Talk of China laying “debt traps” for emerging markets that will trigger a wave of defaults is overblown at best.
But not everyone agrees. In a recent op-ed in the Financial Times, emerging-markets analyst Jay Newman writes: “We are on the brink of an epidemic of emerging-market defaults, the scale and scope of which will rival the debt crisis of the 1980s.”
This time, he says, there is a big difference from back then: China’s lending.
He writes: “When Sri Lanka, predictably, found itself unable to satisfy the debt, China sprang the trap, insisting on repayment, offering to exchange debt for further concessions and vast tracts of land, and offering additional cash to help tide the political class over.”
A debt trap is planted when a country lends to poorer nations, deliberately overwhelming them with unsustainable debt, and then making them surrender key assets or concede increased political power.
I’m currently not convinced by the argument that we’re going to experience a tsunami of emerging markets’ defaults caused by China’s so-called debt traps. For this to happen, it would need to hit Africa, a region made up of 17 emerging markets, including South Africa, the continent’s leading emerging economy.
China has invested an estimated US$340 billion over the past two decades, constructing major infrastructure projects in almost every country.
But there’s no evidence to suggest that China has sprung debt-traps in Africa.
Indeed, research shows that Chinese lenders are willing to restructure the terms of existing loans and have never seized an asset from any sovereign nation because of debt.
There are concerns about high interest rates but, typically, these rates are in line with those of a private bank.
Chinese lending works for Africa in terms of leveling up – especially as Western countries are heavily indebted themselves, and because the private sector has not been stepping up to the plate in general.
In addition, increasingly, African governments are saying they don’t want aid, they want to have trading partners.
China doesn’t do aid, but it does do trade; and it has surplus capital and labor, and enormous experience in large infrastructure projects.
If there is a flood of emerging-market defaults on the horizon, it is likely to be attributable to a variety of factors including the impact of the Russia-Ukraine war, interest-rate rises by central banks, and the lingering impact of the Covid-19 pandemic, among other issues.
I believe the focus on debt-trap diplomacy as a trigger for a wave of emerging-market defaults is misguided and is part of broader Western anxieties about China’s growing global influence.
Nigel Green is founder and CEO of deVere. Follow him on Twitter @nigeljgreen.