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China Says it Believes in Debt Sustainability, Just Not the Way Everyone Else Does

Countries around the world, particularly in Africa, are taking huge amounts of Chinese debt to build badly-needed infrastructure but often without a plan on how to re-pay those loans. That’s given way for critics in the US, Europe, and Japan to accuse China of engaging in so-called “debt-trap diplomacy.”

The predatory lending charge, according to critics, goes something like this: China knows that these countries won’t be able to pay back the loans and will instead recoup their losses either through seizing national assets or gaining leverage over these poor, indebted countries so they fall into China’s political orbit.

While political leaders, especially in the U.S., continue to promote these theories, scholars at universities and think tanks have largely debunked the debt trap narrative on the basis that there’s simply no credible proof whatsoever to support the allegation. In fact, the evidence actually points the other way with Beijing forgiving or rescheduling billions of dollars of loans to indebted countries in Africa, Asia, and the Americas.

Risk Profile of BRI Countries with IMF/WB Debt Sustainability Assessment, Source: IMF

So, if the Chinese aren’t actually preying on poor countries by burying them in so much debt that it’s unlikely, if not impossible, that they’ll ever be able to repay these loans, then what are they doing?

The Chinese, unsurprisingly, refute these U.S.-led charges that their lending is unsustainable. Back in April, at the second Belt and Road Forum in Beijing, the Chinese government for the first time published a document that laid out their debt management strategies for developing countries.

It turns out that the Chinese do apparently believe in some form of debt sustainability, only that they seem to approach the issue in a very way than how traditional lenders in the U.S./Europe and Japan have done for much of the past half-century.

“While China has grown more sensitive to international pressure around its role as a development finance provider – especially when the critiques emanate from other developing countries – its new debt sustainability framework also demonstrates that it is willing to challenge to the IMF’s approach.” 

China-Africa Researcher Johanna Malm

For example, if country X is experiencing high-levels of debt distress, the likely response among traditional lenders would be to halt any new loans and nudge that country into some form of IMF-style structural adjustment that will supposedly right-size the economy. 

The Chinese see it differently.

According to the April document published by the Ministry of Finance, Debt Sustainability Framework for Participating Countries of the Belt and Road Initiative, even if a country is a country is overloaded with too much debt, that by itself is not a barrier for China to extend new loans for specific projects that it deems are economically viable:

“[I]t should be noted that an assessment for a country as “high risk” of debt distress, or even “in debt distress”, does not automatically mean that debt is unsustainable in a forward-looking sense. In general, when a country is likely to meet its current and future repayment obligations, its [public and publicly guaranteed] external debt and overall public debt are sustainable.”

Clearly, the terms “debt sustainability” mean very different things depending on whether in the U.S., Africa or China. Ands since there hasn’t been much follow-up from the Finance Ministry since it published that initial debt sustainability framework report last Spring, a lot of people are still not clear at all as to how the Chinese are going to approach this issue.

Ma Xinyue, China Research and Project Leader at Boston University’s Global Development Policy Center, is among a growing number of development finance scholars who are trying to sort through China’s new approach to debt sustainability and loan risk assessment for countries along the Belt and Road Initiative. 

She joins Eric and Cobus to discuss China’s new debt sustainability framework and whether it is sufficient to alleviate the pressure coming from the U.S. and other countries who accuse Beijing of engaging in harmful predatory lending practices.

Show Notes:

About Ma Xinyue:

Xinyue (Helen) Ma is the China Research and Project Leader at the Global Development Policy Center (GDP Center) at Boston University. Before joining the GDP Center, she worked with the New Climate Economy (NCE) Initiative at the World Resources Institute in Washington D.C., mainly supporting the NCE 2018 Global Report as well as the China-India Dialogue, especially on energy transition, electric mobility, and green finance. Ma has experience researching different aspects of China’s international investment with China’s National Development and Reforms Commission (NDRC), Control Risks, and China Daily. She received her Bachelor’s degree in International Politics and History from Peking University, Beijing, and her M.A. in International Economics and Energy, Resources and Environment from Johns Hopkins University, School of Advanced International Studies (SAIS), with a specialization in Infrastructure Policy and Finance.

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