Zambia’s debt demand shows limits of China’s chequebook diplomacy

The government has decided to ask all external creditors to agree to debt service suspension on the same terms, Zambia’s finance ministry said in a statement on October 13.

The only foreign-currency denominated debt that Zambia will continue to pay is from multilateral agencies, plus debt for a few priority projects, the statement adds.

“Should Zambia fail to reach an agreement with its commercial creditors . . . the Republic with its limited fiscal space will be unable to make payments and, therefore, fail to forestall accumulating arrears.”

Debts to Chinese commercial lenders are at the core of the problem. In a separate statement to the London Stock Exchange (LSE) on October 7, the Zambian finance ministry said that the status of discussions for debt service deferment “varies across Chinese lenders.”

Zambia “hopes to formalize all debt service suspension agreements before the end of the year”, the statement said.

• Zambia is vulnerable to defaulting in the absence of confirmation from Beijing that it recognises China Exim Bank, which is funding the expansion of the Kenneth Kaunda International Airport, as an official creditor, says Nick Branson, director of Gondwana Risk in London.
• Even if Zambia secures the full $225 million of debt service relief it has requested from what the G20 considers to be Chinese bilateral creditors, the state owes a further $158 million to Chinese non-official creditors, Branson says.
• Zambia also has yet to devise a plan for $200 million of arrears to Beijing, he adds.

Belt and Road Limits

The present situation illustrates some limits to China’s Belt and Road Initiative, says Gabriel Collins, co-founder of the China SignPost research group in the US.

• Loan diplomacy “often fails to purchase lasting strategic influence,” he says.  “Such influence is, at best, temporarily rented and financial outlays that opened doors when times were good suddenly become liabilities when a macro shock leaves debtors unable to pay.”
• “Chinese lenders will ultimately acquiesce to Beijing’s demands but in the meantime will press their case as far as they think politically advisable in order to try and at least minimize the haircut that may be coming,” says Collins, a fellow at Rice University’s Baker Institute for Public Policy.

Chinese commercial lenders see a wealth of assets such as copper output which could be used to satisfy obligations, Collins says. But Beijing is unlikely to allow this because Zambia would see such a stance as “a hostile act that destroyed whatever strategic position China might have gained through the loans.”

• It’s “very probable” that the Chinese government will ultimately have its commercial lenders publicly write off some debts or permit temporary forbearance, but then privately reimburse them, Collins says. Such recompense could come through measures back home in China, such as direct money transfers or preferential project stakes, he adds.

The BRI is “a good deal more fragmented and chaotic than much Western media coverage makes out,” says Sebastien Strangio, author of a new book “In the Dragon’s Shadow”, which traces the extension of Chinese power into southeast Asia.

• “While private Chinese lenders and the Chinese state are no doubt close, there may be limits to how far the state can go in telling the former what to do. After all, Chinese commercial lenders have their own metrics and economic incentives that would mitigate against restructure or forgiving foreign debts.”

The Zambian experience shows that China’s lending strategy needs to change, says Harry Broadman, chair of the emerging markets practice at Berkeley Research Group LLC in Washington. He questions why a borrower such as Zambia would not go to a commercial bank – which would have no ulterior political motives – if the loans are made at commercial rates.

• “If China wants to remain in the international creditor game—where by dint of its political structure it is not a commercial-based economy and its motives as a lender are far more than only commercial—it needs to make itself attractive in other ways to debtors if it wants to charge commercial rates,” Broadman says.

Bottom Line: As the British economist John Maynard Keynes once said: ““If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.”