Global worries over trade wars, central bank rate hikes and geopolitical instability have hammered emerging-market debt in recent months. The fact is, over the past decade, many developing and low-income countries have simply borrowed too much. They borrowed from the markets, from banks and from other countries. In particular, they borrowed from China, which has averaged more than $100 billion in annual financing commitments since 2010.
Those bills are now coming due. As one of the largest providers of emerging-market credit, China needs to be part of a global effort to prevent a wave of debt crises. It should start by joining other sovereign lenders in the Paris Club, the world’s multilateral framework for official creditors.
China’s massive overseas lending has been driven by its quest for resources and its ambitions for the Belt and Road Initiative -- President Xi Jinping’s signature foreign-policy program to finance and build land and maritime infrastructure across continents. While developing countries have welcomed money for much-needed infrastructure, many Chinese state-sponsored loans have lacked transparency. They’ve often funded large vanity or political projects rather than commercially viable ones. And they haven’t taken into account the debt capacity of borrowing countries.
That’s helped generate unsustainable debt loads across the developing world. Some notable borrowers of Chinese debt, including Zambia, the Republic of Congo and Sri Lanka, have already turned to the International Monetary Fund for financial assistance; Venezuela will have to do so at some point.
The problem is that the IMF can’t know how China -- the official creditor -- will respond in each case. In March, IMF Deputy Managing Director Tao Zhang highlighted the troubling shift toward non-traditional official lenders, given the risk that they might not join coordinated global efforts to resolve debt crises; China is the only large country that falls into that category.
As the IMF and existing Paris Club members consider appeals for assistance from debt-burdened nations, they’ll be reluctant to act without greater transparency on the debt China is owed. They need to know that China will cooperate in returning borrowers to debt sustainability and that their money won’t be used to bail out irresponsible Chinese state creditors.
Early indications show this could prove a challenge. In 2017, for instance, China chose to swap unsustainable debt owed by Sri Lanka for possession of its strategically located Hambantota Port and 15,000 acres of land around it. China’s aggressive approach has fueled political unrest in Sri Lanka, increased suspicions of China’s motives in other Belt-and-Road countries, and raised alarm bells among the official creditor community, as well as powers such as India and the US, where strategists see such “debt-trap diplomacy” as the real goal of China’s generous lending.
It’s past time for China to become a more responsible lender -- one that ensures the transparency, viability and sustainability of its loans, while coordinating with other sovereign creditors. The Paris Club is the right vehicle to do so. Over the past 60 years, this group of sovereigns has signed over 400 deals to address bilateral, official, developing-country debt. It coordinates with the IMF and multilateral development banks to ensure reform programs are in place to return borrowers to sustainability.
At the very least, China should publicly agree to abide by all the Club’s principles, processes and terms. Better yet, it should join the group itself.
China plays a generally responsible role in other global financial institutions. Its claims to champion multilateralism will ring hollow, however, if it won’t abide by the same rules as other major sovereign lenders when a borrowing country goes into debt crisis, especially if Chinese money helped create that problem. The best way to convince the world to embrace the Belt and Road is to play by the world’s rules in financing it.
Heidi Crebo-Rediker
Heidi Crebo-Rediker is an adjunct senior fellow at the Council on Foreign Relations and the chief executive officer of International Capital Strategies. -- Ed.
(Bloomberg)
