While much of the Western developed world was glued to the mutiny in Russia over the weekend, much of the developing world contemplated a debt crisis that has both governments and individual families struggling to pay their bills. Minor relief surfaced at a global finance summit in Paris on Friday, when China and other major creditors reached a “landmark” agreement to restructure part of Zambia’s debt, providing other countries in financial distress with some hope for similar treatment. But geopolitical tensions between China and the U.S.-backed International Monetary Fund may jeopardize the cooperation required to avert further suffering in the world’s poorest countries.
This week, Wang Liwei, Wang Shiyu, and Han Wei at Caixin summarized China’s role in the global sovereign debt crisis:
At least 65 countries owe China debts that exceed 10% of their total external debt. China is the largest bilateral creditor in many countries under the Debt Service Suspension Initiative [DSSI] framework, with a median share of 54% and reaching as high as 72% in some cases.
[…] The DSSI is a G-20 initiative launched in May 2020 under which bilateral creditors temporarily halt debt service payments from the poorest countries that request the suspension. It was intended to help these nations focus on safeguarding lives during the pandemic.
The Ministry of Finance, and policy banks such as the China Development Bank and the Export-Import Bank of China, as well as state-owned commercial banks, are the main lenders. There are no official statistics on China’s external sovereign debt, but Caixin’s calculation based on public information and experts’ analysis show that sovereign debt that meets the conditions of the DSSI program is relatively limited at around $20 billion.
China’s external loans of all types are estimated to equal $30 billion.
[…] “The persistent global sovereign debt risks have been periodically unleashed every few decades in modern times,” Lu said. “This is the first time that China finds itself directly involved and significantly impacted.” [Source]
China is also the largest official creditor of Zambia, which was at the center of conversations at the international Summit for a New Global Financing Pact last week. Joseph Cotterill, Leila Abboud, Jonathan Wheatley, and Yuan Yang from The Financial Times reported on the “milestone” debt-relief agreement that China helped broker at the summit:
Zambia’s President Hakainde Hichilema praised Chinese president Xi Jinping on Friday “for helping us reach this significant milestone” after lenders led by China agreed to rearrange $6.3bn in loans, in a deal that French president Emmanuel Macron’s government helped to seal at the global finance and climate summit in Paris.
“We are fully aware that there is still a considerable amount of work ahead of us,” Hichilema added, reflecting that Zambia still had to iron out terms with each bilateral lender and strike a separate deal to restructure another $6.8bn in private debts.
Africa’s second-biggest copper producer had been left in financial limbo and unable to continue accessing a $1.3bn IMF bailout while China, the country’s biggest creditor, and other lenders clashed for months over a proposal to reduce by about half the value of almost $13bn of overall external debts. [Source]
As part of the deal, Zambia will be given a three-year grace period on interest payments and an extension of its loan repayment deadlines. Consistent with China’s preference for restructuring debt rather than writing it off, Zambia did not secure any debt write-downs. Moreover, the agreement provides less debt relief in the event that Zambia’s economy exceeds expectations in the next few years, a clause that is rarely seen in Western-led debt restructurings. Some observers view the clause, believed to have been inserted by China, as a sign of China’s new rule-making role in global finance. “[The] deal is very welcome to Zambia but it is China who got what it wanted,” concluded Stephen Chan, a professor of world politics and international relations at the School of Oriental and African Studies in London.
French President Emmanuel Macron hailed the Zambian debt deal as “historic,” but it received little attention in China. Coverage of the deal by Chinese media featured only one short summary from Xinhua, two short reports on WeChat, and one follow-up article from China Daily; none of them mentioned China’s role specifically. At the China Global South Project, Eric Olander gave one possible explanation for why Chinese media were noticeably quiet on the deal:
The lack of any news coverage and social media discussion on this topic is indicative of just how sensitive debt issues are in the Chinese discourse. Domestically, Chinese authorities have downplayed debt issues in Africa to avoid criticism that Beijing is too generous with loans which many Chinese stakeholders misinterpret as financial aid.
The government also has a well-tuned narrative where it positions itself as the victim of Western attacks for debt trap diplomacy and predatory lending. A story like this where China is a major actor, is a lot more complicated to present to a public who is accustomed to a grievance narrative. [Source]
In Foreign Policy, Agathe Demarais described how Western countries such as the U.S. are seizing this moment of financial crisis to use global debt restructuring as a way to compete with China:
For Western countries, focusing on debt restructuring is a smart strategy: At a time when their fiscal room for maneuver is limited, restructuring has no immediate impact on taxpayers and actually increases the chance that official lenders will get their money back. Rich countries also believe that now may be the perfect time to strike back against Beijing’s financial largesse, for two reasons. First, China is facing economic difficulties: The post-COVID rebound is disappointing, the financial sector is wobbling, and local governments are weighed down by debt. In light of these challenges, Beijing has focused its efforts on reviving the domestic economy at the expense of international outreach. Second, Beijing is facing a growing backlash in indebted countries amid fears of corruption and predatory lending. In Pakistan, for instance, these exact concerns sparked protests against a Chinese-backed port project earlier this year.
[…] Like so many other summits, the Paris gathering will probably produce lots of cheery promises that will never be implemented in practice. But it may be the summit’s symbolic meaning that really matters. After many years of inaction, rich countries are finally striving to respond to China’s growing influence in the global south. This highlights how aid is fast becoming another battleground for influence between China and the West. The upshot is that low-income countries could well benefit from the trend, assuming that they are willing and able to seize this opportunity to play China and the West against each other. [Source]
However, as Peter S. Goodman from The New York Times reported on Monday, it is poor countries that end up trapped in the crossfire of this geopolitical competition:
The challenges facing Suriname illustrate one of the new complexities in global finance. As scores of middle- and lower-income countries grapple with an intensifying debt crisis, assistance is often held up by conflict between traditionally dominant Western institutions and a significant rising player: China.
In decades past, the International Monetary Fund — a central component of the liberal democratic order forged by the United States and its allies at the end of World War II — was the only source of cash for nations that struggled to pay their bills. China has since emerged as a major lender for countries from Asia to Africa to Latin America. Its financial institutions dispense loans accompanied by few demands, providing an alternative to the austerity prescribed by the I.M.F.
But as strapped governments negotiate with creditors to diminish their debt burdens, the I.M.F. and the Biden administration have balked at providing relief until Chinese financial institutions participate. Otherwise, they assert, Chinese lenders are free-riding on debt forgiveness extended by others.
[…] The concerns of ordinary people in indebted nations are typically “nowhere to be seen,” added [Daniel Munevar, a sovereign debt expert at the United Nations Conference on Trade and Development in Geneva]. Rather, they are subsumed by politically loaded negotiations that cater to the interests of creditors. [Source]