Commentary on Political Economy

Monday, 7 December 2020



Only the U.S. and China Can Stave Off Debt Disaster

A pandemic-induced crisis threatens to hurl millions into poverty unless Washington and Beijing can work together.

China’s lack of disclosure contributed to Zambia’s default. 
China’s lack of disclosure contributed to Zambia’s default.  Photographer: Guillem Sartorio/AFP/Getty Images

Relations between the United States and China promise to be fraught even under President-elect Joe Biden’s administration. There’s one area where the two rivals can and should cooperate immediately, however: to head off a looming debt crisis that threatens to hurl millions into poverty across Africa, Latin America and Asia.

When many of the world’s poorest countries last found themselves unable to service their debts 25 years ago, the U.S. led a global effort — the 1996 Highly Indebted Poor Countries Initiative — to forgive much of that debt. The role made sense: The U.S. was the world’s sole superpower at the time and its government was a leading creditor to the 36 countries involved.

While 55 creditor governments ultimately joined the initiative, most of the relief offered by bilateral creditors (over $16 billion) came from the wealthy, mostly Western G-7 countries. Not only were these nations the dominant creditors — the U.S. alone forgave nearly $2.5 billion of debt owed to agencies such as the Export-Import Bank and the Department of Agriculture — the burden was also fairly well distributed within the group.

Led by the U.S., these rich nations proved a powerful political force, coaxing along other major creditors such as the World Bank and International Monetary Fund, as well as the other 48 creditor countries. Well down that list, trailing Costa Rica, was China, with $445 million in credit exposures.

Today, 35 of those 36 poor countries again face the prospect of debt distress due to the economic shock of the Covid-19 pandemic. If most of the borrowing countries look the same, however, the creditors are dramatically different. The U.S. government now accounts for just $370 million of the struggling countries’ outstanding debt.

Meanwhile, with over $31 billion in outstanding claims, China has blazed past Costa Rica and everyone else. In fact, it has loaned more money to these low-income nations than all other bilateral creditors — combined.

Declarations and commitments by the G-7, which doesn’t include China, won’t be enough this time. And, with no clear leadership from either China or the U.S., the G-20’s recently announced common framework on debt relief falls far short of the kind of systematic action plan that’s urgently needed.

Only hard-headed negotiations between the U.S. and China will produce a bilateral agreement on how debt relief should be structured. Such an understanding would greatly improve the prospects for a detailed and binding G-20 framework on debt, which would in turn accelerate resolutions among government creditors and improve the odds of meaningful private creditor participation.

There’s more room for cooperation than the rhetoric in Washington, D.C. and Beijing might suggest. Chinese Finance Minister Liu Kun, for instance, recently offered financial support for the World Bank and other multilateral lenders to step up their debt relief efforts. The U.S. can and should meet this offer with its own pledge of support. The World Bank alone rivals China as a lender: A new package of donor support led by the U.S. and China could deliver over $30 billion in new financing and debt relief on highly favorable terms.

The Chinese have also taken tentative steps toward greater lending transparency in recent months by reporting details of their debt suspensions to the G-20 and even releasing some, albeit limited, information publicly for the first time. Data disclosure, which enables all creditors and debtors to know where they stand, is essential to orderly and equitable debt workouts. Suspicions about the opaque terms being offered to Chinese lenders are what led private creditors to resist signing off on a comprehensive relief package in Zambia last month, prompting its default. The Biden administration should press China to formalize its ad hoc disclosures around a consistent framework.

Why might China agree to any concessions? The crisis induced by the Covid-19 pandemic has been a reckoning for the country in many respects — significantly so when it comes to its program of massive overseas lending. The Chinese government is now coming to terms for the first time with what it means to be a dominant creditor in the face of a systemic debt crisis.

The scores of loans that were a boon to Chinese construction firms working abroad and burnished the reputation of China’s government in infrastructure-starved countries have now become a burden for many of the borrowers and a prudential risk for Chinese lenders. While a go-it-alone strategy may have served China well in normal times, it is now untenable as default risks spike across the developing world and China’s every move is under intense scrutiny globally.

For its part, as a relatively small creditor, the U.S. has vastly less to lose if no agreement is reached. But there is much to be gained in terms of U.S. standing in the world if the new administration can successfully facilitate a rescue of the world’s poorest countries. Biden officials like to say that “America is back” and ready to lead. This is their chance to prove it.

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