China has been demonstrating “greater sensitivity” to the debt issues of the countries that benefit from its funding, particularly those under the Belt and Road initiative, according to researcher Johanna Malm.
In an article for the Johns Hopkins University China Africa Research Initiative (CARI) website, Malm said that China, “has acknowledged these concerns and adapted some of its practices.,” regarding funding to third countries, notably at the most recent Belt and Road Forum, held in Beijing in April.
Debt sustainability was a key issue at the Forum, with official documents stating that China is committed to preventing and solving debt-related risks, and the Chinese Ministry of Finance published a new document entitled “Debt Sustainability Framework for countries participating in the Belt and Road initiative.”
Chinese Finance Minister Liu Kun has encouraged China’s financial institutions, the Belt and Road signatories and international agencies to use the framework to improve debt management, according to Malm.
“China’s new debt sustainability framework marks the first time the country’s approach to debt and development has been articulated in an official document with an English translation, thus signaling that it is targeted for a Western audience,” said the researcher.
International Monetary Fund (IMF) Director-General Christine Lagarde considered the new debt sustainability structure a “positive step” for the Chinese authorities, although she underscored the Fund’s official position that infrastructure financing in the Belt and Road initiative should focus only on what is strictly necessary and in places where debt can be sustained.
These developments, Malm said, show that, “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,” but also that its new debt sustainability framework demonstrates that “it is willing to challenge the IMF’s approach.”
“China’s approach to development finance reflects the country’s own experience as a borrowing country. State-led development finance worked well for China’s own development and it is this model that China replicates in its lending to developing countries today, ” said the researcher.
The structure now presented contrasts with that of the IMF, which advocates financing on favourable terms for low-income countries, which “leaves space for its banks to lend on commercial rates. This can be compared to the IMF’s debt limits policy, which advocates for financing on fully concessional terms to low-income countries,” nor does it point to debt as an obstacle to continued lending, in addition to stressing that productive investment, by stimulating economic growth, may “lead to lower debt ratios over time.”
According to Malm, China sees lending as a catalyst for economic growth, in contrast to the IMF’s debt capping policy, where growth is higher if loans are granted on favourable terms.
Different approaches from China and the IMF, it adds, have different benefits and drawbacks, with China boosting growth in countries in urgent need of investment and the “more cautious” IMF prioritising lower debt burdens for developing countries. (Macauhub)