Since the outbreak of the neo-crowning epidemic, many countries and some international organizations have been calling on countries like China to forgive the debt they have provided to poor countries. According to a new study, Chinese banks are unlikely to forgive large amounts of debt, and moratoriums remain China’s preferred solution, but some of China’s debt negotiations to date have been neither regular nor public. It is also noted that China has handled some debt renegotiations in a non-transparent manner, creating obvious obstacles for some countries to reach agreements with other creditors.
Large Debt Relief Unlikely
Requests for debt renegotiations are becoming more frequent as a result of the neo-crowning epidemic, according to a study released Oct. 8 by New York-based consulting firm Rhodium Group titled “Seeking Bailout: China’s External Debt After the Neo-Crowning Epidemic.
At least 18 debt renegotiations with China will take place in 2020, almost double the number from a year ago, according to the Rongding Group. As of the end of September, 12 countries, including Laos, Pakistan and Kenya, were still negotiating with China, involving about $28 billion in Chinese loans.
For large loans, debt relief is unlikely, the study added. “Debt write-offs are almost always limited to small zero-interest loans.” Not only are these loans smaller than other loans, but they represent only a small fraction of China’s overseas loans, no more than 2 percent of current Chinese overseas loans.
According to the study, “Even if China were to unilaterally cancel all outstanding zero-coupon debt by the end of 2020, the impact on overall debt service would be minimal.”
Sun Yun, a senior fellow at the Stimson Institute, a Washington think tank, has previously said, “Zero-interest loans are in the definition of Chinese foreign aid as something that is considered to be forgiven, and will eventually be forgiven.”
As for commercial and concessional loans in places like Africa, she said China is unlikely to waive them. Sun Yun said, “If China were to forgive, it would have a particularly big impact on the Chinese economy, which means that on such a scale, I don’t think China has the financial capacity to forgive such loans.”
Dr. Lee Jones of Queen Mary University of London also said, “China is not going to write off its debt, and the impact of the trade war means it has fewer resources at its disposal. China’s banks will want at least some of their money back.”
Scott Morris, a senior fellow at the Center for Global Development, told VOA, “We’ve seen debt relief from China for some of the poorest countries, but in many cases we don’t see that, and at best, we may see some debt restructuring that just extends the repayment period. But to some extent, that doesn’t reduce the debt burden.”
Unpredictable and Lacking Transparency in Debt Negotiations
The Rongding Group mentions that while China is unlikely to write off its debt, it is likely to choose to postpone principal repayments and extend repayment terms, and that “the Maldives, Venezuela, Ecuador, and Angola have all received some degree of deferment or rescheduling (of payment terms).”
But the study also points out that China’s approach is one-sided (focusing on rescheduling principal repayments, sometimes excluding interest payments), and its negotiations are neither standardized nor open, nor are they coordinated directly with other bilateral lenders. “None of the Chinese banks display standard terms, which makes it difficult to predict future outcomes,” and “past experience suggests that some of these negotiations may take months, if not years, to complete.”
The study notes that unlike Paris Club lenders, which coordinate debt relief based on standard terms, renegotiations in China are conducted on an ad-hoc, case-by-case basis, with the process and outcome varying by borrower, loan type, and lender.
Andrew Small is a fellow in Atlantic affairs at the German Marshall Fund, a think tank, and a deputy senior policy fellow at the European Council on Foreign Relations. He told a Senate hearing in September that China’s bilateral and opaque approach to some debt renegotiations could create obvious obstacles to reaching agreements with other creditors.
He said, “Until China’s position is clear, other lenders, including private-sector financiers who hold large amounts of developing-country debt, are reluctant to reach agreements with those countries, and they are very resentful of any relief from Chinese lenders.”
Morris also believes that if a country has many borrowers, this will pose a challenge to other lenders, “Are they willing to continue to act without China? What is China offering because of the lack of transparency? Are they less generous than other creditors?”
Sebastian Horn, who studies international finance and macroeconomics at the Kiel Institute for World Economics, told VOA: “Knowing the claims of other creditors and having a comprehensive understanding of the debt situation in the debtor country is a necessary condition for creditors to share their debt fairly. Creditors will obviously be more hesitant to commit to generous relief measures if they are concerned that their debt relief will be used to repay other creditors (China as well as some private creditors) rather than for additional expenditures on medical care and crisis management.”
International community calls on China to increase DSSI participation
World Bank President Malpass recently said that the neo-crowning epidemic could trigger a debt crisis in some countries, so investors should provide some relief measures or forgive the debt of some poor countries. He also blamed China for not fully participating in the G20’s Debt Sustainability Initiative (DSSI).
G20 finance ministers and central bankers held a video conference in April this year, after which the group agreed to suspend debt repayments to 77 countries from May 1 until the end of the year, a move to help developing countries cope with the impact of the neo-crown epidemic.
In addition, G7 finance ministers also said in a joint statement last month that they “deeply regret” that some countries have classified state-owned or government-controlled institutions as commercial banks, and thus are not fully participating in the DSSI.
Although the statement did not specifically mention China, G7 officials said the message was clearly aimed at Beijing, according to Reuters.
Japan’s Finance Minister Taro Aso was reported as saying after the G7 conference call that “China’s participation in the DSSI is totally inadequate,” and that “I told the G7 that we must put further pressure on China that the DSSI needs to be further extended after the deadline expires at the end of this year. Ensure that all creditors share the burden fairly.”
U.S. Treasury Under Secretary for International Affairs Brent McIntosh also said in an interview last week that he would urge Chinese officials to fully and transparently comply with the debt moratorium initiative agreed to by the G20 in April.
China is the largest bilateral lender in this area,” he said. Therefore, we need to see transparency from official bilateral lenders, not to impose confidentiality agreements and not to use secured financing.”
For his part, Chinese Foreign Ministry spokesman Zhao Lijian said on Monday (Oct. 12) that China is committed to fully implementing the G20 debt relief initiative, “The Export-Import Bank of China, as an official bilateral creditor, has signed debt relief agreements with 11 African countries. Other non-official creditors are also actively referring to the G20 MDRI and have reached a debt relief consensus with some African countries. He also said that China will continue to push the international community, especially the G20, to further extend the debt forbearance period.
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