China – the reluctant debt relief leader in a debt-distressed world
- China carries much of the burden and blame in many cases of countries in extreme difficulties, the World Bank says
- Beijing must go beyond short-term service relief and lead the way, whether it wants to or not, analyst says
But the relief was temporary and the debt crisis has now worsened for some countries in Africa, Asia and Latin America.
As the biggest bilateral lender to many of these countries, China should step up and reduce the debt hanging over their economies, analysts say.
According to the World Bank, 60 per cent of the world’s poorest countries are already at high risk of debt distress or already in distress, with China carrying much of the burden and blame in many cases.
At the end of 2021, China was the largest bilateral creditor to World Bank’s International Development Association countries, accounting for US$100 billion of their bilateral debt stock, up from US$15 billion in 2010, World Bank president David Malpass said.
Malpass said China was expected to account for 66 per cent of the debt-service payments the countries would be making on their official bilateral debt.
“While China’s debt stock is roughly half of bilateral debt, its debt service payments are around two-thirds of bilateral debt service payments,” Malpass said at the launch of the “International Debt Report 2022” on Tuesday.
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In Africa, Ghana is facing debt troubles and has asked investors to exchange around US$9 billion in domestic debt for new bonds to ease a crunch in payments as the government negotiates an International Monetary Fund (IMF) bailout. Ghana said a foreign debt restructuring programme would be announced later.
Kenya also plans to renegotiate the US$5 billion in Chinese loans that it took to build the Standard Gauge Railway. Kenya says the current repayment schedule of the loans used to finance the railway cannot be sustained with its revenue. Nairobi intends to request China Exim Bank to extend the maturity of the loan from the present 20 years to up to 50 years.
Zambia, which in 2020 became the first African nation to default on loans during the Covid-19 era, is renegotiating loan terms for its foreign debt, including borrowings from China.
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While in China, they held talks with Chinese Premier Li Keqiang, Finance Minister Liu Kun, central bank chief Yi Gang and policy bank representatives, with Malpass describing the talks as “positive”.
“President Malpass and Premier Li discussed rapidly rising debt service payments that drain limited resources from spending on development priorities, including health, education, climate, and infrastructure,” the World Bank said on Friday.
“We discussed the urgency of more rapid progress in the ongoing debt restructuring discussions, including for Zambia. Changes in China’s positions are critical in this effort,” Malpass said.
Georgieva said the parties talked about ways to prevent individual cases of debt distress from triggering a global debt crisis.
“The application of the G20 framework must become much faster and more predictable, and it needs to reach a broader set of countries. We also see space for a platform for more systematic engagement on debt issues, where China can play an active role,” she said.
In his talks with Georgieva, Li said China would implement the G20’s DSSI in all respects, and “work with relevant G20 members to formulate and participate in a fair and equitable debt-restructuring plan”.
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Patrick Curran, a senior economist at Tellimer, said the G20 debt relief offered under the DSSI was minimal, and “only kicked the can down the road as rescheduled payments are now coming due at a time of heightened financial stress”.
Curran said Chinese lending had been a major driver of the debt increase in many low-income countries over the past decade, alongside increased access to the commercial debt market.
As a result, he said there was a much more complex mix of creditors than there typically was in decades past.
“While excessive borrowing from China is ultimately the responsibility of the borrowers, China’s unwillingness to comply in a timely way with established restructuring norms is making it much more difficult to resolve crises when they occur,” Curran said.
He said as long as global financial conditions remained tight, countries on the verge of distress would have to make difficult policy choices to avoid a debt crisis, including fiscal and monetary policy tightening and exchange rate depreciation.
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Mark Bohlund, senior credit research analyst at REDD Intelligence, said the DSSI was only intended to give temporary cash flow relief so the applicant countries could meet increased expenditure needs to counter the impact of Covid-19.
However, Bohlund said the common framework was the solution for those countries that needed debt restructuring to put their fiscal policy back on a sustainable basis.
He said these issues could be financed by debt maturity extensions and/or refinancing.
With more countries at serious risk of default, it was clear there would need to be much more ambition from official lenders like the World Bank, said Scott Morris, a senior fellow at the Centre for Global Development think tank in Washington.
“But it also means that the Chinese government will need to show leadership when it comes to debt relief, embracing measures that go beyond short-term debt service relief,” Morris said.
“In virtually every emerging case of debt distress in Africa, China is the largest official bilateral creditor. As such, it is now tasked with leadership whether it wants it or not.”
The Chinese government will need to show leadership when it comes to debt relief
Padraig Carmody, a professor at Trinity College Dublin, said China had sometimes written off some loans but the amounts tended to be small and in some cases debt renegotiations enabled China to increase the value of its portfolio.
“Sometimes repayment time lines are extended but there is generally an insistence that debts be repaid. This is the approach that is applied domestically in China, by lenders such as [China Development Bank],” Carmody said.
However, this does not solve the problem of over-indebtedness. To solve the problem, he said the lenders needed to forgive debts and release borrowers from a debt overhang that brought their economies down. This was what many Western lenders had to do in the 1980s but so far China had resisted such a course of action, Carmody said.
