Talk of the Town
Jin Zhongxia, the director general of People’s Bank of China’s department of international affairs, made an appearance at the China Finance 40 Forum in Beijing recently, discussing the debt sustainability challenges faced by developing countries. The talk opens a window into the current thinking on the debt crisis in the Global South and the role of China in the global financial environment of inflation and rate hikes. On such occasions, some buck-passing and sugar-coating is inevitable, but Jin’s speech still offers a few important insights that help inform the global conversation on debt.
A Chinese diagnosis of the current problem
Jin first offered his (or rather the Chinese official) take on how the debt crisis in the Global South came into being. He ascribed the problem to:
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Debtor country mismanagement: Certain debt-dependent countries mismanaged their borrowed funds and failed to use them productively to generate economic growth;
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Over-abundant money supply at the global level: The low-interest environment in the post-Financial Crisis era enticed many developing countries to borrow agressively and many international investors to enter the sovereign debt market. Yields of Eurobonds issued by African countries were as low as 4% at some point. Sub-Saharan Africa’s sovereign debt volume grew more than five times from 2009 to 2020, and private players grew to be the major creditor of the developing world, from 43% in 2009 to 62% in 2020. Meanwhile bilateral official lenders’ share shrank from 25% to 14% over the same period.
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Covid, war and increasing debt vulnerability: Covid-induced economic losses and war-induced inflation are eating into developing countries’ current account balances. The Federal Reserve’s continued rate hikes are leading to currency depreciations that further exacerbate an already stretched fiscal situation.
A “holistic and balanced approach” is needed
Jin then offered a few recommendations on how to address the debt challenges.
He first pointed out that the G20’s Common Framework for Debt Treatments is an important coordination mechanism among bilateral lenders and China had been “actively participating in debt treatments for Chad, Zambia and Ethiopia.”
He underscored how important it is for debtor countries to shoulder their own responsibilities for “recklessly” handling their own debts in order to avoid moral hazards. He also called on them to increase the transparency of their loans and the conditions of collaterals, which “affect the interest of all existing and potential creditors”. The IMF, he said, should play a professional, objective and fair role in its assessments and proposals.
He then suggested that Chinese creditor organizations should increase their coordination and strengthen their cooperation with the IMF and other official creditors. Specifically, Jin suggested that “perhaps” China Development Bank and China Exim Bank should carry out reforms that better distinguish policy loans from commercial loans and increase the transparency of their lending businesses.
In this aspect, he made important elaborations. “Forgiving public-financed debt is no easy task in any country,” he noted. China must coordinate all its involved creditor organizations (such as CDB and Exim Bank), which independently select most of their lending projects and follow a more-or-less commercial logic. “If now the government is to tell them what to do, it is a complicated process as the government did not participate in most of the project-level decisions in the first place.” A lengthy process of assessments and decision-making is needed. He maintained that Chinese creditor organizations have relatively little experience of dealing with large scale debt restructures and need to learn by doing.
He told the audience that China had been working with Paris Club creditors on a country-by-country basis. The good thing about the G20 Common Framework is it involves both members and non-members of the Paris Club, traditional creditors and new creditors. The new platform facilitates mutual trust building and can lead to better collaboration in the future.
He also pointed out that debt negotiations should go beyond the Common Framework which involves only official creditors and not private ones. He specifically named Glencore, Chad’s largest private creditor that did not enter into debt negotiation with the government in a timely enough manner, resulting in a major delay in the IMF approval process.
He made an explicit criticism of the World Bank’s approach of offering new low-interest loans to debt distress countries as a way for them to tide over the crisis, based on the rationale that debt restructuring would hurt such countries’ credit rating. “But for debt distress countries, any new loans, no matter how discounted their interest rates are, will increase their debt burdens,” he said, “unless these are grants.” He urged multilateral banks to participate in debt restructure discussions, rather than “using new loans to limit the options of other creditors.” He praised the IMF’s Catastrophe Containment and Relief Trust (CCRT) and a general allocation of SDRs as a more sensible approach to the debt crisis.
Solutions
At the end of his address, he advocated for two long-term solutions to the debt crisis. First, the world should strive to end the pandemic and restore the mobility of people, goods and commodities so that countries like Sri Lanka may see their revenue streams recovered. Second, countries should refrain from protectionist measures that arbitrarily cut exchange among trading partners and disrupt supply chains.
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