Down Debt

China does not always collect its debts on time

VSLOAN FROM HINA The rise of poor countries is turning sour as governments struggle to repay their debts to public lenders like the Export-Import Bank of China and the China Development Bank. So how will China handle countries on the verge of default? Will it show the solidarity that one developing country can expect from another? Or will he insist on his pound of flesh?

Some think the defaults would be good for China. He is often accused of “debt trap diplomacy”: lending heavily to poor countries in order to seize their strategic assets, such as ports, when they cannot repay. The truth is more prosaic. A new effort to count China’s debt restructurings reveals that when faced with a debtor who cannot repay, China is usually content to kick the road.

The new paper by Sebastian Horn and Carmen Reinhart of the World Bank and Christoph Trebesch of the Kiel Institute for the World Economy counts 261 cases of debt relief or renegotiation since 2000. Given that China is far to be open about its loans, the number is probably an underestimate. It includes 149 cancellations or reschedulings of small interest-free loans by China’s Ministry of Commerce, mostly in the 2000s, when debt relief became a cause celebre, embraced by g7 Irish governments and rock stars. 28 others were payment holidays granted to countries with little over-indebtedness within the framework of the gThe 1920s response to the pandemic. This leaves 84 actual restructurings (30 of which were also part of the g20 initiative, but to countries in financial difficulty).

China’s 84 credit incidents compare to 158 in total from the 22 members of the Paris Club, an informal group of wealthy country governments including America, Japan and Britain (see chart). China may have been unlucky in lending a lot at the wrong time, just before the prices of oil and other commodities exported by African countries started falling in 2014. In almost all of these cases, China simply gave borrowers more time to repay. In only four countries has it reduced the nominal value of the debt (Cuba, Iraq and Serbia, twice). Its approach therefore resembles that of Western lenders in the 1980s, when they rarely provided significant debt relief.

The pandemic could force China to move from tolerance to forgiveness. Otherwise, the authors fear that “over-indebtedness” will inhibit growth in poor countries. China joined the gthe “common framework” for debt relief of the 1920s, which aims to align it with the Paris Club. By becoming a major lender to poor countries, China has followed in the footsteps of major economic club powers. He also repeated a number of their blunders. Now he must follow them by undoing some of his past mistakes. Who is the Chinese Bono?

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This article appeared in the Finance and Economics section of the print edition under the title “How to Default China”