

Several other Mediterranean countries are battling blazes this summer, including Cyprus, Greece, Lebanon and Italy, and scientists have said the extreme weather events across the globe this summer may be the result of global warming.



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