In June, Zambia reached what’s been described as a landmark debt restructuring deal that for the first time brought together the country’s bilateral creditors including China, traditional Paris Club lenders and bondholders.
While the deal is no doubt unprecedented, it also reveals that China was very effective in successful in getting the parties to agree to many of its demands.
Matt Mingey, a senior analyst at the consultancy Rhodium Group, is among the world’s foremost experts on Chinese lending and debt issues. He joins Eric & Cobus from Washington, D.C. to discuss whether China is, in fact, setting the agenda for debt restructurings in the Global South.
Show Notes:
- The China-Global South Project: Zambia’s Landmark Debt Deal Highlights China’s Success in Setting New Rules for Development Finance by Eric Olander
- The Atlantic Council: The G20 still hasn’t made a breakthrough on sovereign debt restructuring by Hung Tran
- Rhodium Group: China’s External Debt Renegotiations After Zambia by Mattnew Mingey and Logan Wright
About Matt Mingey:
Matthew Mingey is a Senior Analyst with Rhodium Group’s China Macro & Policy team. Based in Washington, D.C., Matthew focuses on China’s economic diplomacy and outward investment, including development finance. Previously, he worked on global governance issues at the World Bank. Matthew received a Master’s degree in Global Business and Finance from Georgetown University’s Walsh School of Foreign Service and a Bachelor’s degree from the University of Pennsylvania.
Transcript:
Eric Olander: Hello, and welcome to another edition of the China Global South Podcast, a proud member of the Sinica Podcast Network. I’m Eric Olander, and as always, I’m joined by China Global South’s Managing Editor, Cobus van Staden, in Johannesburg, South Africa. A very good afternoon to you, Cobus.
Cobus van Staden: Good afternoon.
Eric: Cobus, today we’re going to come back to the debt issue. Now, I know a lot of our longtime listeners are probably going to think — What? Again? Really? More debt coverage? Yes, because literally this is, I would say in the top three, if not the number one most important issue for most global south countries right now. And there’s a lot happening. We want to bring you up to date on some of the latest developments. And this came back into the news last week when Russian President Vladimir Putin, announced at the Russia-Africa Summit that Moscow will write off $23 billion of debts owed by African countries.
Now, this was at the Russia-Africa summit that was very sparsely attended by African leaders, even though 49 countries did send representatives. And one of the main takeaways from it was the debt relief proposal. Somalia in particular benefited enormously from the Russian proposal with $684 million in debt relief. Again, we don’t know any of the details on this and it will be very interesting to see the follow-through and to check back next year to see how much of that 23 billion was actually written off. But if the Russian pledge does come through, it really couldn’t come at a better time for most developing countries, really, who are just grappling with a convergence of crippling economic problems.
Ironically, and this is just again, some food for thought here, many of those problems, or at least some of them, are brought on by Vladimir Putin himself, thanks to his invasion of Ukraine. Food prices in many countries are surging due to the disruptions in global grain supplies. The value of emerging market currencies against the dollar is plunging, making everything a lot more expensive for consumers. Cobus, I was talking to some folks in Nigeria who were just lamenting the plunge in the naira. We’re seeing the same thing in the shilling in Kenya. And I think you in South Africa, with the rand, are also struggling with a depreciating currency as well. In places like Kenya, the government introduced new taxes and ended subsidies prompting an outbreak of deadly violence in Nairobi.
There’s also the issue of China’s slowing economy, which has impacted demand for copper and many of the other raw materials that developing countries are using to generate the revenue that would be needed to pay down the debt. So, we have really this vicious cycle that’s in play here. And then, of course, we have the debt itself, and debt levels in many of these countries are just killing their balance sheets. Let’s take into account what’s going on in Kenya. Think of this — 59 cents of every dollar that’s generated by the government goes to service the country’s debt. Quite a bit of which, of course, goes to service the China Exim Bank loans that Kenya borrowed to build the Standard Gauge Railway.
And it’s even worse in Nigeria where a stunning 99% of all the revenue generated last year went to pay down the country’s ballooning debt. By the way, for listeners of our Africa show, on Friday, we’re going to be talking about the Nigerian debt situation. So if that’s something of interest to you, tune in on Friday. Now, as bad as things are for many countries, and it is bad, there actually is a little bit of hope here. Now, longtime listeners of the show will know that we’ve been covering the protracted debt crisis that bloomed in the post-pandemic era for the past two or three years, and it’s been nothing but grim news. I mean, by any measure, the international community has totally and utterly failed the people of the global south.
It took them years for the various governments, creditors, and multilateral agencies to get their act together to actually do something. Cobus, you recall that one G-20 meeting after another came and went, and no progress on debt relief. But back in June, they finally got their act together and reached a landmark deal to restructure Zambia’s debt. Now, Zambia, as you’ll recall, was the first African country to default on its debt in the pandemic era when it missed a $42.5 million interest payment on its Eurobond debt back in 2020. Three years later, under the auspices of the G-20 Common Framework that for the first time brought together traditional Paris Club lenders, bilateral lenders, including China, Indian, Saudi Arabia, and, and this is the key part, private creditors, they were able to actually get a deal done.
So, with Zambia now done, out of the way, tick that box, now the world’s attention is moving to Sri Lanka. It’s important to note that Sri Lanka is a middle-income country, so it doesn’t qualify to participate in the G-20’s Common Framework, but many, if not all, of the same players that were at the table for the Zambian deal are also in the picture in Colombo trying to reach a deal. Now, Cobus, you’ve been following this story all week in our daily coverage. One thing that you noted in your reporting is just as it was in Zambia, where China was heavily criticized for dragging out the process.
And again, this was a complicated process. It’s probably not fair to blame China for all of the delays, but a lot of people on the inside of this process did say that the Chinese were asking a lot of questions and delayed a lot of the resolutions. But it appears, based on what you were reporting and based on what others are also telling us, that the same thing is happening in Sri Lanka.
Cobus: Yes, I mean in Sri Lanka, there’s now been all of these calls from Sri Lanka’s other major bilateral creditors, particularly France, Japan, and India, on China to get more involved and calls on Sri Lanka to try and kind of move the process forward. I’m not sure exactly what Sri Lanka’s supposed to do, but the Japanese foreign minister was pressing them to move forward on it. So, it raises all of the questions about how this is actually going to move forward particularly because in April, China didn’t even participate in the meetings or only participated as an observer in these discussions around debt renegotiations. So, it’s a little unclear where China’s at the moment and how the current economic situation in China is affecting these negotiation processes.
Eric: And you also have to take into account that there’s a level of geopolitics in the Sri Lankan issue that there wasn’t in the Zambian one, simply because India and Japan are at the table as well — two of China’s fiercest rivals. And so again, we don’t know what geopolitics are at play, but anything to do with India and Japan that involves the Chinese does make things a lot more complicated. So keep that in mind. Well, let’s go back to Zambia. Today we’re going to focus on the merits of the Zambian debt restructuring deal. And the key question that I want to address is whether or not the Zambian deal really reflected Chinese priorities in the outcome of the agreement.
And this deal is widely been touted as a landmark agreement. In fact, Zambia’s finance minister wrote in the Africa report this week that Zambia’s debt deal shows that creditors can come together, and this is, I’m quoting here, “…to deliver necessary debt relief to countries struggling with debt burdens. As other heavily indebted countries pursue debt restructuring processes, it is our hope they can follow the path Zambia has paved.” Again, those are the words of Zambia’s finance minister. Let’s find out if it was the landmark deal that the finance minister says and that many in the media also claim.
And for some perspective on this, we have no better expert to help us find our way through this complex process than Matt Mingey, who is a senior analyst with the Rhodium Group’s China Macro & Policy team based in Washington, D.C. I say this in the most complimentary way, Matt, but you are a true debt nerd, and we are very, very happy you’re here to share your expertise with us. A very good morning to you in Washington.
Matt Mingey: Thanks, Eric. Thanks, Cobus. And yeah, great to be back.
Eric: Well, the Zambian deal was hailed as a landmark arrangement as the finance minister claimed. What’s your take on it? You looked at it very carefully. As much as we have, again, we don’t know all of the details. I don’t think the actual terms of the deal have been published, but what we know a lot of people seem to like. What’s your take on it?
Matt: Yeah, I mean, details have kind of gradually emerged, and a lot more detail was provided with some of the latest IMF reporting on Zambia that came out close to the middle of last month. And I think that, well, the Zambian officials are going to sell the deal and obviously try and put a lot of positive spin on it. And at the same time, there’s reason to be skeptical of how much the Zambia deal can serve as a precedent for other restructuring cases. I do think that the deal is a qualified win. You were asking the question earlier over how much of this reflected China’s priorities, how much China was meant to give, and I think that the answer is probably somewhat in the middle.
The Zambia deal shows, I think China obtaining some good features, including some features that have been present in some of its other larger debt renegotiations over the last few years that we’ve been looking at. And at the same time, it seems like China didn’t necessarily get everything. That there’s still a lot to be determined in other country cases. Precedents were not necessarily set that will bind China’s hand or indeed the IMFs hand, the other creditors’ hand in those other cases. So, while the deal, I think, doesn’t do everything that debt relief advocates were hoping for, it doesn’t do everything that maybe China was hoping for, Chinese creditors are hoping for, I think that it falls somewhere in the middle.
Cobus: So, can you break down a little bit for us? Like, which kinds of concessions did China actually make?
Matt: I think that in reviewing what we know about the agreement so far, I think that one of the main things that seems to be a concession on the China side had to do with the inclusion of, or the issue of the inclusion of viable projects in the restructuring. One of the key features of the Zambia deal, and actually one of the largest sort of dollar value components of the Zambia deal is the Kafue Gorge Dam project, which was like bind credit I think from China Exim and ICBC. The question of whether or not you would basically be able to set aside these viable projects from restructuring is one that I think was on China’s mind. And ultimately, in the Zambia deal, it is included in the official sort of creditors agreement as something that will be subject to restructuring.
It will be subject to those terms that were described. On the question of domestic debt held by a non-resident, that was obviously a major holdup, a major concern of the Chinese negotiators going into Zambia. It was responsible for a lot of the delays based on everything that we heard. There’s not necessarily a settlement there. And then obviously there’s the question of MDB participation and the idea of multilateral development bank haircuts. Obviously, there was the communication following the April meetings that China had backed off some of its claims or some of its desires for the MDBs to share in some of the debt relief or to take haircuts. Subsequent reporting tended to bear out the idea that maybe it wasn’t a solid a retreat as we might have originally thought.
But certainly, there’s nothing in the Zambia deal that China might have otherwise hoped for that clarifies or binds treatment at the MDBs or forces them into burden sharing as China would say. At the same time, there are other features that I think can be interpreted as wins for China. the whole structure of the deal where you have a sort of upside contingency whereby interest rates can be increased and the maturities can be brought in depending upon an IMF assessment 2025/2026, certainly goes China’s way. And talking about a broader point, I think China, on the sidelines of the Zambia deal, has also managed to obtain some concessions that both it wanted but also are probably good for general transparency.
As part of the global sovereign debt roundtable discussions, we’ve had a commitment from the IMF and some new disclosures clarifying the extent of DSA analysis, when it will be disclosed, to whom will be disclosed, increasing the number of people that can take a look and get under the hood of those calculations. While I think that China didn’t necessarily get everything it wanted, I think that, at the same time, we see a lot of China’s preferences reflected in the final deal. So, it’s a mix of both.
Eric: Okay, so you’ve come around a little bit to my thinking on this one because when I wrote a column, literally the day of the announcement that basically said China kind of came out ahead in this deal, and my basic understanding of it was absent China in these talks, the outcome of the Zambian deal would’ve looked totally different. And the key takeaways for the Chinese were the fact, and the key wins in my view for the Chinese, were the fact that there was no reduction on the principal debt. So, this is not something the Chinese like to do. So, there was no write-downs, there was no debt cancellations on that. Also, they used the same model that they’ve used in Ecuador and in Angola and a number of other places by extending the term, reducing the interest rates. But at the end of the day, these countries will pay back their debts to the Chinese and to others. That is very much out of the Chinese playbook.
And I was criticized quite a bit, and again, friendly criticism. It was really wonderful to have these discussions by a number of people who said, “Eric, sorry. You’re not right on this one.” But they didn’t tell me specifically why. And then I felt vindicated, yes, I am a petty man, I felt vindicated a couple of weeks ago when Hung Tran, who is a non-resident senior fellow at the Atlantic Council, and a former deputy director at the International Monetary Fund basically said the same thing that the Chinese walked away with this deal. And he pointed out, again, no reduction in principal. He also pointed out that the $1.75 billion of claims insured by Sinosure, they were then reclassified as commercial creditor claims, not official lending claims, which was something that the Western countries wanted.
And this is again, something that Hung Tran said is in line with China’s longstanding priorities. So, a number of the big issues, yeah, you’re right on the smaller, some of the smaller issues, they did make some concessions. That’s inevitable. You have to make some concessions. But broadly speaking, I felt that this deal very much mirrored China’s priorities. And I think in many ways this is going to set a template for China’s restructuring and even the G-20’s restructuring in many other global south countries. In the time since the deal has been announced and where we are today, has your thinking on this evolved as well?
Matt: I think that’s probably fair to say that originally a lot of our work, in reflecting a lot of the work that we’ve done on debt so far, we usually talk about the constraints on China, both domestic sort of institutional constraints in terms of its ability to negotiate and coordinate among many different actors inside and outside the government with their own interests, and as well as the constraints that are presented to Chinese creditors by the international system. Some of that is technical constraints in terms of the IMF just getting used to how it works and navigating very complex procedures. And then there’s just the structure of the international system itself, the existence of Paris Club as a block with its own experience in debt renegotiation.
I think, as we learn more about the Zambia deal, I think of slowly coming around to the idea that China has been able to get slightly more out of the deal than I otherwise might have been able to expect. That said, I do think that there needs to be some caution in terms of thinking about how much the Zambia deal and how much China’s experience with the Zambia deal will bind those other negotiations and how much precedent it will set, especially for the other common framework cases. One of the main reasons is, and this came out in the sort of IMF report detailing the deal is that the Zambia negotiation, the tentative outcome for the bilateral creditors committee doesn’t necessarily set binding precedence for how the other negotiations will be conducted. So, it’s not to say that China, having been able to say, build in this sort of contingency feature to the Zambia outcome, will be able to do so or want to do so in, say, Sri Lanka, Ghana, or any of the other cases.
And the other thing I think, well, it’s interesting and certainly important to think about the distinction between CDB, ICBC, and the official versus commercial creditor distinction that has been so blurry for a lot of China’s lending during the BRI period and definitely raised its head during the pandemic as part of the discussions around the DSSI, will be includable, but not be included. I think in terms of how the negotiations were conducted themselves, in terms of what we understand the expectations were, I’m not sure that CDB or the ICBC loans were ever realistically thought to be fully on the table as far as eligible for the type of treatment that the China Exim loans received.
I suspect that if you were to ask other relevant officials that just based upon China’s longstanding sort of stance that whatever was said in public and certainly the hopes that some of the CDB or ICBC loans, the Kafue Gorge loan excluded, the main part of the official deal may have been overhyped. That said… yeah.
Eric: I’m sorry to interrupt you. Just because I think a lot of our listeners may not be familiar with CDB and ICBC. CDB, of course, being the China Development Bank, and then ICBC being the Industrial Commercial Bank of China. Can you just expand on that and why they’re important in all of this? Because you’ve made a number of references to them.
Matt: Sure. Yeah. So, China Development Bank and ICBC, besides China Exim, are probably the two most important creditors, especially to African countries and especially during this Belt & Road period. They are in some ways different. CDB is an official policy Bank of China. It is actually larger than China Exim. It’s the largest Chinese policy bank. But most of its activity and its lending activity is done at home. It’s charged with facilitating domestic infrastructure and domestic development as much as it is abroad. And a lot of its loans have, where it does lend abroad, have been in support of oil-backed projects — Ecuador, Angola — for resource acquisition. Very concentrated in a handful of countries.
ICBC, on the other hand, is one of the big four commercial banks, and it is one of the big four commercial banks that has been most active in lending to emerging market countries, especially in Africa. And for that reason, CDB and ICBC, and especially by their weight in Zambia and other African countries, how they’re going to respond and how they have been negotiating has been really, really important, not just in the COVID-19 period. This is going back all the way to sort of the mid-BRI when some of these loans started going wrong or started breaking bad. So, the question of how to treat them has been an interesting one and a very, very important one.
On the one hand, CDB is a Chinese policy bank. On the other hand, unlike China Exim, its loans are not subsidized. And ICBC as a commercial bank, even though it’s state-owned, again, similarly not subsidized. On the other hand, a lot of times you might have, as you mentioned, the idea of Sinosure insurance, which can throw some wrinkles into whether or not lending is considered official or commercial. And then there’s the question of Chinese government support. So, CDB and ICBC, they are basically thought of as commercial banks in terms of their contracts.
If you were to read them, they read like commercial loan contracts and they lend on commercial terms. But what the expectations should be of them in negotiations, if you were to ask or were to ask up until more recently, I think has been a question that’s been negotiated. Certainly, China’s position has been more consistent that they are commercial banks or should be thought of as commercial banks, and that’s something that has appeared in the Zambia deal and that they’ll have to be worked at, at a later date. That said, we have seen instances where CDB has made some concessions and has provided some instances of not debt relief, at least a debt rework. CDB and China Exim, for example, around the same time, announced treatment for Ecuador. They’ve announced a couple different treatments actually and have been active in Angola too. So, they’re recurring features of the debt negotiation landscape.
Eric: And just one footnote, a lot of people may find it a little bit unusual that a state policy bank like the China Development Bank is issuing commercial loans. But Matt, that’s not exceptional. I mean, the Germans also have something similar, and other governments too, where their policy banks also have a commercial lending arm. So, this isn’t unprecedented what the Chinese are doing.
Matt: No, obviously, there is some controversy as well as part of the DSSI and some other ongoing negotiations I think involving KFW, the German development bank, which similarly, I think, had resisted calls to be classified as a commercial bank. So, it’s not to say that China is alone when it has policy banks that are engaging commercial term lending, it’s just to say that throughout the history of China’s finance and especially its development finance, its infrastructure finance around the world, that sometimes the lines, and certainly how they’re treated by politicians, by borrowers, by Chinese institutions, can sometimes be blurry even if the terms in which they’re lending are very clearly commercial.
Cobus: So, Matt, in the rethinking of the role of these banks, does that mean that we now have to also reweigh what the division between commercial bilateral and multilateral debt is in the case of something like Zambia? Does it turn out that Zambia actually has more commercial debt than people thought of before?
Matt: So, it’s interesting. And actually, in the latest sort of IMF article four report, as part of this tentative debt deal, you actually saw some of the Chinese debt reclassified. And again, I think, Eric, you had pointed this out earlier, that 1.75 billion, some of which may have been Sinosure insured, it’s a little bit difficult to tell, but the CDB and ICBC debt, apart from the ICBC debt that was rolled into the negotiation, was actually reclassified as bilateral to commercial. So, it does move things around a little bit on your balance sheets in terms of the classification. And it does have implications for what then happens now. I mean, CDB and ICBC, now that this distinction has been made, they will be part of the follow-up private commercial creditor discussions that will need to take place, not the official arrangements are in place.
So, it does matter. It’s interesting because there was a similar issue during the DSSI, whereby CDB was basically rescheduling some payments, including for Zambia, but for a much shorter term in a couple different countries. The DSSI terms, I think, were based on sort of a four-year extension plus one grace and then three-year sort of payment rescheduling. Whereas CDB, I think, kicked the can down the road for maybe six months or in some cases up to a year, I think in other cases. So, it’s not to say that differences in treatment are a new feature in terms of how they are internally handling the negotiations, but the classification of those creditors and how they are handled in the Zambia case and how we can expect for them to be handled in the other cases, I do think matter, if not just for the expected outcomes, but also just in terms of the brass tacks as far as how these things are calculated, how they’re treated in terms of international reporting, which matters a lot for how these things are calculated.
Eric: So, the DSSI that Matt is referring to is the debt service suspension initiative. That was the G-20’s first foray into this debt restructuring space that they went into. That was later succeeded by the Common Framework, which is what handled Zambia’s debt restructuring. Now we’ve got a number of other countries that are lining up for Common Framework restructuring. So, Ghana and Ethiopia are next in line. They’re going to look very different than what happened in Zambia because unlike in Zambia where there were more than a dozen Chinese creditors, some SOEs, some private enterprises like Huawei, then you had the state’s policy banks, and then you had commercial lenders like ICBC, a real hodgepodge of lenders in Zambia, in Ghana and in Ethiopia the situation’s very different where it’s predominantly just the policy banks.
Can we now start looking forward beyond Zambia to other countries that are waiting in the queue now to get debt restructuring, hopefully with outcomes like what Zambia received? What’s your forecast and what are you looking at now in places like Ghana and Ethiopia?
Matt: I think, certainly now that Zambia, which has been the longest-running of the Common Framework cases as we start getting towards tentative solutions, all eyes are turning to see what’s going to happen next. And certainly, the hope is that now that some of these issues, technical issues have been worked out, we have the sovereign debt roundtable that is addressing some of these technical discussions. We have some changes as far as how DSA methodology is shared and how those assessments are circulated. The hope is that in a case like Ghana where you have a much smaller loan exposure, you’re talking about less than $2 billion, for example, on the China side.
And again, as you just mentioned, most of that belonging to policy banks, with a couple credits from different suppliers, you’ll be able to move quickly. You’re dealing with primarily China Exim and CDB as your creditors. And just because you have less at stake that you’ll hopefully be able to move quickly. The question of Ethiopian and even beyond that, if you start looking to Sri Lanka, is I think a lot more complicated. And I think it’s complicated for me, in part, because of the issue of serial restructuring or how China may approach serial restructuring. Obviously, in Ethiopia, one of the confounding factors there is the fact that Ethiopia has already concluded that restructuring deal with China related to the Addis Ababa-Djibouti railway, where there already was a long, major maturity extension, I think of 15 years. Yet railway’s a major component of Ethiopia’s debt service to China.
It’s not the only project. And there are other projects, high projects, infrastructure projects that Ethiopia is servicing. But I think one of the biggest questions for me that I’ll be looking for in the context of this Zambia deal and how fast Ethiopia can move is will China be willing to renegotiate or will be willing to give way on, for example, that Addis-Djibouti loan where it already has been in, at least in our recorded negotiations, relatively generous in terms of its treatment from the pre-COVID era. There’s some indication, and this has been very interesting going back and looking at some of the latest IMF reporting, that China may be reluctant to engage in renegotiating loans that it has already renegotiated, or at the very least that it can provide a little bit of a wrinkle.
There was some chatter on Twitter related to the Republic of Congo which completed a debt renegotiation with China in 2019 just before the pandemic. And it appears that the loans that were renegotiated as part of that were serviced throughout the pandemic, despite the fact that Congo participated in the DSSI and was also trying to renegotiate a ton of other debt. For me, the hope is that this will work out some of the technical issues that may allow a case like Ghana to proceed quickly. And certainly, that’s the hope. After Ethiopia and Sri Lanka, the path forward is a little bit less clear, partially because the Zambia deal, in many ways, is non-binding. It does not necessarily tie, despite what the U.S. is hoping for, to the same approach.
And you still deal with, in any negotiation involving Chinese creditors, a lot of fragmentation. Even if it’s just Exim and even if it’s just CDB, that is still a major gulf to bridge. And that is not to say that they can necessarily move quickly even internally. So, while the hope is that things can move quickly and that Zambia will grease some of those wheels, I still think there are reasons to be a little bit cautious especially if you’re dealing with some of the more complex common framework cases that are on the table.
Cobus: So, in the case of Sri Lanka, we’ve seen China only attending these meetings as an observer. And there was even mentions a few weeks ago where some of the other participants said that they might move on without China in the negotiation. So, I was wondering like what would that look like, and how would that actually work?
Matt: Well, it’s interesting. I think it’s safe to say that no one really knows for sure what that would look like because I don’t think that it’s happened before. Certainly, with the Zambia case, the goal was very much not to go home with China, and China was in the room working out those details to make sure it did not get left behind. It’s interesting because I’ve seen some analysts on Twitter talking openly about the idea that the way to potentially speed up some of these renegotiations might be potentially to do just that. To say that either we treat Chinese banks as private creditors, that’s including China Exim, and wrap them into the commercial creditor discussion which might allow things to move faster, or you have a dual track discussion as is kind of de facto happening in Sri Lanka which allows the Paris Club, other creditors to move on quickly, then leave essentially China, which takes a long time to get to a determination as to what it wants to do and what’s acceptable to handle it on its own.
Certainly, the idea that you can use the threat of leaving China behind is powerful or potentially powerful leverage to try and convince Chinese negotiators to move quickly. And to me, I think that that’s the most likely dynamic at play here, despite the idea that has been floated, and this has been floated by U.S. analysts, by other analysts, you’ll sometimes hear the lending into arrears policy brought up weekly by people at the IMF. The idea that you could leave China behind in Sri Lanka, I think would be something of a nuclear option when it comes to negotiations. That said, if Sri Lanka threatens to drag on for multiple years, if it really does seem like we’re not going to be able to get to an outcome on the official credit, let alone the commercial credit, I think that you could start seeing discussions around that possibility taking shape.
And the idea there would be that you would work out a sort of representative deal with the creditors that are meeting as part of the official bilateral creditor committee that you would try and serve that up to China saying, “Hey, take it or leave it.” And the idea then would be that you could potentially then allow the IMF to continue dispersing despite the presence of Chinese recalcitrant there. But that said, I think that that in many ways would have reverberations that extend far beyond Sri Lanka, and that might defeat some of the progress that any of the tentative goodwill that you’re seeing in the Zambia case as regards to Chinese creditors. So, it’d be a tricky situation.
Eric: I’d like to see if you can help us understand some of the competing narratives that are out there when it comes to the debt issue because the facts and the politics oftentimes are not aligned. And so, when we look at the facts here, that it was a Eurobond payment that Zambia defaulted on, $42.5 million, back in 2020, in Sri Lanka, the government there fell behind again on their private creditor debt on Eurobond payments. And in Ghana, it was the same way. And we have not heard a single African leader, or even to that extent, any global south leader, come out publicly and complain about the Chinese debt. And one of the things that we’ve actually seen is the Chinese, as you and your team at Rhodium have done research on, have renegotiated quite a bit of debt and restructured quite a bit bilaterally. But yet, in Washington and in London in particular, we hear a very different narrative.
Just this week, UK Foreign Secretary James Cleverly told the Financial Times just before his trip to Africa this week, and let me just give you a quote here, he said, “Regarding China, I talked to African leaders who are uncomfortable with their level of indebtedness and are uncomfortable with China not engaging in the Paris Club, for example, when it comes to how you deal with national indebtedness.” And that’s a little bit odd because really what you hear African leaders talking about is the Eurobond debt, which by the way is under the jurisdiction, a lot of it, of the UK, and to some extent the U.S. as well. And I just, I’m having a difficulty understanding the politics. And I think a little bit about is that Cleverly and Janet Yellen in the United States, the Treasury Secretary, really just like to use the debt to punch China in the nose.
But the facts are that Eurobond debt is considerably more expensive than the Chinese debt and that the Chinese have shown a lot more willingness to negotiate bilaterally than private creditors have. And again, I don’t say this to defend the Chinese, I want to put my disclaimer out there. The Chinese can go and defend themselves all that they want. This is, by the way, a Chinese talking point, I will admit that, but it does resonate a little bit that there’s some truth to it. So, can you help kind of clear that fog a little bit in terms of what’s the reality and what are the politics?
Matt: I think it’s certainly an interesting and important point to note that, and not just in terms of the recent debt crisis, talking about Sri Lanka, again, even going back to Hambantota, some work by Deborah Brautigam, other researchers has shown that a lot of the debt pressure that even prompted the whole debt trap narrative was also brought on by foreign currency bonds. So, it’s not necessarily, I think, a new critique to say that, actually, the issue is private debt, foreign bondholders that are certainly participating or compounding some of the debt issues that are faced by emerging market countries that have borrowed heavily.
And that pressure has been in existence since well before the COVID-19 crisis, and it’s been supercharged with some of the currency dynamics that have emerged in the wake of the pandemic. And it’s also important to note, I think, that the issue of how you handle renegotiations involving foreign bondholders has been a complex one and it’s been an ongoing one for decades. There are any number of different proposals, and certainly changes, whether that’s with respect to collective action clauses, whether that’s with respect to different compositions of creditor committees to try and solve that problem, and that problem hasn’t gone away.
I definitely think that it’s fair to acknowledge that that is as much a part of the debt issue that emerging market countries are facing as China, especially given the fact that, as has been pointed out elsewhere, China’s lending is very, very concentrated, and the countries that are facing debt issues, even the ones that are engaged in Common Framework negotiations, are in some ways outliers when you’re talking about the broad scope of China’s lending. That said, I think that it’s still is fair to scrutinize and to think about China’s role in the debt relief process if only because China’s share of foreign lending of overseas lending has increased so rapidly. And again, it is concentrated in a handful of countries but has increased very rapidly. And I think a lot of what analysts would tell you is that there has not been a corresponding development or that has been slow in developing the means, the tools institutionally, if not necessarily technocratically.
Certainly, there have been efforts by Chinese institutions going back years and years to liaise with foreign banks and MDBs to get better at handling some of these issues to deal with debts that probably should have been expected. And I think that one of the other things that is very, very tricky is that if you are an emerging market borrower, depending upon deals that you made, your expectations of China in terms of the finance that you received, as well as what you could expect in terms of renegotiation may have been very different. Certainly, if you are dealing with foreign bondholders, you know what you are getting. You know the rates that you are paying which are generally very, very high. You know the foreign currency risk when you are taking on Eurobonds or dollar-denominated bonds.
I think what some borrowers, and certainly debt advocates might argue is that because of this blending of official and commercial, and certainly the rhetoric that surrounded China’s lending, especially during the BRI period, that borrowers may have thought that they were in for a better deal, that they had potentially more support than they did, or that they could count on political support to break through any of these issues in a way that has been more scattershot. I don’t think it’s coincidental that, going back to Ethiopia, for example, certainly some of the other negotiations, any country that is involved in debt renegotiations with China that has been successful has sought, whether or not they’ve been able to get the meeting with Xi Jinping or a major bilateral meeting, for example, with China’s foreign minister.
The idea that you would be able to cut through your debt issue at a high political level and that the political relationship would allow you to then take care of this, I think, fair or unfair is an expectation that some borrowers had. And so, acknowledging that China is, in many ways, a commercial creditor and should be expected to behave as a commercial creditor, or its institutions that are in many ways not different from the bondholders, and that bondholders themselves are contributing to a lot of the debt pressure. I still think it’s important to recognize how China is different and what are reasonable expectations for China’s institutions as everyone works together, try and get to a solution.
Cobus: So, there’s clearly a moment, a kind of an historical inflection point where some of the tools that we’ve used so far to deal with emerging economy debt and larger debt distress need to be rethought. But at the same time, we’re also coming up against this massive climate crisis, which puts, by order of magnitude, larger weights on countries to change a lot of infrastructure, to build a lot of new infrastructure to mitigate coming climate change, but also to deal with the climate change that’s already built into the system. So, I was wondering how things look for you when you look into the future. 10, 20 years from now, are we talking about these countries just being completely just ruined by debt? And what kind of other options are open there?
For example, South Africa’s Green Transition, South Africa recently got a deal of $8.5 billion from the G-7 to kickstart its green transition. And most of that is in the form, I think only 4% is in the form of grants. The rest is all loans, different kinds of loans. But the South Africans themselves have estimated that in order to do a full comprehensive green, they need around $100 billion, like $89 billion. Which is like, just adding that amount of data would be ruinous to the economy. So, I was wondering like what kind of tools do you see emerging to deal with these emerging challenges?
Matt: One of the most important questions of our time is, yeah, how do you accomplish the green transformation? And obviously, there is no green transformation possible, closing the infrastructure gap in a green way, it’s not possible without changes in terms of how we do finance. And I don’t think that’s possible without China. Certainly, from a tactical level, just where you’re going to get the equipment to be able to do that. But also I think in terms of financing, I do think that there need to be changes, and I think that there are discussions underway with how China and other countries can cooperate and coordinate to provide the amount of climate finance and adaptation finance that the world is going to need. Certainly, we’ve seen, I think even as there’s been a downshift in the amount of new Chinese lending abroad, we have seen changes in terms of how China is financing some of its other projects.
We’ve seen changes in a shift to say more foreign direct investment. We’ve seen changes, there’s been some recent research on public-private partnerships for green transition, not just for China, but also internationally, not just involving Chinese creditors. And there’s been a lot of new work going on, on the idea of different nature swaps and how to rework them. Those can be very, very complicated. They are difficult to rework. They take a lot of time and makes them more difficult to execute, certainly at the scale that you’re going to need in order to try and get the amount of finance that you need to sort of close that green gap if you want.
I think that there’s a role for China. I think that there’s a role for new financing systems, new financing structures. The hope is that there’s going to be a way to coordinate and a way to cooperate despite these other major financial questions and points of friction between China and the rest of the world.
Eric: Matt Mingey is a senior analyst with a consultancy Rhodium Group on their China Macro and Policy team. He’s based in Washington, D.C. He’s one of the smartest guys out there when it comes to monitoring these debt issues and analyzing them. Matt, thank you so much for taking the time out of your very busy schedule to join us and help us walk through all of the complexities of the Zambia deal and the bigger picture as well. You are on Twitter, do we still call it Twitter? I don’t… is it X? Is it Twitter?
Matt: Is it X now?
Eric: I don’t know what it is, but you’re on that website. If people want to follow what you’re reading and writing, where can they find you on that website?
Matt: Yes, so I am on that website @mattmingey. One of the best ways to follow Rhodium Group’s work is to just head to our website where we publish all of our public research. That is rhg.com, and we’ll be publishing increasingly more and more public work related to China’s debt China’s overseas finance and the impact of China’s external economic relations. So, I’d encourage anybody to check it out.
Eric: Yeah, and I’m going to put some links on our site for our subscribers to some of your previous work on this issue. It’s absolutely fascinating. And by the way, Rhodium Group, if you’re not familiar with them, they’re a benchmark agency out there in terms of what scholars and analysts and corporates use to follow and to understand these issues. So, if you’re not familiar with Rhodium Group’s work, you want to be. We’ll put links in the show notes. Matt, once again, thank you so much for taking the time to join us.
Matt: My pleasure. Thanks again for having me.
Eric: Cobus, it is so refreshing to talk to somebody like Matt because he is an oasis away from the desert of facts that we have to deal with every day in dealing with people like UK Foreign Secretary James Cleverly. I mean, he says, in his FT interview, that indebtedness to China is what everybody’s uncomfortable with, and it just doesn’t make any sense. It just doesn’t make any sense. Let me refer you now to an article on the China project website by our old friend, Anzetse Were, who is just probably one of the smartest minds out there on this, and she comes back over and over again. And she just published this article last week — loans from China make up just 12% of Africa’s total debt.
And when you look at the most indebted countries, take Angola out of that picture, that’s about a third of all Chinese debt in Africa. We’re looking at 8%, 9% in Kenya, 3%, 4% in Ghana of the total, and 3% in Nigeria. What is cleverly talking about? Do you know what I mean? So, this is more about politics.
Cobus: Yeah. Particularly if you look at it in the context of the massive amounts of private debt as you mentioned in those same countries.
Eric: Well, there you go. There you go. I mean, and the private debt has shorter terms on it, higher interest rates, and is far more inflexible as we’ve seen. Again, I’m not saying this to defend the Chinese, I’m saying it to call people out like Cleverly as being unashamedly political. And again, I don’t know if people like Janet Yellen and Cleverly are smarter than this, and they’re doing this because they have the facts, but they’re trying to, again, they want to punch China in the nose and this is a good way to do it. I’ll have respect for them if that’s what they’re doing.
I suspect, Cobus, and you and I both know this from our talks with a number of people, that they really think this is a problem. They’re getting bad information the same way that we hear over and over again in Washington about the debt trap still to this day. And these people can’t do a simple Google search. And it comes up now on the first page of Google. Everybody just go out there, type, China, debt trap, Africa. And what you’re going to see on the first page of Google is a whole bunch of debunking from Deborah Brautigam, from Boston University, from Chatham House — pick your research institute that looks into this., Rhodium Group as well, that there is no evidence of the debt trap.
Now, again, this issue is highly, highly emotive for a lot of people. All I’m saying is follow where the facts are, and the facts don’t support that Chinese debt in Africa is overbearing.
Cobus: Yeah, I do think they are being political. I think they’re being doubly political. One is that they’re being geopolitical where any kind of anything you can throw at China is a worthwhile thing to throw. That kind of mindset. But at the same time, I think they’re being, more specifically, they’re being domestically political, which is that the financial industries in London and New York are some of the biggest donors to these parties. There’s no way these politicians are going to pick fights with them unless they’re absolutely forced to. And there’s nothing in the Zambian crisis that forces them to do it. So, it just becomes this kind of convenient thing where they essentially use it as an opportunity to hit China as much as they can and hoping that no one in their own countries care enough to actually fact-check their claims.
Eric: Well, that seems to be evident that very few people in their home countries are actually fact-checking this, which is regrettable. Again, and the people who ultimately suffer from this are people in the global south who get sucked into this geopolitical contest. And again, let’s go back to Sri Lanka because this isn’t only a debate between China and the U.S., and Europe, China and the West. Japan and India are absolutely essential in this. And again, China, they get off cheap on this because all they say is the West, the West, the West, the West. And let’s not forget where the debt trap actually originated from by the pundit Brahma Chellaney in India in 2017, and it’s Indian media that continues to propagate so much of this.
So, when the Chinese kind of say it’s always the West and Western media, they love blaming Western media for this, that’s actually not true either. That’s intellectually lazy on their part. So, they’re as much complicit in this dumbing down of the discourse as the West is as well. And they also have this attitude of like, we’re totally innocent here. Everything’s great with our debt. When you look at what’s happening in Kenya, when the Chinese refused to reschedule the China Exim Bank loans, and the Kenyan government asked over and over and over again for a deferral, they didn’t want a cancellation. They just said, “Listen, we’re bleeding cash right now, our currency is in problems, can you just give us some breathing room?”
Exim Bank gave them six months as part of the DSSI, the debt Service Suspension Initiative. And then, unlike the Japanese and the French, the other two major bilateral lenders, Exim Bank said no. And that was a BS move in my view. And so when China says a friend in need is a friend indeed, you know that line that they like to put out? Call them on the BS on that and use the Kenya example as a case in point because they could have done more to help Kenya. There’s no doubt.
Cobus: I think in lots of ways, despite the fact that both the kind of Western/U.S. side and the Chinese side, they always work as hard as they can to differentiate themselves as much as they can from the other. I think in lots of ways, China and the U.S. are very similar in these respects in the sense that they both have a kind of a tunnel vision where they can only see each other and they both are by far more interested in domestic issues than they are international issues. So, for both of them, I think the fate of these poor countries, they’re relatively marginal priorities, but what counts much, much more is the issues within the country. And, of course, with China at the moment, also a very pressing domestic economic situation.
Eric: Well, I’m glad you brought up the domestic economic situation because we’re still hearing calls from a number of African scholars and stakeholders who are calling on China to cancel the debts. And this speaks again to the persistent problem in Africa of poor China literacy and not understanding the dynamics of the Chinese system and specifically what’s going on today, and the history of debt in China domestically. So, China has had a number of, going back to the late ’90s, of economic fluctuations where provinces have racked up massive amounts of debt. And again, this isn’t my expertise on Chinese domestic economics, but there was a period back in the ’90s where the central government came in, bailed out some of the provinces, but said, “Never again, you’re on the hook.”
Now we have a situation today where a number of Chinese provinces are deeply in debt, in part because the domestic real estate market is in real trouble. They used to generate a lot of their revenue by releasing land into the market, and then property developers would buy it. That would go into provincial and city coffers. They can’t do that anymore. They don’t actually have the tax generation methods that we have in the West, such as property tax, for example. So, it’s much harder for provinces to generate money. The point of this is that the Chinese government, for domestic political reasons, is not going to ever cancel Ethiopia, Angola, Zambia, or Ghana’s debt because it can’t do that when at home it’s saying to its provinces, “We’re not going to cancel yours.”
Imagine the blowback in China, okay, if they canceled parts of Zambia’s debt, but Zhejiang Province doesn’t get any cancellation. People would be like, “What the F is going on when you’re canceling African people’s debts but not ours?” So, under those circumstances, it will never happen that the Chinese will cancel developing world debt. So, anybody who thinks that’s a possibility needs to stop thinking that. It just won’t happen.
Cobus: Yeah. And again, that’s another similarity. Like in both cases, the populations think their governments give away a lot more money to the global south than they actually do. One consistently find in the U.S. that domestic constituencies far overestimate the amount of aid that’s given by the U.S. and particularly the amount that actually goes out of the country because vast majority of U.S. aid is spent via U.S. companies, which means it kind of stays, circulates within the U.S. economy. Similar in China, we see that every few years with FOCAC summits. Big backlash within China about the amount of money that’s being pledged, to the extent that I think now they try and not make any big public pledges because it is so toxic domestically, not taking into account how much of that money stays within the Chinese economy and goes directly to Chinese companies and Chinese banks.
Eric: That’s right. So, a lot of people in China think that all these loans are giveaways, are aid, which it’s not. Most of the loans, as we’re seeing in Kenya, are interest-bearing loans, concessional as they may be, but they’re still interest-bearing loans. And you’re absolutely right about the United States. It turns out that as a share of GDP, the United States is one of the stingiest countries in the world when it comes to aid, contrary to what a lot of Americans actually think that we’re the most generous country in the world. And as you’ve also rightly pointed out, significant portions of USAID money, I think it’s somewhere around 60% to 75%. Georgetown Professor, Ken Opalo, has a great essay on this, where the vast majority of that money is spent in the United States or on U.S. contractors. So, aid is really as much aid for U.S. interests as it is for people in developing countries.
Again, very interesting points there. Let’s leave the conversation there. We’re going to come back to this question of debt later in the week to talk about the situation in Nigeria. We have a fascinating interview with a scholar on that, and again, talking about the governance and the management of the debt. So, a different wrinkle on this. I know we’re doing a lot of debt, but it is so important, particularly for developing countries, and then understanding China’s role. And as you’re seeing with Foreign Secretary Cleverly’s remarks, it still comes up in the geopolitics quite a bit. So, that’s one of the reasons why we’re focusing on it so much. So let’s leave the conversation there.
Cobus and I will be back again next week with another edition of the show. If you’d like to subscribe and follow everything that we’re doing, or just to support the independent journalism that Cobus and the team are doing in Africa, the Middle East, and in Asia, we would love your support. Go to chinaglobalsouth.com/subscribe. Sign up for a subscription. You’ll get 30 days free. We also have half off rates for students and teachers. Just send me an email, eric@chinaglobalsouth.com, and I’ll send you the links for those discounted subscription rates. For Cobus van Staden in Johannesburg, I’m Eric Olander — thank you so much for listening.
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