The Club’s members hesitate to restructure their own loans to troubled developing countries, because they worry that the relief they offer would be used to pay off Chinese dues. Clearly, China needs to be part of the decision-making structures of global finance. The West’s refusal to increase the quotas of the IMF and voting rights in the World Bank in proportion with the changed economic weights of countries such as China and India hinder this integration.
The IMF has updated its World Economic Outlook, published in April, to lower global GDP growth rate to 3.2% in 2022 and to 2.9% in 2023. As inflation continues to resist attempts by policymakers to tame it—expected to touch 6.6% in the rich world in 2022 and 9.5% in the developing one—policy interest rates are being ratcheted up around the world, with the most global consequence in the rich world. This causes developing country currencies to depreciate, accelerating the tendency for their imports of food and fuel to become relatively more expensive. Higher prices, in turn, prompt further interest rate increases, depressing investment, financed purchases of durable goods by consumers, and overall growth. Depreciating local currencies make the servicing of external debt all the more onerous for developing countries, triggering default, political turmoil and calls for extensive restructuring.
The fact that China remains outside the Paris Club of lenders but has acquired the status of the biggest source of development credit with quite a few developing countries, bigger than other bilateral donors and the multilateral development finance institutions such as the World Bank, has led to the Paris Club restricting the extent of relief it offers its borrowers—club members do not want to see the relief they offer being utilised to pay off Chinese dues, effectively making the Paris Club members pick up the tab for developing countries for servicing their Chinese debt.
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The solution is, indeed, for China to be included in the Paris Club. Rather than carry out such a change in just one of the governing structures of global finance, what is required is to overhaul the governance and regulatory structures of global finance altogether. That would mean expanding and reallocating quotas and voting rights in the IMF and the World Bank to reflect the current realities of the global distribution of economic power among the countries of the world, rather than the post-World War II pecking order.
Such a revamp of the governing structures of global finance would make data—on how much debtor countries owe, and to which creditor nations, and on what terms—more transparently available. Coordination among lenders is key to facilitate debt restructuring, including write-offs of the principal and interest, extension of the loan tenure and other relief. Absence of reliable data hinders such coordination today, making things needlessly more difficult for both creditors and borrowers than they ought to be. Further, data on debt would include information on the extent to which assets, such as Sri Lanka’s Hambantota port, or vital export streams, such as nickel, cobalt and lithium vital for a world in which storage batteries play a much bigger role than the one they do at present, are collateralised against debt servicing on Chinese debt.
Estimates of how much developing countries owe China and to what extent China has accommodated demand for debt relief vary widely. Sebastian Horn, Carmen M. Reinhart and Christoph Trebesch, in an NBER working paper, estimate that 50% of China’s lending to the developing world is not reported to the IMF or the World Bank. William and Mary College, Virginia, has a research lab, AIDDATA, which tracks Chinese development finance. It estimates China has funded 13,427 projects worth $843 billion across 165 countries in every major world region over an 18-year period ending 2021. The study estimates that 42 low- or middle-income countries (LMICs) owe China debt worth some 10% of GDP. Further, says the study, “(w)e estimate that the average LMIC government is underreporting its actual and potential repayment obligations to China by an amount that is equivalent to 5.8% of its GDP. Collectively, these underreported debts are worth approximately $385 billion." Such underreporting is facilitated by the fact that much of the debt is directed to companies with government ownership rather than to the sovereign itself.
This is a matter of concern also because the loans are underwritten by collateralisation, in which commodity exports or other vital income streams play a vital part. Dollops of debt to countries with strategic mineral reserves, such as of cobalt or nickel, of key interest in the emerging world of electrification of mobility, could, in effect, help China corner exports of these minerals.
From the point of view of macroeconomic stability in indebted developing countries and from the point of view of transparency on how much of the world’s strategic minerals or bits of infrastructure, such as ports, are in hock to China, it is vital to bring China on board in the governance structures of global finance.
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