Engaging China: A New Vision for a Western Global Debt Restructuring

Image by Christian Lue.

In the ever-evolving sphere of global finance, China’s approach to debt relief and restructuring marks a clear departure from Western norms and introduces a nuanced strategy that deserves a closer examination.

Western nations frequently express concerns over China’s hesitance to engage in multilateral frameworks like the G20 Common Framework. This criticism may stem more from a misunderstanding than from China’s actual disinterest. Assertions of China’s financial dealings being opaque and a “barrier” to multilateral mechanisms often fail to acknowledge China’s rise as the main creditor to developing nations. Its steadfast commitment to bilateral lending, although met with skepticism in the West, is central to China’s alternative strategy. At the heart of this approach are contention points that no party is willing to relinquish easily.

As China assumes the role of “lender of last resort”—a position historically held by the IMF and the U.S.—geopolitical and economic tensions gain prominence. China’s refusal to adhere to the traditional collective debt relief rules has undoubtedly challenged the status quo, making the Paris Club’s norms appear increasingly obsolete. This is evident as developing countries, like Ethiopia, turn directly to China for assistance, indicating a shift in preference and highlighting the slow progress under traditional frameworks. Such developments signal a potential seismic shift in managing debt crises as established norms are reconsidered.

Actions speak louder than words, especially when evaluating China’s role as a creditor and its commitment to debt relief. The emphasis should be on tangible actions and results rather than on rhetoric. Beijing’s decision to restructure loans under the G20 framework for Zambia’s debt relief is significant, showing a move toward multilateralism and recognizing previous limitations. Yet, a consensual solution requires all creditors to be open to losses or concessions. China’s urging for multilateral development banks, including the World Bank, to join debt relief efforts for Zambia suggests a real desire to improve the system. The traditional exclusion of such institutions from restructuring talks, despite their considerable role in accruing debt, complicates matters further.

It is important to note that while Western governments are critical of China’s stance on debt forgiveness, they themselves have been hesitant to provide such relief in the past. Their reluctance to create a fully functional, predefined sovereign bankruptcy mechanism casts doubt on the consistency of their critiques of China.

China’s non-participation in the sovereign debt regime, particularly its absence from the Paris Club, leaves a gap that diminishes the regime’s effectiveness, more so when China is a major contributor to the regime, albeit on a partial basis. Efforts to build new and lasting institutions are yet to be validated. The Paris Club’s lack of cohesion among bilateral creditors presents significant challenges to the IMF in managing debt crises, as it complicates negotiations for countries heavily indebted to China, causing delays that can exacerbate their financial crises.

The slow pace of debt restructuring, illustrated by Zambia’s situation, underscores the urgent need for a more collaborative and efficient approach to sovereign debt management, involving major creditors like China.

In the specific case of Zambia, China’s adherence to the DSSI allowed for the postponement of payments totaling $8.2 billion in 2020 and 2021. However, the lack of coordination among private creditors, wary of information gaps, and the opaque nature of Chinese loans, posed significant challenges. Even after more details on Zambia’s debts to China came to light following the 2021 elections, bondholders remained cautious, doubting whether China would provide substantial debt relief.

China is actively seeking “comparability of treatment,” a principle outlined in the Common Framework terms. To alleviate Western concerns over potential “free-riding” by China, it is crucial to integrate Chinese systems into the multilateral sovereign debt structure. A more constructive approach than forcing China to comply strictly with OECD and Paris Club standards would be to reconcile the differing U.S. and Chinese systems, avoiding a “Common Framework Cold War.”

Such reconciliation is vital given the significant differences between the two systems, particularly in understanding the appropriate policies for debt-distressed states and the role of austerity or further borrowing in resolving debt crises. The current state of U.S.-China relations should not hinder a broader level of information sharing and cooperation.

With China’s growing influence, debt-laden nations might find solace in the diminishing role of the IMF’s conditionalities. A more effective approach, as suggested by Ray Dalio, may involve restructuring debts over a more extended period or outright cancellation. This should be coupled with measures to stimulate nominal economic growth, such as incurring more debt or printing money. African countries, in particular, need increased fiscal capacity to invest in sustainable development.

On the other hand, China is at a juncture with its refinancing strategies, showing a preference for deferment or rescheduling over the new money approach it has traditionally employed. Building greater cooperation, supported by the private sector and high-level political backing beyond creditor committees, is essential for successful refinancing. This is especially important given China’s hesitance to adopt the common practice of debt write-offs, although it has done so for interest-free loans. Creating a sustainable path for debt restructuring requires a unified effort, acknowledging China’s evolving role, leveraging its willingness to operate within multilateral frameworks, addressing the challenges within the Common Framework, and promoting cooperative solutions that consider the needs of indebted nations and the necessity for responsible and sustainable fiscal practices.