A number of factors influence China’s current approach to debt relief. First, it views its lending to developing countries as being qualitatively different to the lending by Western banks in the 1970s and 1980s, which preceded the Heavily Indebted Poor Countries (HIPC) Initiative. From China’s perspective, its lending supports development by stimulating trade and investment rather than simply financing unproductive consumption. It is therefore harder for Chinese authorities to acknowledge that the money advanced to countries in debt distress has actually been lost rather than reflecting liquidity shortages.
Second, China wants to be seen as a leader of the Global South in various multilateral institutions. Since its inception in 1949, the People’s Republic of China has maintained a close relationship with developing countries, notably in the UN context where it remains a member of the G77 developing nations group.
Third, there are unresolved debates within the Chinese system over whether it should extend generous debt relief to countries, such as Ethiopia, for purely diplomatic reasons or be more cautious and focus on maximizing the chances of recovering its investments. The MFA and CIDCA favour the former approach whereas the MOF, PBOC and MOFCOM prefer the latter. Moreover, even within these differing voices, parties may disagree on the appropriate terms. Like many aspects of Beijing’s economic diplomacy, each department argues from the perspective of its own departmental benefits or from their standpoint on the best approach to debt relief.
When China does decide debt relief is appropriate it has historically had a strong preference for offering it on a bilateral rather than multilateral basis. This reflects its desire to have full control over the terms and conditions, and an unwillingness to accept, without question, rules devised years previously by Western countries. When President Xi came to power, he advocated the notion of projecting China’s power to shape and dictate the global governance agenda across all multilateral platforms and to become an agenda-setter rather than a rule-follower.
China’s eventual decision not to join the Paris Club in 2016 during its presidency of the G20 reflected these concerns, together with the desire not to be seen to be joining a club of advanced economies. Paris Club methods – which require transparency on the amount, duration and composition of loans; that link relief to IMF conditions on good governance; and avoid the exploitation of collateral – were particularly problematic for Beijing.
When China does decide debt relief is appropriate it has historically had a strong preference for offering it on a bilateral rather than multilateral basis. This reflects its desire to have full control over the terms and conditions, and an unwillingness to accept, without question, rules devised years previously by Western countries.
China continues to deal bilaterally with certain debtors, as seen in its recent decision to write off a relatively small amount of interest-free loans to Africa and its more substantial agreement on restructuring Ecuador’s debt.
But it has also become more open to multilateral approaches. While not formally joining the group, China has for several years engaged with the Paris Club as an observer and as an ad hoc participant in meetings about borrower countries where it had substantial credit exposure. This engagement paved the way for China to agree cautiously on the DSSI and the Common Framework, under the auspices of the G20. Indeed, in June 2020, President Xi Jinping proposed an extension of the DSSI into 2021 at the Extraordinary China–Africa Summit on Solidarity Against COVID-19. One Chinese scholar noted in a research interview that, ‘[I]t is futile to argue back and forth on China’s potential membership with the Paris Club as Beijing has already practised most of the terms and conditions of the Paris Club under the G20.’
China’s increasing engagement with multilateral debt relief processes since 2020 probably reflects the view that, at least during the ongoing economic crisis affecting developing countries, it is the best way both to maximize the value of recoveries from outstanding loans and to preserve China’s reputation and leadership in the developing world.
It remains to be seen if the heightened tensions over Taiwan between China and the West (particularly the US) will hinder cooperation. The multilateral context and strong developing-country interest in debt negotiations may insulate such cooperation from these tensions.
Faster and more substantial progress – including agreement on debt restructuring in specific countries – will require solutions to a number of technical disputes between China, Paris Club members and the private sector. These relate to the assessment of debt sustainability, the need for debt transparency, the role of state-owned financial institutions in the provision of debt relief, and the precise form of debt relief. These subjects are discussed in further detail in Chapter 4. China will also want to ensure that the process and objectives for both multilateral and bilateral debt relief discussions are aligned with its plans for future lending and infrastructure investment in Africa.
The examples in the previous chapter showed how the surge in riskier Chinese lending to African nations over the past two decades was thought to be addressed, at least in theory, through collateralization. However, as the potential for loss from much of this lending has become clearer, the Chinese central authorities have sought more coordination of, and greater control over, new development lending by Chinese institutions and required more attention to be paid to its underlying sustainability.
An indication that China is serious about increasing its focus on debt sustainability is its decision to establish the Multilateral Cooperation Center for Development Finance (MCDF). This was launched at the inaugural Belt and Road Forum in 2017 and its objective is to establish international standards for lending to developing countries, which would apply to Chinese institutions going forward. Among key concerns is enhancing the physical security of Chinese investments in developing countries.
Meanwhile, analysis of the statements at the 2021 Forum on China–Africa Cooperation (FOCAC) in Dakar confirms that future Chinese lending to Africa will be at a lower level than before.
One important factor determining the volume of future Chinese lending may be the size of China’s hard currency foreign exchange reserves, and how the authorities perceive the adequacy of existing reserves, in light of China’s continuing struggle with COVID-19 and following the unprecedented financial sanctions imposed by the G7 on Russia in the aftermath of the latter’s invasion of Ukraine (see Box 6).
