Photographer: Dado Galdieri/Bloomberg

Citi: Why China Is the Future of Emerging Market Debt Refinancing

China is offering lifelines to cash-strapped countries that supply natural resources.

Who will save the world's overindebted, cash-strapped, earnings-challenged entities?

China, apparently.

Last week, Petroleo Brasileiro SA got a lifeline in the form of a $10 billion loan from China Development Bank Corp. Brazil's junk-rated, state-owned oil producer has been struggling to refinance its significant debt load in the face of ultra-low oil prices and skittish investors.

As Bloomberg's Sabrina Valle reported at the time, China has struck similar deals before as "it seeks to ensure supplies to the world’s biggest crude market after the U.S.," with similar deals having previously helped Venezuela fund its own significant debt pile.

Indeed, Citigroup Inc. analysts W,R, Eric Ollom and Ayoti Mittra reckon China may have more financing tricks up its sleeve, opting to "pull a Japan" in the sense of spending its cash pile on overseas assets.

As they note: 

Details have yet to be released as to ultimate amount of new money, security, term, or timing, but [China Development Bank] already had a $3.5 billion line of credit outstanding to [Petrobras], and in 2009 had entered into a $10 billion loan agreement that was backed by future oil exports to Sinopec at market prices. While clearly credit positive for [Petrobras], we see a larger significance in this deal as it is another example of China recycling its foreign reserves to shore up its long term supply of raw materials. Just as Japan did in the 1980s and 90s in the mining, steel and pulp industries in Brazil, we believe it is possible that Chinese financial institutions become more active across emerging markets in providing cash poor industries with financing in exchange for a secure long term supply of raw materials. ... We believe other industries in Brazil, perhaps mining or food, may be able to benefit from this Chinese largesse in the future. Given how the capital markets seem reluctant to open for Brazilian corporates, potential access to a new pool of funds is significant to bridge any cash shortfalls in 2016 and has the potential to change the perception of risk for the sector if not to the positive, perhaps to the less negative.

Of course, with China's own corporate bond market now ballooning, a cynic might wonder who will finance the financiers?

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