China Has a Debt Problem—Other People’s Debt
Tom Hancock
October 1, 2022
China has become the world’s largest government creditor to the developing world. Now it’s facing the prospect of having to restructure debt to multiple countries at the same time. That will be high on the agenda of the International Monetary Fund and the World Bank’s annual meetings later this month.
Beijing is joining with creditors from the “Paris Club” of major lenders for the first time to offer relief in Zambia, a model that will extend to other low-income countries. But China’s domestic politics, including competing ministries and powerful banks, as well as its tense relations with the West, have caused some delay in debt relief.
For example, financial officials in Beijing are eager not to be accused of wasting public money, but China’s foreign ministry—worried about the country’s overseas image—is more inclined to restructure debt.
The Zambia case arguably shows that a lack of coordination was baked into the country’s “belt and road” overseas infrastructure initiative from the start. Deborah Brautigam of Johns Hopkins University found 18 different Chinese banks and companies providing credits for projects in Zambia. Those banks and companies appear not to have communicated much about their lending, and no one in Beijing seemed to be coordinating what they were doing.
“The proliferation of firms created a tragedy of the commons,” according to Brautigam. “Individual firms and banks all fished for profits, financing projects without much consideration of the impact on debt sustainability, other lenders’ portfolios, and on their own ability to be repaid”.
The Zambia example also illustrates the importance of government decisions in countries that have borrowed from China. On the Zambian side, new projects were launched to gain support in election years, with more of an eye on boosting votes in the short term than long-term financial returns.
The governments of developing nations shape which projects get built: Kenya’s Lamu Port and the South Sudan–Ethiopia Transport Corridor in East Africa was designed by African officials long before China’s global initiative was launched. A Zambian dam project was considered for World Bank financing prior to China entering the picture.
“East African countries—Ethiopia, Tanzania and Kenya— influence and co-determine Chinese-funded and constructed infrastructure,” says Frangton Chiyemura, lecturer in international development at the UK’s Open University who studied Chinese projects in the region.
Zambia President Hakainde Hichilema has made a clear effort to improve relations with the US since he was elected in 2021. That helped add to pressure on China to restructure, Chiyemura said, something seen in the past in countries like Tanzania.
Zambian President Hakainde Hichilema speaks after touring the Kafue Lower Gorge Power Station in Southern Province, Zambia, on July 21.
The role of the IMF is also sure to attract more scrutiny. The fund has been unusually active recently, announcing programs to Pakistan ($3.5 billion), Sri Lanka ($2.9 billion) and Zambia ($1.3 billion), and talking with countries including Egypt and Ghana about emergency financing.
China’s coordination with the Paris Club in Zambia’s case was officially under the auspices of the Common Framework, a G-20 debt restructuring initiative, but that scheme is closely tied to the IMF.
To receive an IMF program when their debt is judged to be unsustainable, low-income countries will need to demonstrate efforts to restructure—a nd the Common Framework will be the way to do that.
Second, the IMF carries out a debt sustainability analysis that government and private creditors then use as a guide to the amount of relief that needs to be provided.
A new wave of IMF programs will likely lead to strong complaints from citizens and international civil society about cuts to government spending, as they did in the 1990s. That’s already happening in Zambia, where the IMF wants the government to cut back on fuel subsidies at a time of high energy prices. "This program is based on the traditional IMF austerity package— but delivered on steroids,” according to charity ActionAid.
For many countries, there’s a risk of a historical pattern repeating, said Ndongo Samba Sylla, a Senegalese development economist at the Rosa Luxemburg Foundation. A debt crisis may lead to a drawn-out “structural adjustment” period where national economies are remade around the objective of servicing foreign creditors, as in the 1980s and 1990s.
Those adjustments didn’t solve the debt crisis, he said. “Partial debt cancellations and improving terms of trade did.”