Save for later Print Download Share LinkedIn Twitter China's past largesse may be coming back to haunt it. Many of the oil producers it has propped up over the past decade with large loans are now struggling to repay their debt, and that's causing political headaches for Beijing. The uncertainty over loan repayments has become a pressing issue for China's biggest overseas lender, state-owned China Development Bank (CDB), and for the government -- which can hardly be seen to be losing money overseas while asking people to make sacrifices and restructure at home as the domestic economy slows (EC Aug.5'16). Most of the loans are repaid in oil shipments, and China has become increasingly dependent on such deals for its crude imports. China's first such loan, a $6 billion credit to Russia, came in 2005, and lending accelerated significantly after the 2008-09 financial crisis. China saw the loans as a solid alternative to placing its massive foreign-exchange reserves in US Treasury bonds, which under quantitative easing were yielding only paltry returns. According to the London-headquartered consultancy Energy Aspects, oil shipped to China via such loan deals last year amounted to as much as 1.6 million barrels per day, representing about one-fourth of Beijing's total crude imports. But the fall in oil prices since mid-2014 has meant that recipients of Chinese loans must increase their export volumes substantially in order to meet their repayments, and not all countries are in a position to do that. Venezuela, Angola and Russia have received the biggest oil-backed loans, adding up to more than $100 billion altogether, much of it still to be repaid. Russia, via state-controlled Rosneft and Transneft, took a $25 billion loan in 2009 to be repaid through exports of 300,000 b/d of crude to China through to 2031. Rosneft in 2013 signed another contract, to supply state China National Petroleum Corp. (CNPC) with an additional 2.64 billion bbl of crude oil for 25 years, which envisaged prepayment for up to 30% of the volume -- worth more than $70 billion back in 2013 before oil prices halved. Rosneft has already received $35 billion from CNPC, but insiders say favorable terms mean further payments from CNPC are expected. The total amount lent to Angola between 2000-14 was $21.2 billion, of which around $12 billion went to state Sonangol, according to Deborah Brautigam, who heads the China-Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies. But the debt and repayment schedule has become much more onerous since oil prices fell in 2014, despite which Sonangol signed up to yet another oil-backed loan in late 2015 that's seen Sinochem's term liftings rise in February from some 60,000 b/d to 210,000 b/d. It is also almost impossible to tally what the net debt is, because there are several loans, and the maturities on each keep changing along with the oil price. China's most troublesome borrower is Venezuela, whose economy, crippled by years of overspending and now the oil price plunge, has essentially collapsed (EC Jul.29'16). The Washington-based Inter-American Dialogue estimates that Beijing lent $60 billion to Venezuela between 2007-15, although not all those loans were oil-backed. Earlier this year, China reportedly gave Venezuela a grace period on its principal payments under past oil-backed loans, freeing up more barrels for Caracas to sell on the open market. But Venezuela is believed to still owe China at least $20 billion (EC May13'16). China has long worried that Venezuela's economic mismanagement would jeopardize its repayment ability and has reportedly frozen new lending. But it is unclear how much more pressure China can exert. Matt Ferchen of Beijing's Tsinghua University says that the loan debacle and China's reaction to it is testing the country's touted "patient capitalism," which envisaged lending to developing countries as a long-term project. "We are already at the point where patience is being lost," he told Energy Compass. As China grows increasingly worried that its borrowers will not repay their loans, it is reevaluating its longstanding lending policies. Having served as an attractive financing source for distressed borrowers such as Venezuela because it imposed fewer conditions than Western lenders, China is now considering joining the Paris Club, the principal international forum for restructuring official bilateral debt. That move could see Beijing move closer to Western lending practices, and its loan terms become less beneficial for oil-producing countries. Stepping Back China does not look likely to abandon oil-backed loans altogether, however, and has signed at least $12 billion of such deals so far this year. "Although this is a weak demand market, oil demand is involved with national energy security; it is a long-term thing," an analyst with CNPC tells Energy Compass. Yet a flurry of new deals is unlikely in the short term, as Beijing thinks twice before lending more to struggling countries, and because China's slowing economy is denting its need for oil. China's apparent oil demand, at 10.91 million b/d, has barely budged this year, according to Energy Intelligence calculations. Erica Downs, senior analyst for Asia at political risk consultancy Eurasia Group, also notes that the Chinese government is seeking to reorient the nation's economy away from traditional industries and toward a services-based economy -- a shift that will gradually delink economic growth from oil-demand growth (EC Jan.8'16). Maryelle Demongeot, Singapore, Dawn Lee, Beijing, Christina Katsouris, London, and Nelli Sharushkina, Moscow Compass Points • SIGNIFICANCE: China has bankrolled many developing oil-producing nations for the last decade through oil-backed loans. But a slowing Chinese economy and worries that cash-strapped borrowers will run into payment troubles -- Venezuela in particular -- are prompting Beijing to wind down its lending. • CONNECTION: That securing international sources of oil supply is less of a concern to Beijing is underscored by its new investment focus on Southeast Asia and South Asia. • NEXT: China will likely funnel more of its lending through new multilateral institutions that it dominates, including the Asian Infrastructure Investment Bank and New Development Bank. In doing so, it's also expected to tighten up the terms of its lending. China's Top Crude Suppliers (b/d) 2013 2014 2015 2016† Saudi Arabia 1,082,409 997,319 1,014,995 1,046,725 Russia* 490,923 664,884 852,122 1,025,595 Angola* 803,554 816,349 777,332 907,698 Oman 511,730 597,312 643,920 687,571 Iraq 472,209 573,956 644,922 674,221 Iran 430,585 551,482 534,506 617,237 Venezuela* 316,250 276,888 321,493 407,916 Brazil* 105,246 140,618 279,495 338,456 Kuwait 187,707 213,280 289,748 324,579 UAE 206,362 234,003 252,427 234,519 Congo (Brazzaville)* 142,141 141,613 117,723 141,467 Colombia 79,102 198,554 178,060 195,545 China's total crude imports 5,666,071 6,192,037 6,737,401 7,524,011 *Denotes countries with which China has signed oil-backed loans, but not all volumes are repayments for loans.