With friends like these

Mar 25, 2015 Editorial

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Our country’s administrators have in the recent past admitted to grabbing at what they described as eye-catching loan opportunities on offer from developed nations, China in particular. These administrators, as we have gradually learnt, have no qualms about plunging the country into immeasurable debt repayment. After all, it’s not their money.
But shouldn’t we be concerned as taxpayers?
The Financial Times published an interesting article on March 17 captioned “China: With friends like these” – Beijing has lent billions to spread its influence, but as defaults loom its approach is shifting.” We think that the following excerpts from that analysis make for interesting reading, considering our leaders’ apparent myopic approach to financial stability and independence.
“In global terms, the defeat of Mahinda Rajapaksa in Sri Lanka’s presidential elections in January ranked as a mere political tremor. But for China’s policy of financial diplomacy — a key strand in Beijing’s strategy to win friends and commercial advantage around the world — the loss has been convulsive enough to rearrange the region’s diplomatic furniture.
Sri Lanka’s new leader, Maithripala Sirisena, has not hid his antipathy toward China. In a veiled reference to Chinese policy-backed loans worth several billion dollars, Mr Sirisena blamed “foreigners” during his election campaign for stealing his country.
“This robbery is taking place before everybody and in broad daylight…if this trend continues for another six years our country would become a colony and we would become slaves,” he said in his manifesto.
Since his victory, Colombo has informed Beijing that it is reviewing the terms of its loans. It has also suspended work on a $1.5bn port project being built by the state-owned China Communications Construction Company. And while Sri Lanka says it hopes to keep warm ties with Beijing, last week Mr Sirisena also stepped up his courtship of China’s main regional competitor, by welcoming Narendra Modi on the first visit by an Indian premier for 28 years.
The reversal is not an isolated setback for China’s “cheque book” foreign policy, but the latest in a string of upsets that have punctuated Beijing’s attempts to secure resources, markets and strategic alliances in developing countries with policy-driven loan deals.
Ukraine is heavily in arrears in its Chinese lending, while Zimbabwe has failed to repay a much smaller amount. Other recipients of Chinese policy-driven finance — such as Venezuela, Ecuador and Argentina — are suffering varying degrees of economic distress, casting doubt on their ability to repay.
For China, there is much more than money at stake. Beijing has used its status as the world’s biggest provider of development finance to burnish claims of leadership in the developing world, deploying funds from its $3.8tn in foreign currency reserves to boost relations with countries that sometimes have an anti-US agenda. But this model now looks compromised, analysts say. Bilateral deals stitched together in secret with countries afflicted with poor credit ratings, insecure governments and ailing resource sectors have shown a propensity to unravel.
The change in China’s financial diplomacy model has implications for the wider world. There are signs that Beijing is growing less tolerant of the more egregious risks, a trend that could deprive some of the world’s most fragile economies of crucial lines of credit.
Even minor changes in the way that China deploys development finance could have a significant impact, given the scale of its operations and the speed of its growth since the 2008 crisis.
Venezuela, in particular, is a source of alarm. China has lent a total of $56.3bn in 16 loan tranches to the country, according to Inter-American Dialogue data. The country’s economic meltdown has prompted bond investors to price in a 90 per cent likelihood of default in the next five years. Beijing is perturbed. It refused the entreaties of Nicolás Maduro, the president, who travelled to China seeking a bailout earlier this year.
The debt deal was initially struck by “a friend of the Chinese people”, the late Hugo Chávez, Mr Maduro’s predecessor. Checks and balances were skirted, with the debt bypassing authorisation by parliament on the grounds that because it was to be repaid in oil — not in dollars — it could not be classified as “debt”.
“While countries such as Venezuela have previously enjoyed something of a special relationship with China, the Chinese government does not appear to have the appetite to write a blank cheque to bail them out now that lower commodity prices have exposed strains in their balance of payments,” says David Rees, an analyst at Capital Economics.”
We hope that our leaders are taking careful note.

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