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Chinese debt traps won’t trigger EM defaults

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Talk of China laying ‘debt traps’ for emerging markets that would trigger a wave of defaults are “overblown”, said the CEO of a leading independent financial advisory and fintech, following warnings in the media.

“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,” said deVere’s Nigel Green.

“Because 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.”

A debt-trap is created 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.

“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,” emerging markets analyst Jay Newman wrote in the Financial Times.

This time, however, there is a big difference to back then – and it’s China’s lending, warned Newman.

“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,” he wrote in the FT.

Infrastructure projects

Defending his argument Green said that China has invested an estimated $340 bln 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,” he said.

“Indeed, Chinese lenders are willing to restructure the terms of existing loans and have never seized an asset from any sovereign nation due to debt.

“There are concerns about high interest rates but, typically, these rates are in line with those from a private bank,” the deVere CEO said.

He added that 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.

“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 labour, and enormous experience in large infrastructure projects.”

The deVere CEO said he believes that if there is a flood of emerging market defaults on the horizon, it is likely to be attributable to a variety of factors.

These include, “the impact of the Russia-Ukraine war, interest rate rises from central banks, and the lingering impact of the pandemic, amongst other issues.”

Green concluded that, “the focus on debt-trap diplomacy as a trigger for a wave of emerging market defaults is overblown and is part of broader western anxieties about China’s growing global influence.”