China and west should co-operate on emerging market debt

For at least a couple of years, it has been clear that the wheels are coming off China’s Belt and Road Initiative, the $838bn programme launched by Beijing in 2013 to build infrastructure in about 160 mostly developing countries. Yet as Beijing seeks to contain the fallout from stalled projects and non-performing loans, it risks complicating matters with a surge in “emergency lending”.

New data from AidData, a US-based research lab, has uncovered evidence of Chinese rescue loans to Pakistan, Argentina, Sri Lanka, Mongolia, Kenya, Venezuela, Ecuador, Laos, Angola, Suriname, Belarus, Egypt and Ukraine. Three of the largest recipients, Pakistan, Sri Lanka and Argentina, have together received as much as $32.83bn since 2017, AidData has found.

This type of credit is very different from the infrastructure loans that dominate the BRI. It is intended to save countries from default on their foreign debt, including that borrowed from Chinese institutions and used to build ports, airports, roads, railways and other BRI infrastructure.

In one respect, such assistance is to be applauded. The Covid-19 pandemic has hit many emerging markets hard and driven more than 100mn people into extreme poverty, according to World Bank estimates. If it were not for Chinese rescue loans, it is likely that financial crises would have erupted in more countries least able to deal with them.

But a broad emerging market debt crisis remains a distinct possibility. Kristalina Georgieva, the IMF’s managing director, said this month that about a quarter of emerging countries and more than 60 per cent of low-income countries face difficulties, sometimes severe, in paying their debts.

Georgieva called upon major creditors such as China to “prevent difficulties from arising”. What can and should China do? In the first instance, Beijing should co-operate with IMF-led rescue packages, as it has done in the case of Zambia and provisionally for Sri Lanka, under the auspices of a debt relief framework drawn up by the Group of 20 largest economies.

But the next stages present a real test. Chinese creditors will have to put aside their longstanding aversion to recognising losses on their loans. What is more, such creditors will have to allow the terms of their lending, which have long remained largely hidden, to be exposed to public view. Such transparency will be necessary if all creditors are to be convinced they are carrying a fair share of the likely haircuts.

However, the number of different Chinese creditors, which include the central bank, policy banks, state-owned commercial banks and others, may complicate the task of reaching early resolutions. With speed of the essence, such institutions should move quickly to agree on issues of seniority so as not to hold up proceedings.

Over the longer term, the G20 is the best forum in which China can co-operate with other bilateral creditors over debt restructuring in emerging markets. Beijing has long favoured this forum in international affairs because its membership combines large emerging countries as well as wealthy western nations.

Ultimately, however, it will be in everybody’s interests — including those of Beijing — to create an efficient system of debt resolution and emergency lending able to deal speedily with debt crises in emerging markets. This means bringing China’s “rescue lending” practices alongside those of other international creditor organisations such as the Paris Club and the IMF. The chances of averting crises, or dealing with them swiftly, will be greatly enhanced by such a spirit of co-operation between China and western-led agencies.