On Wednesday, global finance officials held the inaugural meeting of a new roundtable aimed at overcoming resistance to a proposed sovereign debt restructuring from China, the lone holdout. Previously, the IMF said it detects early signs in investment flows that regional trade blocs centered on the United States and China are emerging in place of the integrated global market that arose at the end of the Cold War.
“It’s the unspoken theme of the meetings: rival blocs, rising tensions, whatever you want to call it. That’s what’s on the table,” said Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center. “We’re in a different era now.”
Talks over the debt load weighing on countries such as Zambia, Ghana and Ethiopia illustrate how China’s approach to global lending clashes with the traditional playbook employed by multilateral lenders and the U.S. Treasury.
Wednesday’s roundtable brought together the multilateral lenders, banks, borrowers, and governments including China, the world’s single largest government creditor. A joint statement issued at its conclusion said attendees had agreed on a variety of technical steps “to accelerate debt restructuring processes and make them more efficient.”
World leaders, acting through the Group of 20 nations in November 2020, established a debt relief process intended to benefit several dozen of the world’s poorest borrowers. But this “Common Framework” has made little headway.
China has blocked agreement on debt restructuring by insisting that the IMF and World Bank — like private-sector banks and government lenders — take losses on their loans. Typically, the global institutions are not required to swallow losses in a restructuring because they agree upfront to charge below-market interest rates and are responsible for mounting emergency rescues.
China’s overseas lending, in contrast, carries an average interest rate of around 4 percent, twice the typical IMF figure, according to Bradley Parks, executive director of AidData, a financial research lab at William & Mary, a public university in Virginia.
U.S. Treasury Secretary Janet L. Yellen criticized China’s lending practices last month, saying they left many poor nations “trapped in debt.” The Trump administration also accused China of designing loan programs to gain influence over borrowing nations.
According to the IMF, 60 percent of poor nations are already in financial distress or close to it. Without a plan to cut debt payments, their economies will flounder, sapping global growth.
“The impacts of debt crises do not respect boundaries; they can have cascading effects on the global economy,” Yellen said Tuesday.
Rising interest rates have made the problem urgent. Many developing countries borrowed heavily over the past three years to cope with the pandemic and subsequent economic downturn. Higher rates are effectively preventing them from rolling over those debts with new borrowings.
Nations that are eligible for the Common Framework must repay about $55 billion of debt this year.
Yet they raised just $4 billion from bond sales last year, down from more than $17 billion in 2021, according to a report from the Institute of International Finance.
Some especially risky borrowers must offer lenders a return that is 12 percentage points higher than what they can earn by investing in treasuries, up from a spread of about 4 percent at the start of the pandemic, the institute said.
The looming debt crisis comes with relations between the world’s two largest economies at a low ebb.
Gone are the days when U.S. and Chinese officials collaborated on their response to the 2008 financial crisis. In the intervening years, relations soured amid a multiyear trade war and China’s willingness to flex its diplomatic muscle.
As the United States and China seek greater self-sufficiency in key industries such as high technology, cross-border investment flows are increasingly concentrated in countries that share a political alignment, according to IMF research released at the start of the spring meetings. “The fragmentation of capital flows along geopolitical fault lines and the potential emergence of regional geopolitical blocs … could have large negative spillovers to the global economy,” the fund concluded.
For much of the past eight decades, the IMF and World Bank — created under U.S. auspices at the end of the Second World War — presided over a global financial architecture made in the image of American capitalism.
But over the past decade, China has become an increasingly influential force. In dollar terms, the Chinese economy has roughly doubled in size while Chinese banks, state-owned and private, became the largest source of new financing for the developing world.
China and other emerging powers began agitating several years ago for a greater say in the operations of the IMF and its sister institution. But little changed. Now, China’s greater heft is colliding with the approach customarily employed by the IMF, World Bank and U.S. Treasury.
“These channels are reckoning with the reality of China’s position in the world today,” said Scott Morris, senior fellow at the Center for Global Development, a Washington think tank. “Whether you’re the head of the [World] Bank or the U.S. treasury secretary, you’re stuck with the reality that China is a much bigger bilateral creditor than anyone else, certainly bigger than the U.S.”
China’s lending binge had its origins in the nation’s unbalanced trade with the United States, according to Parks. Because Americans bought much more from China than Chinese customers bought from Americans, China ended up with a vast supply of U.S. dollars.
At first, it invested them in U.S. Treasury securities. But after the 2008 crisis, as treasury yields fell below 2 percent, Beijing started looking for a way to earn higher returns. State banks were tasked with offering U.S. dollar loans around the world at market interest rates rather than at a discount.
At the same time, multilateral lenders were completing two rounds of debt relief that wrote down what many developing nations owed — in some cases to zero — and offered new grants and cut-rate loans.
“China was not part of that experience at all,” Parks said. “China doesn’t have any of that muscle memory.”
That’s left Beijing with a much different outlook about how to handle troubled borrowers.
The U.S. typically accepts the need for banks and government lenders to write off some of their loans, clearing the way for an IMF bailout in return for the debtor country’s agreement to implement reforms.
Rather than accept a “haircut” that would reduce the ultimate value of its loans, China has in some cases struck much tougher bargains with troubled borrowers.
In 2019, the Export-Import Bank of China agreed to reschedule a $2.5 billion debt owed by the Republic of Congo. But while the new deal gave Congo more time to repay, it also raised the interest rate and thus increased the total amount to be repaid by $300 million, according to AidData.
Brad Setser, a senior fellow at the Council on Foreign Relations, said China’s stubbornness could reflect distraction amid turnover in the top ranks of the Chinese government or specific features of Zambia’s debt profile.
“It is also possible that China will not accept dictates about the amount of debt relief from the IMF because they believe these institutions don’t incorporate China’s interests; these institutions are not neutral; and they’re working against China. If so, any restructuring that involves China will be difficult,” he said.
This week, Yellen cited encouraging signs in China’s decision last month to support a debt restructuring for Sri Lanka, paving the way for a $3 billion IMF bailout.
Still, IMF Managing Director Kristalina Georgieva, fresh from a recent trip to Beijing, said this month that Chinese officials need “to speed up their participation” in the debt talks.
The debt roundtable statement hinted at progress Wednesday, saying officials would meet in coming weeks to figure out how to “assess and enforce” comparable treatment for lenders.
The fund could bulldoze China by proceeding with bailouts without waiting for Beijing’s agreement on debt write-downs, a process known as “lending in arrears.” In such cases, the fund would agree to replenish the coffers of countries in distress on the condition that the money not be used to repay Chinese lenders.
But that is regarded as a last-ditch tactic, one that would probably lead to an open rupture between Beijing and the U.S.-backed multilateral bodies.
