All keen to grab private Chinese loan

The country's private sector loan from China increased by 140% in a year, thanks to capital machinery imports, mostly for the power sector.

The total amount borrowed by private sector enterprises from Chinese lenders stood at $2.23 billion at the end of June this year from $920 million in the same month last year, according to data from the Bangladesh Bank.

These were medium- and long-term loans taken out for the import of capital machinery, said a senior executive of the Bangladesh Investment Development Authority (Bida) that approves foreign loans.

High borrowing from China caused the total medium- and long-term external debts in the private sector to reach $8.19 billion in June this year, 19% higher than the amount in the same month last year, central bank data shows.

This significant rise in Chinese credit flows has the prospect of having higher cost of repayments for individual borrowers amid rising dollar prices.

Taka has lost its value by nearly 25% over the last one year, with the dollar price now reaching above Tk105 from Tk84.8 in June last year. It means that borrowers will have to bear this additional cost for repayments.

Moreover, interest costs will also be higher amid rising LIBOR (London interbank offered rate), which crossed the 3% mark, taking the final interest rate for borrowers above 6%, according to the Bangladesh Bank.

Chinese loans are given in dollars and at floating rates, which may put pressure on borrowers as LIBOR rate may increase further if the Federal Reserve Bank of the United States hikes its rate to tighten money flow to control inflation, say industry insiders.

LIBOR represents a benchmark rate that leading global banks charge each other for short-term loans.

However, the Bangladesh government has adopted a cautious stance on taking out financing from China, considering a repayment risk.

Bangladesh's share of foreign loans at floating rates has already doubled in four years as development partners are more inclined to offer market-based loans than fixed-rate ones, citing the country's overall economic progress including the rise in per capita income.

In the fiscal 2021-22, market-based loans stood at a little over 23% of Bangladesh's total external debt portfolio, which was 11.6% in FY18, according to the latest data of the Economic Relations Division (ERD).

A Bida executive, wishing not to be named, said borrowers mostly in the power sector took loans from China for purchasing capital machinery. They borrowed mostly from China as Chinese machinery is cheaper than in other countries, such as Japan and the US.

The overall private sector loan to the power sector rose 42% to $4.33 billion in June this year from $3 billion in September last year, central bank data shows.

Hong Kong, another region of China, is the second highest lender for Bangladesh's private sector, according to Bangladesh Bank data.

However, loans from Hong Kong stood at $1.41 billion in June, 13% down from the same period of the last year.

Private sector loans from the US, the fourth top lender, declined by 18% to $749 million in June, according to the Bangladesh Bank data.

When private sector lending from China more than doubled, loans from other top 10 lenders grew marginally, less than 1%, during the period.

For instance, loans from the third highest private sector lender, the United Kingdom, grew less than 1% during the same period.

Garment owners prefer purchasing machinery from China and Hong Kong due to lower costs. They have to change machinery in 5-10 years because of changing fashion trends, said a senior executive of the Bangladesh Bank.

Moreover, China is funding various projects in Bangladesh and contractors are purchasing machinery from China, he said. 

The committee comprising Bida and the Bangladesh Bank for approving foreign loans are welcoming more loans at dollars amid faster depletion of foreign exchange reserves, he noted. 

Asked about the repayment pressure, he said loans were given for 5-10 years. So, by the time the maturity dates come, the country's foreign currency crisis might be resolved, he hoped. 

China was the seventh highest development partner of Bangladesh, with a 8% share in the total external debt in FY21, according to the ERD. 

Bangladesh Bank data shows that after three years of negative growth, the country saw a big jump in capital machinery imports, led by the apparel industry, in the last fiscal year.

The capital machinery imports grew by 40.78% in FY22, overcoming the negative growth of 12.39% in the previous fiscal year.

Textile and garment sectors mostly led the imports in the last fiscal year, registering 24% and 46% growth respectively. The capital machinery imports of these two sectors were negative in the last three years.

China is the top import country for Bangladesh from where the highest amount of machinery was procured in the last fiscal year, according to data from the Bangladesh Bank. 

In FY21, Bangladesh imported nuclear reactors, boilers, machinery and mechanical appliances and parts worth $2 billion. 

But the imported amount was 15.39% down from $2.32 billion in the previous fiscal year, according to central bank data. 

Amid growing trade with China, the Bangladesh Bank recently allowed banks to maintain an account in yuan with their corresponding branches abroad to settle cross-border transactions in the Chinese currency.

The central bank opened the scope of cross-border payment settlements in yuan at the time when central banks around the world are increasing yuan holdings in their reserves as China, while its economic might grows, wants its money to replace the US dollar as global currency.