What to Make of China’s Debt Relief Announcement

By Eleanor Albert

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China announced earlier this week that it had suspended debt repayments for dozens of developing countries and regions as part of the debt relief initiative put forth in April by the G-20 amid the COVID-19 pandemic. The news is being packaged with other efforts by Beijing to contribute to the international response to the virus, along with $50 million in funding to the World Health Organization, vaccine development efforts, and bilateral support, including partnerships between Chinese and African hospitals. In May, Chinese President Xi Jinping committed $2 billion in aid and donations to developing countries for post-epidemic and economic and social recovery. Still, details about the types of loans, money involved, and recipient countries remain few and far between.

The G-20’s Debt Service Suspension Initiative (DSSI) outlined an agreed upon coordinated, “time-bound” suspension of payments starting in May through the end of 2020 by all bilateral official creditors. All International Development Association (IDA) countries qualify for the initiative and are required to formally request debt service suspension from creditors and commit to making use of the fiscal space to increase spending on the economy, health, and social programs in response to the effects brought on by the COVID-19 crisis. (The IDA is a part of the World Bank committed to assisting the world’s poorest countries by providing loans and grants for programs designed to boost growth and reduce poverty.) As delineated in the G-20 Communiqué, repayments will be paused through the end of 2020, with the possibility of an additional year grace period.

Particularly at risk of default amid the COVID-19 crisis may be African countries to whom Beijing, Chinese banks, and firms, have loaned an estimated $143 billion between 2000 and 2017, according to the Johns Hopkins School of Advanced International Studies (SAIS). Earlier this month, Angola joined the G-20’s DSSI, with the country’s finance ministry announcing that it was also in an advanced stage of negotiations with oil importing partners. The announcement was followed by reports that the African country has cut the number of its oil cargoes destined for state-owned Chinese firms, which are used to pay down debts to China. (Meanwhile, Kenya spurned the G-20 initiative, saying that its terms were too restrictive and instead, has opted to engage with its creditors separately.)

A number of developing countries were already facing difficulties related to loans prior to the global public health crisis and its knock-on economic effects. Separately, some developed countries and to a certain extent local populations in loan recipient countries had begun to perceive elements of China’s extensive lending as “debt trap diplomacy,” such that countries may compromise their sovereignty to pay off high levels of debt. But the boom of Chinese financing should be viewed as more than a nefarious scheme. “China has been lending more and more to poorer countries, and in many cases is a key port-of-call for those countries in seeking more debt and support to grow as well as to survive COVID-19. But it is a fact that countries are turning to China because the international system for loans is broken,” wrote Hannah Ryder, CEO of Development Reimagined in The Diplomat’s June 2020 cover story.

Although Chinese lending to low-income countries has experienced an uptick in recent years, Beijing also rolled out a debt sustainability framework at the 2019 Belt and Road Forum, a document likely intended both to proactively prevent debt problems and reframe the narrative surrounding Chinese lending and pivot away from “debt trap diplomacy.”

Still, there is significant debate between observers, media commentary, policy analysts, and academics on the subject. Deborah Brautigam, professor and director of the China Africa Research Initiative at Johns Hopkins University’s SAIS, has challenged the conventional wisdom and sought to dispel myths about the frequency of China canceling debt, the ease of debt negotiations, and the likelihood of strategic asset seizure in lieu of payment. Her team’s research also revealed the more complex web of Chinese lenders extending beyond the government to included numerous banks, as well as private lenders, thus constraining what China may be able to offer loan recipients. Others, including Linda Calabrese, a research fellow and development economist at the Overseas Development Institute in London, state that there is little evidence to support China’s alleged debt trap diplomacy, and that the scope of debt owed to China varies widely across African nations with some owing money not only to China, but other governments, multilateral institutions, and private actors alike.

Although Beijing first pursued its own bilateral medical diplomacy in the face of the spread of the pandemic, it has also increasingly turned toward an embrace of multilateralism. Last week in a press conference, Chinese Foreign Ministry Spokesperson Zhao Lijian praised the G-20, saying that it “can play a unique leading role at a critical moment, as the premier forum for international economic cooperation, important mechanism for global crisis response and vital platform for equal dialogue and coordination between major developed and emerging economies.”

These two paths for Chinese assistance to the developing world, on a bilateral basis and under the G-20 initiative, are only first steps on what will likely be an enduring back and forth between Beijing as a creditor and its loan recipients. China has both a financial and reputational stake in the success of its Belt and Road Initiative. As Yun Sun writes for the Brookings Institution, on China’s debt relief for Africa, “the world is looking at a long process of bilateral renegotiations, debt restructuring, and refinancing instead of a rapid, blanket, and comprehensive solution.”