China”s global debt stance, reflected in its decision to retain loan repayment obligations amid escalating defaults by multiple nations, is intensifying tensions with the United States and its allied countries. Studies conducted recently have brought to light China”s growing role as a provider of last-resort lending, as it offers credit swap lines through the People”s Bank of China to rescue struggling nations.
China’s Growing Lending Dominance and the Geopolitical Fallout for Developing Countries
China is emerging as a key player in the lending landscape, surpassing other governments and approaching the traditionally Western-dominated International Monetary Fund and World Bank as the largest official lender to developing countries.
However, the ongoing geopolitical rivalry between the U.S. and China is causing collateral damage to these countries, as China resists demands to write off its loans even as a majority of low-income countries struggle to repay their debts or are at risk of defaulting amid global economic pressures.
These tensions are set to escalate at the upcoming spring meetings of the IMF and World Bank in Washington, as top finance officials gather to discuss the issue. The U.S. is pushing China to provide more debt relief, making it one of the most contentious topics of discussion at the event.
The Challenge of China’s Rising Dominance in Lending to Developing Countries
China’s rising prominence in lending to developing countries is challenging the traditional Western model of providing assistance and negotiating debt relief with borrowers, which has been in place since World War II.
The International Monetary Fund, World Bank, and other development lenders have established debt forgiveness programs for struggling countries, but China’s approach is seen as more transactional and opaque.
Its lenders are less prone to applying strict conditions and are more risk-tolerant in financing infrastructure projects to access natural resources.
However, China’s hardline approach to lending is causing concerns as it refuses to write off debts, which could lead to more poverty in Africa and other regions.
The conflict is exposing a new potential fault line in the global economic order and is contributing to the broader trend of decoupling between the West and China, consolidating China’s influence in these regions.
Treasury Secretary Janet Yellen and other officials are calling on China to provide more debt relief, but tensions are high as China pursues a parallel system of development finance with its own rules.
“We are moving to more of a bipolar system with a very significant creditor to a great many countries bent on doing things bilaterally with its own rules,” said Carmen Reinhart, the former chief economist of the World Bank.
US pushes China for debt relief in developing countries as Treasury Secretary Yellen calls for resolution
In January, Yellen discussed with China’s then-Vice Premier Liu He in Zurich the importance of swiftly resolving debt issues for both borrowers and creditors.
A senior Treasury official, who spoke anonymously due to lack of authorization, stated that allowing debt overhang to persist only leads to lower payback for the country in the long run.
This argument, that China must forgive some of its debt to ensure repayment, is believed to be the best leverage the U.S. has with Beijing. However, despite initial assurances, China has not taken significant steps towards writing off its debt.
While China agreed to join the common framework, a G-20 process aimed at helping poorer countries resolve debt issues arising from the pandemic, it has yet to produce any meaningful results.
IMF Managing Director Kristalina Georgieva recently visited China, where she stated that top officials expressed a willingness to cooperate on debt resolution.
Georgieva emphasized the need for faster debt resolution, noting China’s multiple debt institutions, which complicate participation, and urging the country to speed up its involvement.
China defends lending practices amid debt relief concerns
China’s stance on global debt sets it apart from the rest of the world, as it refutes allegations about its lending practices and argues that its extensive financing of projects has been crucial for the development of regions like Africa.
The Chinese government asserts that the private sector, mainly consisting of bondholders in the U.S. and Europe, often holds more debt than China in poorer countries.
According to Chinese Foreign Ministry spokesperson Mao Ning, China has always engaged in investment and financing cooperation with developing countries based on international rules and principles of transparency, without any political strings attached or seeking selfish interests.
Despite this, a senior official from China’s central bank expressed reluctance to participate in sovereign debt restructuring unless the World Bank and other regional development banks also agree to write down their loans.
However, the World Bank has dismissed this demand, stating that development bank financing comes with low interest rates and does not significantly add to a country’s debt burden.
US pushes China for debt relief in developing countries as Treasury Secretary Yellen calls for resolution
In January, Yellen discussed with China’s then-Vice Premier Liu He in Zurich the importance of swiftly resolving debt issues for both borrowers and creditors.
A senior Treasury official, who spoke anonymously due to lack of authorization, stated that allowing debt overhang to persist only leads to lower payback for the country in the long run.
This argument, that China must forgive some of its debt to ensure repayment, is believed to be the best leverage the U.S. has with Beijing.
However, despite initial assurances, China has not taken significant steps towards writing off its debt.
While China agreed to join the common framework, a G-20 process aimed at helping poorer countries resolve debt issues arising from the pandemic, it has yet to produce any meaningful results.
IMF Managing Director Kristalina Georgieva recently visited China, where she stated that top officials expressed a willingness to cooperate on debt resolution.
Georgieva emphasized the need for faster debt resolution, noting China’s multiple debt institutions, which complicate participation, and urging the country to speed up its involvement.
China defends lending practices amid debt relief concerns
China has refuted allegations regarding its lending practices, stating that its extensive financing of projects has played a crucial role in the development of regions such as Africa.
The Chinese government argues that the private sector, consisting mainly of bondholders in the U.S. and Europe, often holds more debt than China does in poorer countries.
Chinese Foreign Ministry spokesperson Mao Ning dismissed recent comments from Yellen, stating that China has always engaged in investment and financing cooperation with developing countries based on international rules and principles of transparency, without attaching any political strings or seeking selfish interests.
A senior official from China’s central bank also expressed reluctance to participate in sovereign debt restructuring unless the World Bank and other regional development banks also agree to write down their loans.
However, the World Bank has dismissed this demand, contending that development bank financing comes with low interest rates and does not significantly add to a country’s debt burden.
The Lack of International Rules on Sovereign Debt Default Hinders Global Economic Stability
Currently, there are no established international rules that regulate when a country defaults on its debt, unlike the legal processes that are typically available for companies and individuals in many countries.
In the past, wealthy countries that traditionally lent to developing nations created the Paris Club, which would negotiate with governments in distress to write down their debt.
This group, along with the IMF and World Bank, was able to help several highly indebted countries, primarily in Africa, restructure their debt in the 1990s and early 2000s.
However, this changed when China began extensively lending to developing countries as part of its Belt and Road Initiative more than a decade ago.
Chinese lenders were followed into riskier yet profitable markets by private bondholders seeking to make money outside of the then ultra-low interest rate environment in advanced economies.
In the end
China’s stance on global debt sets it apart from the rest of the world, but its participation is crucial to resolving the deadlock preventing the IMF from providing financial support to countries struggling with debt.
These countries must first demonstrate a sustainable strategy to address their debt, and China, as a significant player in their debt structure, must participate. Brad Setser, a former Treasury official and senior fellow at the Council on Foreign Relations, is optimistic that the issue can be resolved practically.
“The administration is taking the view that this is a financial problem that requires a financial solution, and to be honest, the U.S. doesn’t have to convince China to participate in this process,” he said.
“The countries defaulted. China has to participate to get repaid.”
