China and the West should cooperate on emerging market debt

For at least two years, the wheels have been evident from China’s Belt and Road Initiative, an $838 billion program launched by Beijing in 2013 to build infrastructure in about 160 mostly developing countries. However, as Beijing seeks to contain the fallout from troubled projects and bad loans, it risks complicating matters with an increase in “emergency lending”.

New data from AidData, a US-based research laboratory, has revealed evidence of Chinese bailout loans to Pakistan, Argentina, Sri Lanka, Mongolia, Kenya, Venezuela, Ecuador, Laos, Angola, Suriname, Belarus, Egypt and Ukraine. AidData found that three of the largest recipients, Pakistan, Sri Lanka and Argentina, together have received up to $32.83 billion since 2017.

This type of credit is very different from the infrastructure loans that dominate the Belt and Road Initiative. It aims to rescue countries from defaulting on their foreign debt, including those borrowed from Chinese institutions and used to build ports, airports, roads, railways and other infrastructure for the Belt and Road Initiative.

In one respect, this help is commendable. The Covid-19 pandemic has hit many emerging markets hard and pushed more than 100 million people into extreme poverty, according to World Bank estimates. Were it not for China’s bailout loans, financial crises would likely erupt in more countries that are less able to handle them.

But the broad emerging market debt crisis remains a clear possibility. About a quarter of emerging countries and more than 60 percent of low-income countries are facing difficulties, sometimes severe, in repaying their debt, Kristalina Georgieva, the managing director of the International Monetary Fund, said this month.

Georgieva called on major creditors such as China to “prevent the emergence of difficulties”. What can and should China do? In the first place, Beijing should cooperate with IMF-led rescue packages, as it did in the case of Zambia and temporarily for Sri Lanka, under the auspices of the debt relief framework established by the G-20 majors.

But the following stages offer a real test. Chinese creditors will have to put aside their long-standing reluctance to recognize their loan losses. Moreover, such creditors will have to allow the terms of their lending, which have been largely hidden for so long, to be exposed to public view. This transparency will be necessary if all creditors are to be satisfied that they bear a fair share of potential shave.

However, the number of different Chinese creditors, including the central bank, policy banks, state-owned commercial banks and others, may complicate the task of finding early solutions. Essentially, these institutions should move quickly to agree on issues of seniority so as not to disrupt proceedings.

In the long term, the G20 is the best forum in which China can cooperate with other bilateral creditors on debt restructuring in emerging markets. Beijing has long favored this forum in international affairs because its membership includes large emerging countries as well as wealthy Western nations.

Ultimately, it will be in everyone’s interest – including Beijing’s – to create an effective debt-settlement and emergency lending system capable of dealing quickly with debt crises in emerging markets. This means bringing in China’s “rescue lending” practices alongside those of other international creditor organizations such as the Paris Club and the International Monetary Fund. Chances of averting crises, or dealing with them quickly, will be greatly enhanced by this spirit of cooperation between China and Western-led agencies.

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